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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, 1997
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-10968
PARAGON HEALTH NETWORK, 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.)
ONE RAVINIA DRIVE, SUITE 1500 30346
ATLANTA, GEORGIA (Zip Code)
(Address of principal executive
office)
(770) 393-0199
(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 [_]
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 December 19, 1997 based on the
closing sale price of the Common Stock on the New York Stock Exchange on said
date, was $776,905,800.75. For purpose of the foregoing sentence only, all
directors are assumed to be affiliates.
There were 13,737,943 shares of Common Stock of the registrant outstanding
as of December 19, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
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PART OF
INCORPORATED DOCUMENT FORM 10-K
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Proxy Statement for the 1998
Annual Meeting of Stockholders..................................... Part III
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TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. BUSINESS................................................ 3
ITEM 2. PROPERTIES.............................................. 16
ITEM 3. LEGAL PROCEEDINGS....................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 19
ITEM 4A. EXECUTIVE MANAGEMENT OF THE REGISTRANT.................. 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.................................... 21
ITEM 6. SELECTED FINANCIAL INFORMATION.......................... 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...... 59
ITEM 11. EXECUTIVE COMPENSATION.................................. 59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................. 59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K............................................... 60
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
On November 4, 1997, the Company engaged in two merger transactions. First,
pursuant to an agreement and plan of merger among Apollo Management, L.P.
("Apollo Management," and together with certain of its affiliates, "Apollo"),
Apollo LCA Acquisition Corp. (a corporation owned by certain Apollo affiliates
and other investors, "Apollo Sub") and Living Centers of America, Inc.
("LCA"), Apollo Sub was capitalized with $240 million in cash and was merged
with and into LCA (the "Recapitalization Merger"). In the Recapitalization
Merger, LCA was the surviving corporation and was renamed Paragon Health
Network, Inc. ("Paragon"). Second, pursuant to an agreement and plan of merger
among LCA, GranCare, Inc. ("GranCare"), Apollo Management and LCA Acquisition
Sub, Inc. (a wholly owned subsidiary of Paragon, "LCA Sub"), GranCare merged
with LCA Sub with GranCare surviving as a wholly owned subsidiary of Paragon
(the "GranCare Merger," and collectively with the Recapitalization Merger, the
"Mergers"). The GranCare Merger was accounted for using purchase accounting.
The consummation of the Mergers required aggregate proceeds of approximately
$1.4 billion. The funds required for the Mergers and related transaction fees
and expenses were provided primarily by: (i) proceeds of approximately $449
million from the offering (the "Offering") of $275 million in Senior
Subordinated Notes and $294 million in Senior Subordinated Discount Notes
(collectively, the "Notes"); (ii) borrowings by the Company of approximately
$740 million under a new senior credit facility which provides for aggregate
commitments of up to $890 million (the "Senior Credit Facility"); and (iii)
the equity investment by Apollo and certain other investors (collectively with
Apollo, the "Apollo Investors") of approximately $240 million (the "Apollo
Investment"). The Offering, the Senior Credit Facility and the Apollo
Investment are referred to collectively herein as the "Financings," and the
Financings and the Mergers are referred to collectively herein as the
"Transactions." LCA and Paragon are the same legal entity. References to the
"Company" herein refer to LCA and its operating subsidiaries prior to the
consummation of the Transactions and to Paragon and its operating subsidiaries
following consummation of the Transactions.
GENERAL
The Company, through its various operating subsidiaries, is one of the
nation's leading providers of post-acute care. The Company's continuum of
post-acute care services encompasses skilled nursing, subacute and medically
complex care, as well as a variety of related ancillary services. These
ancillary services include pharmacy, rehabilitation and hospital program
management. The Company operates in 38 states with significant concentrations
of facilities and beds in its key markets. On a pro forma basis for the year
ended September 30, 1997 the Company generated revenues of approximately $1.9
billion.
Following the Mergers, the Company's operations are organized into four
divisions: (i) post-acute care; (ii) pharmaceutical services; (iii)
rehabilitation services; and (iv) hospital services. The Company operates 327
skilled nursing and assisted living facilities containing over 38,000 beds, as
well as 34 institutional pharmacies servicing more than 100,000 beds. The
Company also operates over 130 outpatient rehabilitation clinics and manages
specialty medical programs in acute care hospitals through more than 180
management contracts. In addition, the Company provides subacute care, home
health, hospice and private duty nursing services.
As a result of the Mergers, the Company has increased the density of the
services it provides in many of its markets, which management believes will
result in revenue enhancement and cost saving opportunities. Revenue
enhancements are expected to be realized by expanding the range of services
offered within each market, increasing patient acuity levels within the
Company's facilities and strengthening relationships with hospitals,
physicians and third-party payors. Cost saving opportunities include
leveraging fixed overhead costs over a larger revenue base, eliminating
redundant administrative functions and realizing purchasing synergies.
The Company's principal executive offices are located at One Ravinia Drive,
Suite 1500, Atlanta, Georgia 30346, and the Company's phone number at such
location is (770) 393-0199.
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INDUSTRY OVERVIEW
The healthcare industry has become one of the largest sectors of the U.S.
economy, representing 13.6% of the nation's gross domestic product ("GDP") in
1995. Care for the elderly encompasses a broad range of healthcare services,
including skilled nursing, rehabilitation services, home healthcare, assisted
living and pharmacy services. In response to increasing demands for quality
care in a cost effective setting, long-term care providers are increasingly
providing services for patients with specialized needs. These patients
typically do not require many of the services provided in an acute care
hospital setting but still have medically complex conditions that require
ongoing nursing and medical supervision as well as access to specialized
equipment and services. The Company believes that demand for its long-term
care services and specialized medical services will increase significantly due
to changing demographics, existing government restrictions, increasing focus
on cost containment and industry consolidation.
Demographic Trends--According to the U.S. Bureau of the Census,
approximately 1.4% of the population between the ages of 65 and 74 received
care in long-term care facilities in 1990; this percentage increased to 6.1%
for people 75 to 84 years of age and to 24.5% for those over the age of 85. In
addition, according to the U.S. Bureau of the Census, the number of
individuals over the age of 75 increased from approximately 10.0 million (4.4%
of the U.S. population) in 1980 to approximately 14.8 million (5.6% of the
U.S. population) in 1995. By 2005, this segment of the population is projected
to increase to approximately 17.8 million (6.2% of the U.S. population).
Although there is limited growth projected for the population of individuals
over the age of 65 between 1990 and 2000, a significant increase is expected
in the population of people over the age of 85, which comprises the largest
percentage of residents at long-term care facilities. This age group is the
fastest growing segment of the population, projected to increase by more than
55%, from approximately 3.6 million (1.4% of the U.S. population) in 1995 to
approximately 5.7 million (2.5% of the U.S. population) in the year 2010.
Government Restrictions on Long-Term Care Facilities--While the demand for
long-term care is growing, regulatory factors have served to limit the supply
of long-term care beds. The construction of new long-term care facilities and
the addition of beds to existing facilities are restricted by regulation in
many states, most of which require entities that desire to enter the local
long-term care market to apply for and obtain Certificates of Need ("CON") or
other approvals under similar laws. The application and approval process for a
CON or such other approval generally involves approval by a state regulatory
agency for the construction, acquisition or closure of a long-term care
facility, the addition or reduction of beds at a facility or the addition of
services provided by a facility. The significant construction costs and start-
up expenses in some markets may further limit the number of new beds.
Emphasis on Cost Containment--Escalating healthcare costs have caused
governmental and other third party payors, including managed care entities, to
implement cost containment initiatives. As a result, an increasing proportion
of subacute care is being delivered outside the acute care hospital setting.
Subacute care refers to complex medical care and intensive nursing care and
therapies provided to patients with higher acuity disorders, typically
following their discharge from an acute care hospital. Management believes
that this level of care is appropriately delivered in a skilled nursing
environment and that clinical outcomes in these settings are comparable to
those achieved in acute care settings where the cost structure is
significantly higher. Skilled nursing facilities are significantly less
capital intensive and do not require the specialized equipment used in acute
care hospitals. Labor costs are also lower than in hospitals, which typically
have a higher physician to nursing staff ratio and significantly more
administrative personnel, including nursing staff not fully dedicated to
providing care. Management believes that post-acute care providers can achieve
successful outcomes at a lower cost than acute care hospitals and that,
accordingly, hospital discharge planners, physicians and managed care and
insurance company case managers are referring an increasing number of patients
to post-acute care facilities, including those operated by affiliates of acute
care hospitals.
Industry Consolidation--Currently approximately 1.7 million people are cared
for in approximately 15,000 long-term care facilities in the United States.
Market share data suggests that the industry is fragmented, with the 30
largest operators accounting for less than 25% of the total beds available.
The post-acute care industry
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has become subject to increasing competitive pressure, increased government
regulation and a changing reimbursement environment. As a result, management
believes that there is a trend towards consolidation of smaller, local
operators, which lack sophisticated management information systems and
services, into larger, more sophisticated national competitors.
BUSINESS STRATEGY
The Company's strategy is to become the provider of choice for both patients
and payors in each of its markets by offering an integrated comprehensive
network of high quality, cost efficient post-acute and long-term care
services. The Company's strategy includes the following five initiatives:
Develop Integrated Post-Acute Networks. The Company's goal is to maintain or
establish leadership positions in key markets by achieving a critical mass of
skilled nursing facilities and related specialty medical businesses to form an
integrated continuum of care. The Company places strategic emphasis on: (i)
expanding the services offered within its existing facilities; (ii)
strategically growing its base of facilities and related services; and (iii)
enhancing relationships with acute care hospitals and physicians. As an
integrated service provider in select markets, the Company can better respond
to the changing needs of its patients and offer payors a single source from
which to contract for post-acute healthcare services. Furthermore, the Company
believes that specific market expertise, coupled with a broad array of
ancillary services, will allow the Company to negotiate more effectively with
large contract payors such as managed care organizations.
Attract and Care for Higher Acuity Patients. The Company intends to
capitalize on the current trend towards reducing the length of patient stays
in acute care hospitals by offering specialty medical services such as
enteral, intravenous and respiratory therapies. The Company can provide these
services to patients with medically complex conditions who require ongoing
nursing and medical supervision, as well as access to specialized equipment,
and management believes that it can offer such medically complex care at costs
that are below those of acute care hospitals. Management believes that the
Company's ability to care for higher acuity patients will improve its payor
mix, expand its customer base and generate increased operating margins.
Provide Ancillary Services to Unaffiliated Facilities. In addition to
increasing the number of ancillary services provided in its own facilities,
the Company intends to be a leading third-party provider of ancillary
services. The Company provides pharmacy services to approximately 1,000
skilled nursing facilities, and is the nation's fifth largest provider of
institutional pharmacy services to the long-term care industry. The Company is
also one of the largest U.S. providers of contract therapy services and
provides rehabilitation services to over 450 skilled nursing facilities. In
addition, the Company's hospital services division manages specialty medical
programs for acute care hospitals through more than 180 contracts. By
continuing to offer its contract and ancillary services to unaffiliated
entities, the Company expects to increase revenues from these higher margin
ancillary businesses and to increase the quality of its payor mix.
Develop Industry Leading Infrastructure. Management is devoting substantial
time and resources to integrating the operations of LCA and GranCare in order
to realize significant benefits from the combination. Specifically, the
Company is: (i) establishing standardized information systems and operating
procedures; (ii) implementing a "shared services" model under which the
Company's operating divisions will utilize a common financial reporting and
accounting department; (iii) enhancing the internal audit process; and (iv)
combining and enhancing existing compliance and ethics programs. The Company
intends to be an industry leader in the implementation and maintenance of a
comprehensive compliance program, resulting in increased patient satisfaction,
improved staff performance and a "best practices" reputation among managed
care and other payors. The Company believes the enhanced infrastructure, once
completed, will enable it to market bundled services and integrate future
acquisitions more efficiently.
Actively Manage Portfolio of Facilities and Services. In order to increase
the breadth of its facility base and range of services provided in its target
markets, the Company will pursue a growth strategy which includes acquisitions
as well as, in certain limited circumstances, new construction. As such, the
Company intends to:
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(i) increase the breadth and density of the Company's ancillary services
within its existing markets; (ii) expand into new markets with favorable
demographics, regulatory environments and competitive landscapes; and (iii)
exit markets or existing lines of business in markets where the Company
believes it would be inefficient to establish critical mass. The Company hopes
to take advantage of the ongoing consolidation within the post-acute care
industry through both small "fill-in" acquisitions and the purchase of larger
corporate entities.
OPERATIONS
Post-Acute Care Division
The Company's post-acute care division is the largest source of revenue for
the Company and operates the Company's 318 skilled nursing facilities (35 of
which include assisted living units) and nine freestanding assisted living
facilities encompassing over 38,000 beds in 21 states. The post-acute care
division is organized into three operating regions, with a total of 19
districts containing 15 to 20 facilities each. All of the Company's skilled
nursing facilities are certified by the appropriate state agencies for
participation in the Medicaid program and substantially all of the Company's
facilities are certified for Medicare participation.
The Company's skilled nursing facilities provide care to patients requiring
immediate access to 24-hour nursing care. Each of the Company's skilled
nursing facilities has a local medical director who assesses patient needs,
coordinates care plans and, as a member of the local medical community, is
familiar with the local healthcare market. Skilled nursing care is rendered in
the facilities 24 hours a day by registered and licensed practical and
vocational nurses and nurses' aides. All patients in the Company's facilities
receive assistance with various activities of daily living ("ADL services")
including, but not limited to, oversight, feeding, bathing, dressing, eating,
transportation, toiletry and related services. These basic services are
supplemented in the Company's Medicare certified facilities by rehabilitation
services and physical, occupational, speech, respiratory and psychological
therapies.
In addition, the Company operates specialized units in over 90 of its long-
term care facilities serving over 1,200 beds, which provide subacute care to
patients with medically complex conditions. Within these specialty units,
trained staff members offer care for patients in a technologically advanced
physical plant as an alternative to treatment in the more costly acute care
hospital setting. In addition to basic therapy services, these specialty units
offer enteral therapy, intravenous therapy, specialized wound management and
ventilator, tracheostomy, cancer and HIV care, although not all services are
offered in all specialty units. These specialized units have a higher staffing
level per patient than the Company's skilled nursing facilities and compete
with acute care and rehabilitation hospitals, which management believes
typically charge rates higher than those charged by the Company's specialty
units.
The Company's home health and hospice operations are also managed by the
post-acute care division. Through over 40 branches located within nine states,
the Company provides home health, private duty nursing and hospice services.
The Company intends to expand its home health business through the acquisition
and development of additional home health and hospice agencies in its key
markets. The expansion of home health and hospice agencies will complement the
Company's initiative to provide a continuum of post-acute healthcare in its
targeted markets. Additionally, these home care businesses are potential
customers for the Company's rehabilitation therapy and pharmacy operations.
The Company's assisted living facilities provide furnished rooms and suites
designed for individuals who are either able to live independently within a
sheltered community or who require minimal nursing attention. For assisted
living residents, the Company provides basic ADL services combined with the
availability of higher acuity settings should changes in the resident's health
condition require additional care.
The post-acute care division also provides services to residents with
Alzheimer's disease. Within specially designated and designed areas in 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
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typically experienced by residents with Alzheimer's disease. The Alzheimer's
care units also offer 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.
Pharmaceutical Services Division
The Company's pharmaceutical services division, American Pharmaceutical
Services, Inc. ("APS") a former LCA subsidiary, is the fifth largest provider
of institutional pharmacy services in the United States. Through 34
institutional pharmacies in 11 states, APS provides services and products to
more than 1,000 long-term care centers with more than 100,000 beds in 35
states.
APS specializes in meeting the needs of healthcare providers in subacute
care, long-term care and assisted living settings. The division's primary
products are pharmacy dispensing, intravenous ("IV") and enteral therapy
supplies, respiratory therapy and orthotics. Through contractual agreements,
APS provides consultant pharmacists specializing in long-term care drug
regimen reviews and regulatory monitoring. Additionally, APS offers full
clinical support for its products and services through long-term care facility
staff education and quality assurance programs.
Substantially all of the Company's skilled nursing facilities previously
operated by GranCare are subject to pharmacy supply agreements with Vitalink
Pharmacy Services, Inc. which expire in March 2002. As a result, APS will not
provide pharmaceutical supplies or services to most GranCare facilities prior
to such expiration date.
Rehabilitation Services Division
The Company's rehabilitation services division, American Rehabilitation
Services, Inc., operates through three former subsidiaries of LCA: American
Therapy Services, Inc. ("ATS"); Rehability Health Services, Inc. ("Rehability
Health"); and Therapy Management Innovations, Inc. ("TMI"). ATS provides
physical, occupational, and speech therapy to nursing facility residents
through contracts with over 450 skilled nursing facilities throughout the
United States. Rehability Health operates over 130 outpatient rehabilitation
clinics in 18 states. The primary focus of these clinics is rehabilitation
services related to occupational and sports injuries. The primary payors for
services associated with occupational injuries and workers' compensation
claims are private employers and their insurance carriers. TMI provides a
variety of rehabilitation management consulting services to post-acute 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.
The objective of these programs is to assist the patients in attaining their
optimal level of functional independence. Rehabilitation services are
instrumental in lowering the overall cost of care by reducing the length of a
patient's stay and in improving a patient's quality of life. Specialized
management staff oversee these rehabilitation programs to ensure high-quality
service delivery, program compliance and achievement of desired outcomes for
the patient.
Hospital Services Division
The Company's hospital services division operates over 180 medical programs
in 28 states. This division, operated through the Company's Cornerstone Health
Management Company subsidiary ("Cornerstone"), a former GranCare subsidiary,
develops and manages specialty geriatric programs on behalf of acute care
hospitals. In addition, the hospital services division operates two long-term
acute care ("LTAC") hospitals.
The hospital services division programs include subacute skilled nursing,
rehabilitation therapy, geriatric mental health, respiratory therapy and
geriatric primary care networks. This division is generally responsible for
managing the clinical and operational aspects of a prescribed program,
including quality control. Following the
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design and implementation of a program, Cornerstone provides a program
administrator who is supported by a centralized staff of experts. Cornerstone
receives a management fee, typically based on the number of beds it manages.
SOURCES OF REVENUE
The Company receives payments for services rendered to patients from the
federal government under Medicare, from the various states where the Company
operates under Medicaid and from private insurers and the patients themselves.
The sources and amounts of the Company's patient revenues are determined by a
number of factors, including licensed bed capacity of its facilities,
occupancy rate, the payor mix, the type of services rendered to the patient
and the rates of reimbursement among payor categories (private, Medicare and
Medicaid). Changes in the mix of the Company's patients among the private pay,
Medicare and Medicaid categories (quality mix) will significantly affect the
profitability of the Company's operations. Generally, private pay patients are
the most profitable and Medicaid patients are the least profitable. Also, the
Company derives higher revenues from providing specialized medical services
than routine skilled nursing care.
Although reimbursement for Medicare residents generates a higher level of
revenue per patient day, with margins that generally exceed those of Medicaid
patients, profitability is not proportionally tied to the revenue growth due
to the additional costs associated with providing the higher level of care and
other services required by such residents.
MARKETING
The Company's marketing strategy is to focus on relationship development at
the local market level. Information systems are being developed and
implemented to provide marketing managers with the ability to assess
competitors, identify and target referral sources and track several key
indicators of sales performance for each local market. Management believes
that these information systems will provide the Company with the ability to
manage and measure performance at both the local and national level, thereby
allowing the Company to identify shifts in market trends as they occur.
Local market sales efforts focus on establishing and maintaining cooperative
relationships and networks with physicians, acute care hospitals and other
healthcare providers, with an emphasis on specialists who treat ailments
involving long-term care and rehabilitation. Programs focusing on managed care
payors also exist at both the local and national level. Ongoing assessment of
customer satisfaction with the Company's services provides an opportunity for
continual improvements in product and sales performance.
Many of the Company's facilities are currently operated as part of a
marketing cluster. This environment creates a strong focus on identifying more
cost effective methods to provide healthcare. Opportunities to link services
and sell multiple services to a single payor within these targeted markets are
significant. Development of programs to coordinate sales efforts for all of
the Company's services within each targeted market are currently being
examined and management believes that this will improve the efficiency and
effectiveness of its sales efforts, while creating an ability to offer a
continuum of care of post-acute services.
The Company will take advantage of other opportunities for increased
profitability, including potential arrangements with healthcare providers such
as health maintenance organizations ("HMOs"). The Company will continue to
establish relationships with managed care providers which it believes will
increase its subacute care business. Being an industry leader in a particular
market is expected to enhance the Company's ability to serve large providers
of managed care within its targeted markets. Typically, patients referred by
managed care providers, including HMOs and preferred provider organizations,
generate higher revenues per patient day than Medicaid patients as a result of
the higher acuity of the enrollees. Management believes that the Company's
ability to provide subacute and specialty medical services at a lower cost
than acute care hospitals will be a competitive advantage in becoming the
provider of choice for managed care providers.
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MANAGEMENT INFORMATION SYSTEMS
Management is devoting substantial time and resources integrating and
enhancing the existing information systems of LCA and GranCare. Management
expects to complete the installation of a new client-server based financial
and payroll/human resource software package during 1999. The new software is
expected to provide more timely retrieval of financial and operating data and
enhanced analytical review capabilities, thereby increasing the utility and
functionality of the Company's information systems. In preparation for this
implementation, LCA completed a business process review of its financial and
payroll/human resource processing procedures prior to the Mergers. This
business process review was designed so that maximum benefit from the
functionality offered by the new client-server software package could be
attained, best practices could be adopted for financial and payroll/human
resource processing based on procedures currently in use both within and
outside the industry and customization of software could be minimized.
Management expects the combination of the client-server implementation and
business process review to strategically position the Company to operate under
a shared services model. Benefits of a shared services model are expected to
include standardized financial reporting, streamlined human resource
management and increased access to critical and time-sensitive information
across the Company.
REGULATION
Various aspects of the Company's business are regulated by the federal
government and by the states where the Company has operations. Regulatory
requirements affect the Company's business activities by controlling growth,
requiring licensure and certification for the Company's facilities and
healthcare services, and controlling reimbursement for services provided. The
Company believes it materially complies with applicable 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. The Company is in the process of consolidating the compliance
programs and initiatives of LCA and GranCare and plans to roll-out a Company
wide program during 1998.
Medicare and Medicaid. The Medicare program was enacted in 1965 to provide a
nationwide, federally funded health insurance program for the elderly. 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. All of the Company's nursing facilities, assisted
living facilities, home health and hospice agencies, pharmacies, and
rehabilitation clinics are licensed under applicable state law and will be
certified or approved (other than the assisted living facilities) as providers
or suppliers under one or more Medicare or Medicaid programs, as applicable.
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 Health
Care Finance Administration ("HCFA") regulations effective July 1, 1995. These
regulations require that surveys focus on residents' outcomes of care and
state 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.
The remedies include, but are not limited to: civil money penalties of
$5,000 to $10,000 per violation; facility closure and/or transfer of residents
in emergencies; directed plans of correction; and directed in-service
training.
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HCFA requires compliance with certain standards as a condition to
participation in the Medicare and Medicaid home healthcare program. Failure to
comply may result in termination of the agency's Medicare and Medicaid
provider agreements. In 1989, Congress directed the Department of Health and
Human Services ("HHS") to develop and implement a range of intermediate, or
alternative, sanctions for home health agencies. HHS published proposed rules
to implement this authority in 1991; however, these rules have not been
finalized and thus far have not taken effect. The proposed sanctions would
include civil monetary penalties, temporary management, suspension of payment
for new admissions, and other sanctions to be imposed upon agencies found out
of compliance with standards.
The Company believes that its facilities and service providers materially
comply 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
service provider 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, the
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 (or, prior to the Mergers, LCA or GranCare), although
there can be no assurance that such an enforcement action will not have a
material impact on the Company in the future. The Company believes it
substantially complies 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 utilizes a cost-based reimbursement system for nursing facilities,
long-term acute care hospitals and home health agencies for reasonable direct
and indirect allowable costs incurred in providing "routine service" (as
defined by the program and subject to certain limits) as well as capital costs
and ancillary costs. The Company is filing Routine Cost Limit Exception
requests for the facilities which exceed the limits and fit the criteria as
exception candidates. The Company may benefit from exceptions to the routine
cost limits. Allowable costs include nursing, administrative and general,
dietary, housekeeping, laundry, social services, activities, central supply,
maintenance and plant operations as well as ancillary and capital costs. There
can be no assurance that any such requests for the Routine Cost Limit
Exception will be granted.
Congress passed a fiscal year 1996 budget reconciliation bill that contained
a provision that would have required Medicare to pay skilled nursing
facilities on a prospective payment basis beginning in October 1997. Although
this bill was ultimately vetoed by the President, the Clinton Administration
had proposed adopting prospective payment for skilled nursing facilities in
1999. See the discussion of the Balanced Budget Act below for additional
discussion regarding the prospective payment system. Other legislative
proposals, including one adopted by the U.S. Senate, have called for
developing a prospective payment system for specialty medical care programs
within acute care hospitals. Proposals to reduce the growth in Medicare and
Medicaid expenditures are under active consideration in the current session of
Congress. The Company cannot predict at this time whether any of these
proposals will be adopted or, if adopted and implemented, what effect such
proposals would have on the Company. There can be no assurance that payments
under state or federal governmental programs will remain at levels comparable
to present levels or will be sufficient to cover the costs allocable to
patients eligible for reimbursement pursuant to such programs, particularly
with respect to the Medicaid programs, which generally provide lower
reimbursement rates than the Medicare program.
Medicare and Medicaid reimbursements have historically been determined from
annual cost reports filed by LCA and GranCare which are subject to audit by
the respective agency administering the programs. The audits generally focus
on the reasonableness and necessity of the costs incurred by providers,
including the costs of obtaining goods and/or services from related parties.
The Company has received notices for previous cost-reporting periods that the
reviewing agency intends to adjust certain costs with regard to services and
supplies
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furnished by the Company's pharmacy and rehabilitation divisions to its
nursing facilities. The Company disagrees with the reviewing agency's position
and is pursuing all available appeal rights. The Company believes it has
substantial arguments in support of its position that the contested costs are
appropriate, but there can be no assurance that the Company will prevail on
all appeal issues, nor that it will not be required to expend significant
amounts to complete the appeal process. Adjustments to LCA's and GranCare's
cost reports historically have not had a material adverse effect on their
respective operating results. However, there can be no assurance that future
adjustments to such cost reports will not have a material adverse effect on
the Company's operating results.
The Balanced Budget Act, signed into law on August 5, 1997, makes numerous
changes to the Medicare and Medicaid programs which could potentially affect
the Company. With respect to the Medicare program, the new law required the
establishment of a prospective payment system for Medicare skilled nursing
facility services, under which facilities will be paid a federal per diem rate
for virtually all covered services. The prospective payment system will be
phased in over three cost reporting periods, starting with cost reporting
periods beginning on or after July 1, 1998. The Balanced Budget Act also
institutes consolidated billing for skilled nursing facility services, under
which payments for non-physician Part B services for beneficiaries no longer
eligible for Part A skilled nursing facility care will be made to the
facility, regardless of whether the item or service was furnished by the
facility, by others under arrangement or under any other contracting or
consulting arrangement, effective for items or services furnished on or after
July 1, 1998. Likewise, the Balanced Budget Act requires the Secretary of HHS
to establish a prospective payment system for home health services, to be
implemented beginning October 1, 1999. The legislation also requires home
health agencies to submit claims for all services, and all payments will be
made to the home health agencies regardless of whether the item or service was
furnished by the agency, by others under arrangement or under any other
contracting or consulting arrangement. The law also contains provisions
affecting outpatient rehabilitation agencies and providers, including a 10
percent reduction in operating and capital costs for 1998, a fee schedule for
therapy services beginning in 1999, and the application of per beneficiary
therapy caps currently applicable to independent therapists to all outpatient
rehabilitation services beginning in 1999. With regard to hospices, the
Balanced Budget Act limits reimbursement by setting the payment rate increase
at a market basket minus 1.0 percentage point for fiscal years 1998 through
2002. The law also institutes a number of reforms of the hospice benefit,
including a requirement that hospices can be reimbursed based on the location
where care is furnished (rather than the location of the hospice), effective
for cost reporting periods beginning on or after October 1, 1997. Other
provisions limit Medicare payments for certain drugs and biologicals, durable
medical equipment and parenteral and enteral nutrients and supplies.
The Balanced Budget Act also contains a number of changes affecting the
Medicaid program. Significantly, the law repeals the so-called Boren
Amendment, which required state Medicaid programs to reimburse nursing
facilities for the costs that are incurred by efficiently and economically
operated providers in order to meet quality and safety standards. Effective
for Medicaid services provided on or after October 1, 1997, states will have
considerable flexibility in establishing payment rates. The Company is not
able to predict whether any states will adopt changes in their Medicaid
reimbursement systems, or, if adopted and implemented, what effect such
initiatives would have on the Company. Nevertheless, there can be no assurance
that such changes in Medicaid reimbursement to nursing facilities will not
have an adverse effect on the Company. Further, the Balanced Budget Act allows
states to mandate enrollment in managed care systems without seeking approval
from the Secretary of HHS for waivers from certain Medicaid requirements as
long as certain standards are met. These managed care programs have
historically exempted institutional care. However, no assurance can be given
that these waiver provisions ultimately will not change the reimbursement
system for long-term care facilities from fee-for-service to managed care
negotiated or capitated rates or otherwise affect the level of payments to the
Company.
Healthcare reform remains an issue for healthcare providers. Many states are
currently evaluating various proposals to restructure the healthcare delivery
system within their jurisdiction. It is uncertain at this time what
legislation on healthcare reform will ultimately be implemented or whether
other changes in the administration or interpretation of governmental
healthcare programs will occur. Management anticipates that federal and state
legislatures will continue to review and assess various healthcare reform
proposals and alternative healthcare
11
<PAGE>
systems and payment methodologies. Management is unable to predict the
ultimate impact of any federal or state restructuring of the healthcare
system, but such changes could have a material adverse impact on the
operations, financial condition and prospects of the Company.
Referral Restrictions and Fraud and Abuse. The Medicare and Medicaid anti-
kickback statute, 42 U.S.C. (S) 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 healthcare 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 healthcare
programs. Violation of the anti-kickback statute, pursuant to the Balanced
Budget Act, now carries a civil monetary penalty of $50,000 per act, and
treble the remuneration involved without regard to whether any portion of that
remuneration relates to a lawful purpose. The statute contains "safe harbor"
exceptions for certain discounts, group purchasing organizations, employment
relationship, waivers of coinsurance by community health centers, health plans
and practices defined in regulatory safe harbors.
False claims are prohibited pursuant to criminal and civil statutes.
Criminal provisions at 42 U.S.C. (S) 1320a-7(b) 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. (S) 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. Allegations have been
made under the civil provisions of the statute that the Company has filed
false claims. See "Legal Proceedings" for a discussion of these allegations.
The Ethics in Patient Referrals Act ("Stark I"), effective January 1, 1992,
generally prohibits physicians from referring Medicare patients to clinical
laboratories for testing if the referring physician (or a member of the
physician's immediate family) has a "financial relationship," through
ownership or compensation, with the laboratory. The Omnibus Budget
Reconciliation Act of 1993 contains provisions commonly known as "Stark II"
("Stark II") expanding Stark I by prohibiting physicians from referring
Medicare and Medicaid patients to an entity in which a physician has a
"financial relationship" for the furnishing of certain items set forth in a
list of "designated health services," including physical therapy, occupational
therapy, home health services, and other services. Subject to certain
exceptions, if such a financial relationship exists, the entity is generally
prohibited from claiming payment for such services under the Medicare or
Medicaid programs.
Other provisions in the Social Security Act authorize the imposition of
other penalties, including exclusion from participation in Medicare and
Medicaid, for various billing and other offenses.
Additionally, the Health Insurance Portability and Accountability Act of
1996 (the "Accountability Act") granted expanded enforcement authority to HHS
and the U.S. Department of Justice ("DOJ"), and provided enhanced resources to
support the activities and responsibilities of the Office of Inspector General
("OIG") and DOJ by authorizing large increases in funding for investigating
fraud and abuse violations relating to healthcare delivery and payment. The
Balanced Budget Act also includes numerous health fraud provisions, including
new civil money penalties for contracting with an excluded provider; new
surety bond and information disclosure requirements for certain providers and
suppliers; and an expansion of the mandatory and permissive exclusions added
by the Health Insurance Portability and Accountability Act of 1996 to any
federal healthcare program (other than the Federal Employees Health Benefits
Program).
Management expects that business practices of providers and financial
relationships between providers will be subject to increased scrutiny as
healthcare reform efforts continue at federal and state levels. Although the
Company has contractual arrangements with some healthcare providers, it
believes that its practices are not in violation of these federal and state
prohibitions. Management cannot reasonably predict whether enforcement
activities will increase at the federal or state level or the effect of any
such increase on the business of the Company.
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 healthcare providers
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<PAGE>
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. On May 20, 1997, HHS
announced that Operation Restore Trust will be expanded during the next two
years to include 12 additional states (Arizona, Colorado, Georgia, Louisiana,
Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia
and Washington), as well as several other types of healthcare services. Over
the longer term, Operation Restore Trust investigative techniques will be used
in all 50 states, and will be applied throughout the Medicare and Medicaid
program. 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,
healthcare company employees, competitors, and others to call to report
suspected violations. Enforcement actions could include criminal prosecutions,
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 under Operation Restore Trust, there can be no
assurance that substantial amounts will not be expended by the Company to
cooperate with any such investigation or to defend allegations arising
therefrom. If it were found that any of the Company's practices (or the
practices of LCA or GranCare prior to the Mergers) failed to comply with the
anti-fraud provisions, the Company could be materially adversely affected.
Management 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 assurances that such laws will ultimately be
interpreted in a manner consistent with the Company's practices, nor that the
Company will not be required to expend significant sums in the event it
becomes subject to such investigative or enforcement actions under "Operation
Restore Trust." See "--Legal Proceedings."
Certificate of Need. CON statutes and regulations control the development
and expansion of healthcare services and facilities in certain states. The CON
process is intended to promote quality healthcare at the lowest possible cost
and to avoid the unnecessary duplication of services, equipment and
facilities. CON or similar laws generally require that approval be obtained
from the designated state health planning agency for certain acquisitions and
capital expenditures, and that such agency 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. CONs or other similar 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.
Contract Management Regulation. Contract managers of geriatric mental health
centers, subacute care units, specialty acute hospitals and senior health
centers are not typically subject to direct regulation, although the Company
may be held responsible for violations of certain federal and state laws, such
as the referral restrictions described above. Further, the facilities managed
by the Company on a contract basis will be subject to regulation. Management
contracts with these facilities may hold the Company accountable in certain
instances to a facility which is cited for non-compliance with regulatory
requirements. Further, there can be no assurance that the facilities managed
by the Company will not be subject to statutory or regulatory changes which
might adversely impact these facilities and, indirectly, the Company's
contract management business.
Therapy Regulation. The Company furnishes therapy services on a contract
basis to certain providers as well as to patients in most of its facilities,
and the providers bill Medicare for reimbursement of the amounts paid to the
Company for these services. HCFA has the authority to establish limits on the
amount Medicare reimburses for therapy services. For services other than
inpatient hospital services, these limits are equivalent to the reasonable
amount that would have been paid if provider employees had furnished the
services. HCFA has exercised this authority by publishing "salary equivalency
guidelines" for physical therapy and respiratory therapy services. HCFA does
not currently have salary equivalency guidelines for other therapy services,
but Medicare auditors may nonetheless impose disallowances with respect to
purchasers that have failed to act as "prudent buyers." On March 28, 1997,
HCFA issued a proposed regulation that would revise the salary equivalency
guidelines for physical therapy and respiratory therapy and establish salary
equivalency guidelines
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<PAGE>
for speech-language pathology and occupational therapy service. HCFA estimates
that the proposed regulation would increase the reimbursement rates for
physical therapy by 30.5% and for respiratory therapy by 8.1%. The proposed
salary equivalency rates for occupational therapy and speech-language
pathology, however, would reduce current reimbursement rates by 42.7% and
28.1%, respectively. Management cannot predict whether this proposed
regulation will be adopted or, if adopted, the effect it would have on the
Company.
Pharmacy Regulation. Pharmacy operations are subject to regulation by the
various states in which the Company conducts its business as well as by the
federal government. The Company's pharmacies are regulated under the Food,
Drug and Cosmetic Act and the Prescription Drug Marketing Act, which are
administered by the United States Food and Drug Administration. Under the
Comprehensive Drug Abuse Prevention and Control Act of 1970, which is
administered by the United States Drug Enforcement Administration ("DEA"), the
pharmacies, as dispensers of controlled substances, must register with the
DEA, file reports of inventories and transactions and provide adequate
security measures. Failure to comply with such requirements could result in
civil or criminal penalties. The Company believes that its pharmacy operations
are in substantial compliance with such regulations.
Home Health/Hospice. On September 15, 1997, President Clinton imposed a
first-ever six month moratorium on the entry of new home health agencies into
the Medicare program in order to allow new regulations to be written that will
attempt to curb fraud and abuse within the home healthcare industry. HHS will
have authority to grant exceptions from the moratorium for areas of the
country with no access to home healthcare services. In addition to the
moratorium, the Clinton administration will also require, among other things,
that home health agencies re-enroll in the Medicare program every three years
and, at the time of re-enrollment, submit to an independent audit of their
records and practices. Finally, the President pledged to double the number of
audits conducted of home health agencies, while at the same time, HCFA will
increase the number of claims reviewed by 25%. Until the new regulations are
released, the Company is unable to predict what impact, if any, the new
regulations will have on its home health operations. On September 19, 1997,
the OIG issued its report on "Hospice Patients in Nursing Homes" which made
findings of lower frequency of services, the overlap of services and the
questionable enrollment in hospice by nursing home patients, and concluded
that current payment levels for hospice care in nursing homes may be
excessive. The OIG recommended that HCFA seek legislation to modify Medicare
or Medicaid payments for hospice patients living in nursing homes. Until such
legislation is adopted, the Company is unable to predict what impact, if any,
modification of payment will have.
COMPETITION
The long-term healthcare industry is segmented into a variety of competitive
areas which market similar services. These competitors include nursing homes,
assisted living facilities, hospitals, extended care centers, retirement
centers and communities, and home health and hospice agencies. Many operators
of acute care hospitals offer or may offer post-acute care services. These
operators would have the competitive advantage of being able to offer services
to patients through their affiliated post-acute care operators. The Company's
facilities historically have competed on a local basis with other long-term
care providers and the Company's competitive position will vary from center to
center within the various communities it serves. Significant competitive
factors include the quality of care provided, reputation, location and
physical appearance of the long-term care facilities 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 facilities covered by Medicaid and Medicare
as well as the location and physical condition of its facilities will
significantly affect its competitive position in its markets. Competition in
the institutional pharmaceutical and the rehabilitation services markets
ranges from small local operators to companies that are national in scope and
distribution capability. In order to enhance its ability to compete at both
the national and regional market level, the Company is implementing certain
marketing and information systems initiatives. See "--Marketing" and "--
Management Information Systems."
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<PAGE>
INSURANCE
The Company maintains, on behalf of itself and its subsidiaries, insurance
coverages that it deems adequate. The Company also requires that physicians
practicing at its long-term care facilities carry medical malpractice
insurance to cover their individual practice. 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 these states.
EMPLOYEES
At December 19, 1997, the Company employed approximately 45,000 individuals,
of which approximately 1,000 worked at the corporate and field offices. The
Company has collective bargaining agreements with unions representing
employees at 26 facilities and with employee councils at two of its
facilities, most of which are with the Service Employees International Union
and expire in April or May 1998. The Company is preparing to negotiate with
the Service Employees Internation Union. The Company cannot predict the
outcome of these negotiations at this time. The Company cannot predict the
effect continued union representation or organizational activities will have
on its future activities. However, the aforementioned organizations have not
caused any material work stoppages in the past.
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"). In particular, the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Liquidity and Capital Resources" contains
information concerning the ability of the Company to service its debt
obligations and other financial commitments as they come due and "--Business
Strategy" contains information regarding management's belief concerning the
growth opportunities available to the Company. The aforementioned forward
looking statements, as well as other forward looking statements made herein,
are qualified in their entirety by these cautionary statements, which 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 non-governmental
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 non-governmental 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.
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<PAGE>
(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 business
strategies for its post-acute care, pharmaceutical services, rehabilitation
services, or hospital services divisions or that management will be able to
successfully integrate the operations of GranCare and LCA.
ITEM 2. PROPERTIES
As of November 30, 1997 the Company operated 327 long-term care facilities
(318 skilled nursing facilities and nine free standing assisted living
facilities) with 38,272 licensed beds located in 21 states. Licensed beds
represent the number of beds for which a license has been issued and may vary
from the actual beds available for use. As of November 30, 1997, the Company
operated the following facilities:
<TABLE>
<CAPTION>
OWNED LEASED MANAGED TOTAL
----------------- ----------------- --------------- -----------------
FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS
---------- ------ ---------- ------ ---------- ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama................. 7 848 -- -- -- -- 7 848
Arizona................. 4 506 10 1,236 -- -- 14 1,742
California.............. 1 99 30 3,381 -- -- 31 3,480
Colorado................ 19 2,032 11 1,374 -- -- 30 3,406
Florida................. 2 295 -- -- -- -- 2 295
Georgia................. 4 429 6 706 -- -- 10 1,135
Illinois................ 13 1,114 6 766 1 209 20 2,089
Indiana................. -- -- 3 471 -- -- 3 471
Iowa.................... 1 99 6 448 -- -- 7 547
Louisiana............... -- -- 9 1,500 -- -- 9 1,500
Michigan................ 13 1,863 -- -- -- -- 13 1,863
Mississippi............. 1 124 10 1,104 -- -- 11 1,228
Nebraska................ 7 612 -- -- -- -- 7 612
North Carolina.......... 29 3,429 4 600 1 60 34 4,089
Ohio.................... -- -- 1 100 -- -- 1 100
South Carolina.......... 2 265 9 964 -- -- 11 1,229
Tennessee............... -- -- 2 226 -- -- 2 226
Texas................... 48 5,558 42 4,640 1 120 91 10,318
Virginia................ -- -- 5 343 -- -- 5 343
Wisconsin............... 7 1,302 7 924 -- -- 14 2,226
Wyoming................. 3 385 2 140 -- -- 5 525
--- ------ --- ------ --- --- --- ------
Total................... 161 18,960 163 18,923 3 389 327 38,272
=== ====== === ====== === === === ======
</TABLE>
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In addition to long-term care facilities, at November 30, 1997 the Company
operated 133 outpatient rehabilitation clinics in 18 states and 34
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.......................................... -- 3
Connecticut....................................... 3 --
Florida........................................... 17 9
Georgia........................................... 1 2
Illinois.......................................... -- 1
Indiana........................................... -- 1
Kansas............................................ 7 --
Kentucky.......................................... 1 --
Louisiana......................................... 6 2
Maryland.......................................... 2 --
Mississippi....................................... 7 --
Missouri.......................................... 4 --
Nevada............................................ 1 --
New Jersey........................................ -- 1
North Carolina.................................... 22 2
South Carolina.................................... 9 --
Tennessee......................................... 10 --
Texas............................................. 29 10
Virginia.......................................... 7 --
Washington........................................ 1 --
--- ---
Total......................................... 133 34
=== ===
</TABLE>
Substantially all of the Company's outpatient rehabilitation clinics and
institutional pharmacy facilities are leased under "triple net" leases.
Subject to the exceptions set forth below, the Company's hospital services
division enters into contracts with acute care hospitals for the management of
geriatric specialty programs, generally located inside such hospitals. Such
management contracts do not generally involve the lease or purchase of any
property. This division does, however, own two properties. The two owned
facilities are The Specialty Hospital of Austin (Texas) and The Specialty
Hospital of Houston (Texas), which have 104 beds and 134 beds, respectively.
The Company considers its properties to be in good operating condition and
suitable for the purposes for which they are being used.
Certain of the above properties serve as collateral for various mortgage
debt instruments or capitalized lease obligations. See Notes 5 and 11 to the
Consolidated Financial Statements. The Company regularly reviews its portfolio
of properties and intends to divest those properties which it believes do not
meet quality or financial performance standards.
ITEM 3. LEGAL PROCEEDINGS
As is typical in the healthcare industry, the Company is and will be subject
to claims that its services have resulted in resident injury or other adverse
effects, the risks of which will be greater for higher acuity residents
receiving services from the Company than for other long-term care residents.
The Company is, from time to time, subject to such negligence claims and other
litigation. In addition, resident, visitor, and employee injuries will also
subject the Company to the risk of litigation. From time to time, the Company
and its subsidiaries have
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been parties to various legal proceedings in the ordinary course of their
respective business. In the opinion of management, except as described below,
there are currently no proceedings which, individually or in the aggregate, if
determined adversely to the Company and after taking into account the
insurance coverage maintained by the Company, would have a material adverse
effect on the Company's financial position or results of operations.
The Company received a letter dated September 5, 1997 from an Assistant
United States Attorney ("AUSA") in the United States Attorney's Office for the
Eastern District of Texas (Beaumont) advising that the office is involved in
an investigation of allegations that services provided at some of the
Company's facilities may violate the Civil False Claims Act. The AUSA informed
the Company that the investigation is the result of a qui tam complaint (which
involves a private citizen requesting the federal government to intervene in
an action because of an alleged violation of a federal statute) filed under
seal against the Company, and the AUSA is investigating the allegations in
order to determine if the United States will intervene in the proceedings. The
AUSA has requested that the Company voluntarily produce a substantial amount
of documents, including medical records of former residents. Counsel for the
Company has met with the AUSA, and the parties are currently engaged in
discussions on whether the voluntary production of former residents' medical
records can be accomplished without violating the residents' rights to privacy
and confidentiality. Based upon the information currently known about the
complaint, the Company believes that given an opportunity to address the
allegations, the AUSA will find intervention by the United States is without
merit. The Company will vigorously contest the alleged claims if the complaint
is pursued.
The Department of Justice ("DOJ") has advised the Company that the United
States has declined to intervene in the qui tam complaint filed against The
Brian Center Corporation ("BCC") and one of its subsidiaries, Med-Therapy
Rehabilitation Services, Inc. ("Med-Therapy"), both wholly-owned subsidiaries
of the Company (and of LCA before the Mergers) in the federal district court
for the Western District of North Carolina. The Company does not know whether
the individual plaintiff will continue to pursue the alleged claims that BCC
and Med-Therapy caused certain therapists to make improper therapy record
entries with respect to screening services, and that any claims filed with
Medicare for payments based upon such improper record entries should be viewed
as false claims under the Civil False Claims Act. The Company will vigorously
contest any claims which the individual plaintiff pursues. No assurance can be
given that, if the plaintiff were to prevail in his claim, the resulting
judgement would not have a material adverse effect on the Company. Moreover,
in connection with the Company's acquisition of BCC, the primary stockholder
(Donald C. Beaver) agreed to indemnify and hold harmless the Company 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 the Company
common stock held by him.
The Company was served with a Petition, Cause No. 97-1500-G, Community
Healthcare Services of America, Inc., v. Rehability Health Services, Inc. and
Living Centers of America, Inc., in the 319th Judicial District Court of
Nueces County, Texas, seeking $5.0 million in damages, filed by Community
Health Services, Inc. ("Community"), in connection with a home health agency
management agreement entered into between Community and a subsidiary of the
Company. Such subsidiary operated a Texas home health agency which Community
managed. The Company is vigorously defending the allegations of Community that
the Company breached the agreement by terminating Community's management
services and has filed a lawsuit against Community for breach of the
agreement, Cause No. 97-03569; Rehability Health Services, Inc. v. Community
Healthcare Services, Inc., in the 353rd Judicial District Court of Travis
County, Texas. The Nueces County action was transferred to Travis County and
the two cases have been consolidated into Cause No. 97-03569.
18
<PAGE>
On June 10, 1997, a GranCare stockholder filed a civil action in state
district court in Harris County, Texas: Howard Gunty, Inc. Profit Sharing Plan
v. Gene E. Burleson, Charles M. Blalack, Antoinette Hubenette, Joel S. Kanter,
Ronald G. Kenny, Robert L. Parker, William G. Petty, Jr., Edward V. Regan,
Gary U. Rolle and GranCare, Inc. This complaint alleged, generally, that the
defendants breached their fiduciary duties owed to GranCare's stockholders by
failing to take all reasonable steps necessary to ensure that GranCare's
stockholders receive maximum value for their shares of GranCare common stock
in connection with the GranCare Merger. The plaintiffs sought (i) an
injunction prohibiting the consummation of the GranCare Merger or (ii)
alternatively, if the GranCare Merger were consummated, to have such
transaction rescinded and set aside. In addition, the plaintiffs sought
unspecified compensatory damages, costs and to have the action certified as a
class action.
On October 28, 1997, the parties to the aforementioned litigation entered
into an Agreement and Stipulation of Settlement (the "Settlement Agreement")
pursuant to which the plaintiffs agreed to dismiss, with prejudice, all claims
against GranCare in consideration of, among other things, (i) certain
additional disclosure included in the disclosure documents sent to GranCare
stockholders in connection with their approval of the GranCare Merger and (ii)
the payment by GranCare of the fees and expenses of plaintiffs' counsel in an
aggregate amount of no more than $350,000. The effectiveness of the Settlement
Agreement is subject to a number of conditions, including, among others, the
entry by the court of a final judgement approving the terms of the settlement.
GranCare entered into the Settlement Agreement based upon its belief that a
speedy resolution of this dispute was in the best interest of the GranCare
stockholders and in so doing did not in any way admit any wrongdoing or
liability in connection with this matter. The Company believes that the court
will accept the Settlement Agreement once filed following appropriate
shareholder notification.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE MANAGEMENT OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Keith B. Pitts.......... 40 Chairman of the Board, President, Chief Executive Officer
and Director
Leroy D. Williams....... 55 President--Post-Acute Division
Dennis G. Johnston...... 50 President--Hospital Services Division
William R. Korslin...... 47 President--Pharmaceutical Services Division
David L. Ward........... 42 President--Rehabilitation Services Division
Charles B. Carden....... 53 Executive Vice President and Chief Financial Officer
R. Jeffrey Taylor....... 49 Senior Vice President, Development
Susan Thomas Whittle.... 50 Senior Vice President, General Counsel and Secretary
</TABLE>
Keith B. Pitts was appointed Chairman of the Board, President, Chief
Executive Officer and a Director of the Company on November 4, 1997. Prior to
this, Mr. Pitts served as a consultant to Apollo in connection with the
Transactions since August 1997. From February 1997 to August 1997 Mr. Pitts
was a consultant to Tenet Healthcare Corp. ("Tenet"). Mr. Pitts served as the
Executive Vice President and Chief Financial Officer of OrNda HealthCorp, a
healthcare service provider in the United States, from August 1992 until its
merger with Tenet in January 1997. Prior to joining OrNda HealthCorp, from
July 1991 to August 1992, Mr. Pitts was a partner in Ernst & Young LLP's
Southeast Region Health Care Consulting Group, and from January 1988 to July
1991 he was a partner and Regional Director in Ernst & Young LLP's Western
Region Health Care Consulting Group. Mr. Pitts is a director of Sunburst
Hospitality Corporation, a corporation engaged in the hotel business.
19
<PAGE>
Leroy D. Williams was appointed President--Post-Acute Care Division of the
Company on November 4, 1997. Prior to this, Mr. Williams served as President,
Chief Operating Officer and as a director of LCA. Mr. Williams became a
director of LCA in January 1992, Chief Operating Officer of LCA in August 1995
and President in February 1996. Mr. Williams served as Executive Vice
President of LCA from December 1991 to February 1996. In 1978 Mr. Williams
joined LCA as Regional Controller of LCA--Eastern Region. From May 1983 to
February 1985, Mr. Williams was Financial Vice President for LCA--Texas. In
March 1985, he was appointed Vice President--Finance and became Senior Vice
President--Finance in January 1991.
Dennis G. Johnston was appointed President--Hospital Services Division of
the Company on November 4, 1997. Prior to this, Mr. Johnston served as a
Senior Vice President of GranCare and as President of Cornerstone, a wholly-
owned subsidiary of GranCare. Mr. Johnston joined GranCare as President of
Cornerstone in April 1995 and became Senior Vice President of GranCare in July
1995. Mr. Johnston was the co-founder of Cornerstone in 1990 and served as its
President and Chief Executive Officer from 1990 to 1995. From 1984 to 1989,
Mr. Johnston held various positions with the management subsidiary of Republic
Health Corporation, including that of Senior Development Officer.
William R. Korslin was appointed President--Pharmaceutical Services Division
of the Company on November 4, 1997. Prior to this, Mr. Korslin served as a
Vice President of LCA since September 1995 and as President of APS, LCA's
pharmaceutical services subsidiary, 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.
David L. Ward was appointed President--Rehabilitation Services Division of
the Company on November 4, 1997. Prior to this, Mr. Ward served as an officer
of LCA's American Rehability Services division since joining LCA in May 1996.
Prior to joining LCA, Mr. Ward served in a variety of management positions
with NovaCare, Inc., a national provider of rehabilitation services to long-
term care and other healthcare facilities since January 1988, including the
Southern States Regional President of NovaCare's Outpatient Division, the
Arizona Regional President for NovaCare's Hospital Division, NovaCare's Vice
President of Organizational Planning and Development, the Southwestern Vice
President of NovaCare's Contract Services Division, the Western Vice President
of NovaCare's Contract Services Division and NovaCare's National Sales
Manager.
Charles B. Carden was appointed Executive Vice President and Chief Financial
Officer of the Company on November 4, 1997. Prior to this, Mr. Carden served
as Executive Vice President and Chief Financial Officer of LCA since October
1996. Before joining LCA, Mr. Carden was Chief Financial Officer of Leaseway
Transportation Corp., where he was employed for 14 years. He also has held
various supervisory and analytical positions in corporate finance with Ford
Motor Company.
R. Jeffrey Taylor was appointed Senior Vice President, Development on
November 19, 1997. Prior to this, Mr. Taylor served as Senior Vice President
of GranCare since January 1997, as President of GranCare's ancillary services
division from November 1996 through January 1997, and as President of GCI
Renal Care, Inc., a subsidiary of GranCare, from February 1996 through
November 1996. Before joining GranCare, Mr. Taylor was Chief Executive Officer
of American Outpatient Services Corporation, a dialysis company, from July
1995 to February 1996. From January 1992 to June 1994 he was President of
Weisman, Taylor, Simpson & Sabatino, a health care merchant banking firm based
in California. From 1982 through 1992 Mr. Taylor served in several executive
capacities with American Medical International, Inc. including General Counsel
and Executive Vice President, Chief Administrative Officer.
Susan Thomas Whittle was appointed Senior Vice President, General Counsel
and Secretary of the Company on November 4, 1997. Prior to this, Ms. Whittle
served as Vice President, General Counsel and Secretary of LCA since September
1993. Before joining LCA, Ms. Whittle was a partner with the law firms of
Clark, Thomas & Winters of Austin, Texas since February 1992 and Wood,
Lucksinger & Epstein, a national healthcare law firm, from May 1981 through
February 1992.
20
<PAGE>
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 was traded on the New York Stock Exchange under
the symbol "LCA" through November 4, 1997. Since the time of the Mergers, the
Company's common stock has been traded on the NYSE under the symbol "PGN." The
high and low sales prices for each quarter for the last two fiscal years is
presented in the table below:
On November 24, 1997, the Board of Directors of the Company declared a
three-for-one stock split to stockholders of record as of December 15, 1997 to
be paid on December 30, 1997. The information below has been adjusted to give
effect to this stock split.
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FISCAL YEAR 1996
----------------------- -----------------------
QUARTER ENDED HIGH LOW HIGH LOW
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
December 31...... 9 7/16 9 3/16 11 11/16 8 1/2
March 31......... 11 3/4 11 1/4 13 11/16 10 1/2
June 30.......... 13 1/4 12 15/16 13 1/16 10 7/8
September 30..... 13 11/16 12 1/2 9 3/8 6 15/16
</TABLE>
NUMBER OF STOCKHOLDERS
As of December 19, 1997, there were approximately 1,248 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
its common stock. The Company's Senior Credit Facility, indenture with respect
to the Notes, and various other note agreements contain covenants which
effectively limit the ability of the Company to pay cash dividends. 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.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL INFORMATION
The following selected financial data are derived from LCA'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, 1992; such transaction has been accounted for using the pooling
of interests method of accounting. THE CONSOLIDATED FINANCIAL STATEMENTS DO
NOT GIVE EFFECT TO THE MERGERS. 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,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.......... $ 1,140,288 $ 1,114,491 $ 893,869 $ 708,873 $ 576,140
Income from
operations........... 95,108 89,556 57,005 49,468 38,464
Interest expense,
net................ 16,852 12,461 10,817 10,894 8,998
Equity
earnings/minority
interests.......... (735) (156) (204) 1,603 1,582
Net Income.......... 43,917 43,180 24,234 26,616 20,899
Pro forma taxes(1).... -- -- 599 899 899
Pro forma net
income(1)............ 43,917 43,180 23,635 25,717 20,000
Earnings per share(2). $ 0.74 $ 0.71 $ 0.42 $ 0.52 $ 0.44
Pro forma earnings per
share(1)(2).......... $ 0.74 $ 0.71 $ 0.41 $ 0.50 $ 0.42
Weighted average
number of shares
outstanding (in
thousands)(2)........ 59,325 60,945 57,102 51,240 47,472
OPERATING STATISTICS:
Number of centers (end
of period)........... 202 206 294 288 267
Average occupancy
rate................. 82.9% 83.9% 85.1% 85.2% 84.3%
Percentage of patient
revenues from:
Private............. 33.4% 31.9% 25.5% 23.7% 24.0%
Medicare............ 25.7 25.5 23.9 17.5 13.6
Medicaid............ 40.9 42.6 50.6 58.8 62.4
Percentage operating
margin............... 8.3% 8.0% 6.4% 7.0% 6.7%
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....... $102,104 $101,091 $34,631 $ 14,955 $ 15,960
Total assets.......... 874,367 809,612 730,708 525,639 376,248
Long term debt,
including current
portion.............. 295,959 276,448 216,910 206,097 135,409
Stockholders' equity.. 375,283 329,315 303,596 172,018 119,432
Total capitalization.. 671,242 605,763 520,506 378,115 254,841
</TABLE>
- --------
(1) 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.
(2) Earnings per share and number of shares outstanding have been adjusted to
reflect the three-for-one stock split. See Note 19 to Consolidated
Financial Statements.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
On November 4, 1997, in connection with the Mergers, LCA changed its name to
"Paragon Health Network, Inc." While "Paragon" is the same legal entity as
"LCA," following the Mergers the financial position of the Company was
significantly different from the financial position of the Company prior to
the Mergers. The historical financial information contained herein does not
reflect the financial position of the Company on a combined basis because the
Mergers were consummated subsequent to the Company's fiscal year end of
September 30, 1997. Accordingly, all financial information as of September 30,
1997 contained herein should not be construed as being indicative of the
financial position of the Company following the Mergers unless otherwise
noted. For an additional discussion of the Mergers, see Notes 1 and 19 to the
Consolidated Financial Statements.
On November 24, 1997, the Board of Directors of the Company declared a
three-for-one stock split to stockholders of record as of December 15, 1997 to
be paid on December 30, 1997. The per share information contained in this
section, and in the Company's Consolidated Financial Statements, is presented
on a pro forma basis in order to give effect to the stock split.
The Company derives its revenues by providing: (i) post-acute care; (ii)
pharmacy, therapy, subacute and other specialty medical services; and (iii)
contract management of specialty medical programs for acute care hospitals. In
general, the Company generates higher revenues and operating income from the
provision of specialty medical services than from routine skilled nursing
care. The Company seeks to enhance its operating margins by increasing the
proportion of its revenues derived from specialty medical services.
Subacute care refers to complex medical care and intensive nursing care
provided to patients with high acuity disorders. Post-acute care refers to any
care that a patient receives after discharge from an acute care hospital
setting, including subacute, long-term and specialty medical care. Long-term
care refers to care, typically conducted over an extended period of time, at a
skilled nursing or assisted living facility, as well as care rendered in a
patient's home, regardless of whether such care is rendered following
discharge from an acute care hospital. Specialty medical services refer to any
service provided by the Company other than routine skilled nursing care.
The Company's revenues and profitability are affected by ongoing efforts of
third-party payors to contain healthcare costs by limiting reimbursement
rates, increasing case management review and negotiating reduced contract
pricing. Government payors, such as state-administered Medicaid programs and,
to a lesser extent, the federal Medicare program, generally provide more
restricted coverage and lower reimbursement rates than private pay sources.
23
<PAGE>
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,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net Revenues:
Nursing home.............................. 65.6% 69.7% 82.6%
Non-nursing home:
Pharmacy................................ 17.3 11.4 10.4
Therapy................................. 15.7 18.5 6.6
Other................................... 1.4 0.4 0.4
-------- -------- --------
100.0 100.0 100.0
-------- -------- --------
Costs and Expenses:
Salaries and wages........................ 38.5 40.9 40.3
Employee benefits......................... 8.6 8.7 9.1
Nursing, dietary, and other supplies...... 4.7 5.4 6.3
Ancillary services........................ 19.7 16.9 16.6
General and administrative................ 14.2 15.1 15.1
Depreciation and amortization............. 3.5 3.5 3.5
Provision for bad debts................... 2.3 1.5 1.3
Life insurance proceeds................... -- (0.2) --
Gain on sale.............................. -- (2.0) --
Impairment of long-lived assets........... -- 1.9 --
Other..................................... -- 0.3 --
Mergers and acquisition cost.............. 0.2 -- 1.4
-------- -------- --------
Income from operations...................... 8.3 8.0 6.4
Interest expense, net....................... 1.5 1.1 1.2
-------- -------- --------
Income before income taxes and equity
earnings/minority interest................. 6.8 6.9 5.2
Provision for income taxes.................. 2.9 3.0 2.4
-------- -------- --------
Income before equity earnings/minority
interest................................... 3.9 3.9 2.8
Equity earnings/minority interest........... -- -- --
-------- -------- --------
Net income.................................. 3.9 3.9 2.8
Pro forma taxes............................. -- -- 0.1
-------- -------- --------
Pro forma net income........................ 3.9% 3.9% 2.7%
======== ======== ========
</TABLE>
Nursing home revenues are derived from the provision of two basic services:
routine services ($590.7 million or 79.0% in fiscal year 1997) and ancillary
services ($157.4 million or 21.0% in fiscal year 1997) 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 1997 due
to the divestiture of DevCon (see Note 2 to the Consolidated Financial
Statements) in the fourth quarter of fiscal year 1996 and a higher level of
competitive activity resulting from an increase in hospital-operated skilled
units, assisted living facilities, and other alternative care providers in key
markets. The DevCon divestiture reduced weighted average licensed bed count by
1,604 and total average residents by 1,428 for fiscal year 1997. 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.
24
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Weighted average licensed bed count......... 23,028 25,498 26,355
Total average residents..................... 19,095 21,405 22,428
Average occupancy........................... 82.9% 83.9% 85.1%
</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
through the Medicare and Medicaid programs. These sources include 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 cannot 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--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,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Private pay................................. 33.4% 31.9% 25.5%
Medicare.................................... 25.7% 25.5% 23.9%
Medicaid.................................... 40.9% 42.6% 50.6%
</TABLE>
The higher percentage of revenues derived from private pay sources for
fiscal year 1997 is primarily attributable to the growth in the Company's
pharmacy operations, which had a higher percentage of revenue derived from
private pay sources than any other pay source, and the divestiture of DevCon
in the fourth quarter of fiscal year 1996 which resulted in a reduction in the
percentage of net revenue derived from the Medicaid program for fiscal year
1997. In addition to pharmacy operations, the higher percentages of revenue
derived from private pay and Medicare sources in fiscal year 1996 is primarily
attributable to the acquisitions of American Rehabilitation Services, Inc. and
TMI late in fiscal year 1995. Average reimbursement rates for Medicare
patients have also 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.
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--Regulation." The cost of ancillary services,
which includes pharmaceuticals, is also affected by the level of service
provided and patient acuity. General and administrative
25
<PAGE>
expenses include the cost of the Company's various insurance programs, except
worker's compensation. See Note 12 to the Consolidated Financial Statements.
Fiscal 1997 Compared to Fiscal 1996. Net revenues comprising nursing home
and non-nursing home operations totaled $1.1 billion for the year ended
September 30, 1997, an increase of $25.8 million or 2.3%, as compared to
fiscal 1996. Revenues from nursing home operations decreased by $28.5 million,
which included $63.5 million due to divestitures, primarily the disposition of
the DevCon operations in the fourth quarter of fiscal 1996, and an $8.0
million reduction due to lower average occupancy rates. Rate increases of
$30.2 million and higher ancillary service billings of $13.8 million resulting
from the improvement in mix, primarily Medicare, partially offset the nursing
home revenue decreases. Non-nursing home revenue increased by $54.3 million
which consisted of an increase of $69.3 million for pharmacy services, a
decrease of $26.3 million for therapy services, and an increase of $11.3
million from home health, hospice and other services. The acquisition of
pharmacies in fiscal year 1996 that occurred late in the year primarily caused
the increase in pharmacy services revenue. The closure of approximately 30
clinics during fiscal 1996 that no longer met the Company's financial or
operating objectives resulted in a decrease in therapy services revenue. The
increase in home health, hospice and other services is primarily due to the
purchase of Colorado Home Care, Inc. in January 1997 and the purchase of the
remaining 50% interest in Heart of America Hospice, LLC during fiscal year
1997.
Costs and expenses totaled $1.0 billion for the year ended September 30,
1997, an increase of $20.2 million or 2.0%, as compared to fiscal 1996.
Excluding divestitures, costs for payroll and employee benefits, ancillary,
and general and administrative increased by $19.2, $38.1, and $7.0 million,
respectively. The increase in ancillary services was primarily the result of
higher pharmaceutical costs related to the increase in pharmacy services
revenue. Divestitures, primarily DevCon, reduced total expenses by $53.0
million.
The provision for bad debt expense increased by $9.6 million for the year
ended September 30, 1997, which included a reduction of $1.9 million due to
collection of a note receivable and other receivable that were substantially
reserved. The remaining increase of $11.5 million was primarily due to an
increase in average days outstanding for accounts receivable related to the
increase in pharmacy revenues, which have a higher provision for bad debts,
and focused Medicare reviews in several states for therapy operations, which
delays the payment cycle for Medicare receivables while each claim receives a
medical review. In addition, the centralization of billing and collection for
therapy operations resulted in delayed billing and a longer billing cycle
which resulted in an increase in average days outstanding for receivables. In
order to improve the collection process, therapy operations have improved the
timeliness of billing, implemented new collection procedures, and opened three
new regional collections sites for the clinics. Therapy operations were
partially removed from focused billing review in Texas during the third fiscal
quarter and fully removed in October 1997, although certain other states
remain on billing review. Although significant reductions in average days
outstanding were achieved during the fourth quarter of fiscal 1997, average
days outstanding for the therapy operations remain high compared to historical
levels. As a result, the Company recorded an additional provision for bad
debts of $5.0 million during the fourth quarter to reserve for potential
uncollectibility on the older accounts.
Merger and acquisition costs increased total expenses in fiscal year 1997 by
$2.6 million compared to a reduction of costs and expenses in fiscal 1996 of
$1.1 million from non-recurring items. The merger and acquisition costs of
$2.6 million for fiscal 1997 were related to the Mergers. The $1.1 million
reduction of expense from non-recurring items for 1996 consisted of a $2.0
million gain from the receipt of life insurance proceeds on the former
President of the rehabilitation services group, a $22.5 million gain in
September 1996 on the sale of the DevCon operations, a $2.9 million charge
primarily related to the closure of the Company's medical supplies business
and write-off of unamortized loan acquisition costs related to the Second
Amended and Restated Credit Agreement, and a $20.5 million impairment loss
related to the adoption of SFAS 121 (see Note 8 to the Consolidated Financial
Statements).
Net interest expense totaled $16.9 million for the year ended September 30,
1997, an increase of $4.4 million as compared to the same period for fiscal
1996. The increase reflected interest expense to finance the
26
<PAGE>
higher average level of working capital during fiscal year 1997, additional
debt to purchase $20.0 million of the Company's common stock late in fiscal
1996, and acquisitions, investments, and other capital expenditures during
fiscal 1997.
The provision for income taxes totaled $33.6 million in fiscal year 1997, a
decrease of $0.2 million from fiscal year 1996. The 1997 effective tax rate of
43.3% was 0.5% lower than the 1996 effective rate as a result of lower
amortization of non-deductible goodwill amortization and higher tax credits
which were partially offset by non-deductible merger and acquisition costs.
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. Divestiture 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 items ($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 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.
The adoption of SFAS 121, which occurred in the fourth quarter, resulted in
the identification and measurement of an impairment loss of $20.5 million
related to nursing facilities with a history of cash flow losses ($1.8
million), certain other nursing facilities where management believed an
impairment existed as a result of the competitive environment ($0.6 million),
goodwill, primarily TMI ($9.7 million), and other assets to be disposed ($8.4
million). 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.
Goodwill associated with an impaired asset was included with the carrying
value of that asset in performing both the impairment test and in measuring
the amount of impairment loss related to the asset. 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. The facilities with a history of cash flow losses operated at
a loss for periods ranging from one to four years. The undiscounted cash flows
for TMI were estimated based on the operating results of TMI subsequent to the
death of the President of the rehabilitation services group (founder of TMI)
and adjusted for the loss of contracts and impending business changes as a
result of his death (See Note 7 to the Consolidated Financial Statements). The
decision regarding the disposition of certain nursing facilities, which had
operating losses of $0.4 million during fiscal 1996, was completed at the time
of adoption of SFAS 121. See Note 8 to the Consolidated Financial Statements.
27
<PAGE>
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%.
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--HISTORICAL
Cash and cash equivalents were $14.4 million at September 30, 1997, a $7.0
million decrease from September 30, 1996, and working capital was $102.1
million, an increase of $1.0 million during fiscal year 1997. Cash provided by
operations was $54.8 million or $23.0 million more than fiscal year 1996. Net
income of $43.9 million and non-cash items totaling $65.6 million contributed
to the cash provided by operations. These items were offset by the decrease in
accrued expenses and other current liabilities of $5.7 million, primarily
related to income taxes due on the gain on sale of DevCon stock that were paid
in the second quarter of fiscal year 1997, and an increase in receivables of
$44.4 million. The increase in receivables was primarily attributable to
acquisitions ($4.1 million), revenue increases ($18.8 million), and an
increase in average days outstanding ($14.8 million).
The increase in receivables resulting from an increase in average days
outstanding is primarily related to the Company's therapy operations. The
increase in receivables for the therapy operations is related to the
centralization of billing and collection which resulted in delayed billing and
a longer billing cycle, and focused billing review, primarily in Texas.
Focused billing review substantially increases the processing time for payment
of therapy services by fiscal intermediaries. Therapy operations were
partially removed from focused billing review in Texas during the third fiscal
quarter and fully removed in October 1997, although certain other states
remain on billing review. In addition, therapy operations have implemented new
collection procedures and opened three new regional collection sites for the
clinics to improve the collection process. Although significant reductions in
average days outstanding were achieved during the fourth quarter of fiscal
1997, average days outstanding for the therapy operations remain high compared
to historical levels. As a result, the Company recorded an additional
provision for bad debts of $5.0 million during the fourth quarter to reserve
for potential uncollectibility on the older accounts.
Cash used in investing activities was $77.3 million in fiscal 1997 compared
to $66.7 million in fiscal year 1996. Investing activities in fiscal year 1997
included five pharmacy related acquisitions ($6.9 million), construction of
three assisted living facilities and expansion of existing facilities ($8.2
million), the acquisition of the remaining 50% interest in a hospice operation
($3.3 million), the acquisition of two home health agencies ($4.1 million),
and routine capital expenditures. Capital commitments on one assisted living
facility remaining under construction and expansion of existing long-term care
facilities totaled $2.2 million at September 30, 1997. These commitments are
expected to be funded by cash from operations or the Senior Credit Facility.
Cash flow from the disposition of assets was primarily related to the
divestiture of two long-term care facilities in Texas. Restricted investments
increased $20.5 million due to the collection of outstanding receivables from
the Company's third party insurance carrier and current year funding.
Financing activities provided $15.4 million during fiscal 1997 and were
primarily used to fund acquisitions, investments, and other capital
expenditures. In addition to the Senior Credit Facility, the Company has a
lease arrangement providing for up to $100.0 million to be used as a funding
mechanism for future assisted living and skilled nursing facility
construction, lease conversions, and other facility acquisitions (the
"Synthetic Lease"). This leasing program allows the Company to complete these
projects without committing significant financing
28
<PAGE>
resources. The lease is an unconditional "triple net" lease for a period of
seven years with the annual lease obligation a function of the amount spent by
the lessor to acquire or construct the project, a variable interest rate, and
commitment and other fees. The Company guarantees a minimum of approximately
83% of the residual value of the leased property and also has an option to
purchase the properties at any time prior to the maturity date at a price
sufficient to pay the entire amount financed, accrued interest, and certain
expenses. At September 30, 1997 approximately $28.9 million of this leasing
arrangement was utilized. The leasing program is accounted for as an operating
lease.
LIQUIDITY AND CAPITAL RESOURCES--FOLLOWING THE TRANSACTIONS
Senior Credit Facility. Prior to the Mergers, both LCA and GranCare
maintained senior credit facilities that were replaced with a new Senior
Credit Facility in connection with the Mergers. The Senior Credit Facility
consists of four components: a 6 1/2 year term loan facility in an aggregate
principal amount of $240 million (the "Tranche A Term Loan Facility"); a 7 1/2
year term loan facility in an aggregate principal amount of $250 million (the
"Tranche B Term Loan Facility"); an 8 1/2 year term loan facility in an
aggregate principal amount of $250 million (the "Tranche C Term Loan
Facility"); and a 6 1/2 year revolving credit facility in the maximum amount
of $150 million (the "Revolving Credit Facility"). Loans made under the
Tranche A Term Loan Facility ("Tranche A Term Loans"), the Tranche B Term Loan
Facility ("Tranche B Term Loans") and the Tranche C Term Loan Facility
("Tranche C Term Loans") are collectively referred to herein as "Term Loans."
Advances under the Revolving Credit Facility are sometimes referred to as
"Revolving Loans." The proceeds from borrowings under the Term Loans were
used, along with the proceeds of the Senior Subordinated Notes offering, to
fund a portion of the Recapitalization Merger, refinance a significant portion
of LCA's and GranCare's pre-merger indebtedness and to pay costs and expenses
associated with the Mergers.
The Term Loans will be amortized in quarterly installments totaling $0,
$26.5 million, $49.0 million, $51.5 million, $51.5 million, $56.5 million,
$186.0 million, $239.0 million and $80 million in the fiscal years 1998, 1999,
2000, 2001, 2002, 2003, 2004, 2005 and 2006, respectively. Principal amounts
outstanding under the Revolving Credit Facility will be due and payable in
April 2005. With the exception of approximately $14.0 million of letter of
credit issuances, as of December 19, 1997, there were no amounts borrowed
under the Revolving Credit Facility.
Interest on outstanding borrowings will accrue, at the option of the
Company, at the customary Alternate Base Rate (the "ABR") of The Chase
Manhattan Bank ("Chase") or at a reserve adjusted Eurodollar Rate (the
"Eurodollar Rate") plus, in each case, an Applicable Margin. The term
"Applicable Margin" means a percentage that will vary in accordance with a
pricing matrix based upon the respective term loan tenor and the Company's
leverage ratio. Through April 1998, the Applicable Margin for Revolving Loans
and Tranche A Term Loans will equal 1.25% for loans based on ABR ("ABR Loans")
and 2.25% for loans based on the Eurodollar Rate ("Eurodollar Loans"); for
Tranche B Term Loans, 1.50% in the case of ABR Loans and 2.50% in the case of
Eurodollar Loans; and for Tranche C Term Loans, 1.75% in the case of ABR Loans
and 2.75% in the case of Eurodollar Loans.
Subject in each case to certain exceptions, the following amounts are
required to be applied, as mandatory prepayments, to prepay the Term Loans:
(i) 75% of the net cash proceeds of the sale or issuance of equity by the
Company; (ii) 100% of the net cash proceeds of the incurrence of certain
indebtedness; (iii) 75% of the net cash proceeds of any sale or other
disposition by the Company or any of its subsidiaries of any assets (excluding
the sale of inventory and obsolete or worn-out property, and subject to a
limited exception for reinvestment of such proceeds within 12 months); and
(iv) 75% of excess cash flow for each fiscal year, which percentage will be
reduced to 50% in the event the Company's leverage ratio as of the last day of
such fiscal year is not greater than 4.50 to 1.00. Mandatory prepayments will
be applied pro rata to the unmatured installments of the Tranche A Term Loans,
the Tranche B Term Loans and the Tranche C Term Loans; provided, however, that
as long as any Tranche A Term Loans remain outstanding, each holder of a
Tranche B Term Loan or a Tranche C Term Loan will have the right to refuse any
such mandatory prepayment otherwise allocable to it, in which case the amount
so refused will be applied as an additional prepayment of the Tranche A Term
Loans. The Company will also have the right to prepay the Senior Credit
Facility, in whole or in part, at its option. Partial prepayments must be in
minimum amounts of $1 million and in increments of $100,000 in excess thereof.
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<PAGE>
Amounts applied as prepayments of the Revolving Credit Facility may be
reborrowed; amounts prepaid under the Term Loans may not be reborrowed.
Senior Subordinated Notes. Also in connection with the Mergers, on November
4, 1997 the Company completed a private offering to institutional investors of
$275 million of its 9.5% Senior Subordinated Notes due 2007, at a price of
99.5% of face value and $294 million of its 10.5% Senior Subordinated Discount
Notes due 2007, at a price of 59.6% of face value (collectively, the "Notes").
Interest on the Senior Subordinated Notes is payable semi-annually commencing
May 1, 1998. Interest on the Senior Subordinated Discount Notes will accrete
until November 1, 2002 at a rate of 10.57% per annum, compounded semi-
annually, and will be cash pay thereafter. The Notes will mature on November
1, 2007. The net proceeds from this offering, along with proceeds from the
Senior Credit Facility, were used to fund a portion of the Recapitalization
Merger, refinance a significant portion of LCA's and GranCare's pre-merger
indebtedness and to pay costs and expenses associated with the Mergers.
Other Significant Indebtedness. In connection with the Mergers, the Company
became a party to various agreements between GranCare and Health and
Retirement Properties Trust ("HRPT") and Omega Healthcare Investors, Inc.
("Omega"). HRPT is the holder of a mortgage loan to AMS Properties, Inc. ("AMS
Properties"), a wholly owned subsidiary of the Company, dated October 1, 1994,
in the aggregate principal amount of $11.5 million (the "HRPT Loan"). The HRPT
Loan is secured, in part, by mortgage and security agreements dated as of
March 31, 1995 (collectively, the "HRPT Mortgage") in favor of HRPT and
encumbering two nursing facilities in Wisconsin owned by AMS Properties. HRPT
has also leased seven nursing facilities located in Arizona, California and
South Dakota to GCI Health Care Centers, Inc. ("GCIHCC") under a master lease
agreement dated as of June 30, 1992 (the "GCIHCC Lease").
In connection with certain transactions effected in February 1997 by
GranCare's predecessor with Vitalink Pharmacy Services, Inc. ("Vitalink"),
Vitalink (a) paid a consent fee to HRPT in the amount of $10 million, which
was promptly reimbursed by GranCare immediately following the consummation of
the transactions with Vitalink and (b) entered into a limited guaranty (not to
exceed $15 million in the aggregate) of the obligations by GranCare, AMS
Properties and GCIHCC under the HRPT Mortgages, the GCIHCC Lease and the HRPT
Loan (collectively, the "HRPT Obligations") for so long as such obligations
remained outstanding. To support Vitalink's limited guaranty of the foregoing
obligations, GranCare caused an irrevocable letter of credit to be issued to
Vitalink in the event Vitalink made any payments under the limited guaranty
(the "HRPT Letter of Credit").
In connection with obtaining HRPT's consent to the Mergers, GranCare and
HRPT executed a Restructure and Asset Exchange Agreement dated October 31,
1997 pursuant to which HRPT and GranCare are in the process of restructuring
their relationship (the "HRPT/GranCare Restructuring"). As a part of the
HRPT/GranCare Restructuring, HRPT consented to the consummation of the Mergers
and the transactions related thereto. In addition, Vitalink's guaranty of the
HRPT Obligations was released and the HRPT Letter of Credit was terminated and
replaced with an unlimited guaranty by the Company and all subsidiaries of the
Company having an ownership interest in AMS and/or GCIHCC (individually, a
"Tenant Entity" and collectively, the "Tenant Entities") which guaranty is
secured by a cash collateral deposit of $15 million, the earned interest on
which is retained by HRPT. The performance by the Tenant Entities of their
respective obligations to HRPT continues to be secured by a pledge of one
million shares of HRPT common stock beneficially owned by GranCare and, as
part of the HRPT/GranCare Restructuring, GranCare agreed to waive the ability
to request a release of such collateral upon the attainment of certain
financial conditions. Accordingly, the Company does not have the ability to
sell these shares to meet any capital requirements. The terms of the leases
between HRPT and the Tenant Entities were extended to January 31, 2013,
constituting lease extensions ranging from 3 to 7 years and the aggregate base
rental for all facilities leased from HRPT (excluding the Exchange Facilities
(as defined below)) increased by $500,000 per year. AMS Properties will also
prepay the $11.5 million HRPT Loan and HRPT will release the HRPT Mortgage. In
addition, by April 29, 1998 the Tenant Entities will exchange, in a
transaction structured as a like-kind exchange transaction (the "Exchange
Transaction"), five nursing facilities (the two nursing facilities previously
subject to the HRPT Mortgage and three nursing facilities currently owned by
the Company (collectively the "Exchange Facilities")) for four nursing
facilities owned by HRPT. Following completion of the Exchange Transaction,
the Tenant Entities will
30
<PAGE>
lease back the Exchange Facilities for an aggregate annual rent amount equal
to the aggregate rent on the four HRPT facilities.
In consideration of the HRPT/GranCare Restructuring, the Company paid HRPT a
one time restructuring payment of $10 million. The overall impact of the
HRPT/GranCare Restructuring is not expected to have any material effect on the
Company's operations or cash flows. The Company also paid an aggregate amount
of $19.0 million to Vitalink Pharmacy Services, Inc. ("Vitalink") and
ManorCare, Inc. ("ManorCare") in connection with the settlement of certain
litigation initiated by Vitalink and ManorCare seeking to enjoin the
consummation of the GranCare Merger.
A wholly owned subsidiary of the Company, Professional Health Care
Management, Inc. ("PHCMI"), is the borrower under a $58.8 million mortgage
note executed on August 14, 1997 (the "Omega Note") in favor of Omega, and
under the related Michigan loan agreement dated as of June 7, 1992 as amended
(the "Omega Loan Agreement"). All $58.8 million was outstanding as of December
28, 1997.
The Omega Loan bears interest at a rate which is adjusted annually based on
either (i) changes in the Consumer Price Index or (ii) a percentage of the
change in gross revenues of PHCMI and its subsidiaries from year to year,
divided by 58.8 million, whichever is higher, but in any event subject to a
maximum rate not to exceed 105% of the interest rate in effect for the Omega
Loan for the prior calendar year. The current interest rate is 14.5% per
annum. The Omega Loan currently requires monthly, interest-only payments.
Additional interest accrues on the outstanding principal of the Omega Loan at
the rate of 1% per annum. Such interest is compounded annually and is due and
payable on a pro rata basis at the time of each principal payment or
prepayment. Beginning October 1, 2002, quarterly amortizing installments of
principal in the amount of $1.5 million will also become due and payable on
the first day of each calendar quarter. The entire outstanding principal
amount of the Omega Loan is due and payable on August 13, 2007. The Omega Loan
may be prepaid without penalty during the first 100 days following August 14,
2002. Payment of the Omega Loan after acceleration upon the occurrence of an
event of default will result in a prepayment penalty in the nature of a "make
whole" premium.
In addition to the interest on the Omega Loan described in the preceding
paragraph, and as a condition to obtaining Omega's consent to the transaction
between Vitalink and GranCare, PHCMI agreed to pay additional interest to
Omega in the amount of $20,500 per month, through and including July 1, 2002.
If the principal balance of the Omega Loan for any reason becomes due and
payable prior to that date, there will be added to the indebtedness owed by
PHCMI: (i) the sum of $1.0 million, plus; (ii) interest thereon at 11% per
annum to the prepayment date; less (iii) the amount of such additional
interest paid to Omega prior to the prepayment date.
As substitute collateral for certain divested PHCMI facilities, and as
consideration for granting its consent to such divestiture, Omega required
GranCare to cause a letter of credit in favor of Omega to be issued in the
amount of $9.0 million (the "Omega Letter of Credit"). The Omega Letter of
Credit can be drawn upon following the occurrence of: (i) any event of default
under the Omega Loan documents; (ii) if the Omega Letter of Credit is not
renewed or extended at least 30 days prior to its scheduled expiration date
(currently March 31, 1998); or (iii) if certain representations, warranties or
covenants of PHCMI under the Omega Loan documents are breached and such
breaches are not cured within the prescribed time after notice. Following the
Mergers, the Company caused the Omega Letter of Credit to be replaced with a
new standby letter of credit issued under the Senior Credit Facility.
The Omega Loan Agreement obligates PHCMI, among other things, to maintain a
minimum tangible net worth of at least $10 million, increased or decreased by
25% of PHCMI's net income (but in no event less than $10 million). The Company
must contribute additional equity to PHCMI if and when necessary to assure
that such minimum tangible net worth test is met. PHCMI has satisfied this
test in the past without the contribution of additional equity and management
believes that it will continue to do so in the future.
Other Factors Affecting Liquidity and Capital Resources. While federal
regulations do not provide states with grounds to curtail payments under their
Medicaid reimbursement programs due to state budget deficiencies or delays in
enactment of new budgets, states have nevertheless curtailed payments in such
circumstances in the past. In particular, some states have delayed the payment
of significant amounts owed to health care providers
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such as the Company for health care services provided under their respective
Medicaid programs. The failure by a state to reimburse the Company for its
Medicaid receivables could have a material adverse effect on the financial
position of the Company.
In addition to principal and interest payments on its long-term
indebtedness, the Company has significant rent obligations relating to its
leased facilities. The Company's estimated principal payments, cash interest
payments, and rent obligations for 1998 are approximately $187 million.
The Company's operations require capital expenditures for renovations of
existing facilities in order to continue to meet regulatory requirements, to
upgrade facilities for the treatment of subacute patients and to accommodate
the addition of specialty medical services, and to improve the physical
appearance of its facilities for marketing purposes. The Company estimates
that total capital expenditures for the year ending September 30, 1998 will be
approximately $60 million of which $30 million represents maintenance capital
expenditures.
Management is in the process of integrating the operations of LCA and
GranCare and conforming their respective accounting policies. As discussed
above, LCA's provision for bad debt expense increased by $9.6 million for the
year ended September 30, 1997 as compared to the prior fiscal year, primarily
as the result of an increase in average days outstanding for accounts
receivable related to the increase in pharmacy revenues, focused Medicare
reviews in several states for therapy operations, and the centralization of
billing and collection for therapy operations. In addition, GranCare increased
its provision for bad debt expense by $8.0 million in the quarter ended June
30, 1997 as a result of a change in methodology in calculating bad debt
expense. In connection with conforming the accounting policies of LCA and
GranCare, management is continuing to monitor trends in the Company's accounts
receivable and is reviewing the Company's collection procedures (including the
timing of filing claims for reimbursement) and allowance policy, which could
result in a historical adjustment to GranCare's allowance for bad debts and in
future changes to the Company's bad debt expense.
The Company believes that the cash flow generated from its operations, the
Company's cash and cash equivalents, together with amounts available under the
Senior Credit Facility, should be sufficient to fund its debt service
requirements, working capital needs, anticipated capital expenditures and
other operating expenses. The Revolving Credit Facility will provide the
Company with revolving loans in an aggregate principal amount at any time not
to exceed $150 million, of which $136 million is expected to be available
after considering approximately $14 million in outstanding letters of credit.
The Company's future operating performance and ability to service or refinance
the Notes and to extend or refinance the Senior Credit Facility will be
subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control.
As discussed above, the Company's revenues are a function of occupancy rates
in the Company's facilities and payor mix. Management believes that the
Mergers will have a slightly positive effect on the Company's occupancy rates
and payor mix.
Because the Mergers were completed on November 4, 1997, the Company plans to
recognize the costs associated therewith during the quarter ending December
31, 1997. While management has not yet determined the amount of the costs,
management expects that such costs will be significant.
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 September 1997, without a corresponding increase in
Medicaid and Medicare reimbursement rates would adversely impact the Company.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Paragon Health Network, Inc.
We have audited the accompanying consolidated balance sheets of Paragon
Health Network, Inc. (formerly Living Centers of America, Inc.) and
subsidiaries as of September 30, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 1997. 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 Paragon Health Network, 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 Paragon Health Network, Inc., and subsidiaries at September 30, 1997 and
1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
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.
ERNST & YOUNG LLP
Houston, Texas
December 10, 1997
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<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
ASSETS 1997 1996
------ -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 14,355 $ 21,394
Receivables (less allowances of $33,138 and $17,405)..... 211,989 192,340
Notes receivable, net.................................... 2,223 3,756
Supplies................................................. 21,237 16,582
Prepaid expenses......................................... 5,276 6,450
Deferred income taxes.................................... 24,294 19,644
Other (including patient trust funds of $3,799 and
$3,768)................................................. 7,855 9,273
-------- --------
TOTAL CURRENT ASSETS................................... 287,229 269,439
PROPERTY AND EQUIPMENT:
Land, buildings and improvements......................... 378,251 359,137
Furniture, fixtures and equipment........................ 121,698 104,363
Leased property under capital leases..................... 12,551 12,551
-------- --------
512,500 476,051
Less accumulated depreciation............................ 210,117 186,333
-------- --------
302,383 289,718
GOODWILL, NET.............................................. 196,120 188,508
RESTRICTED INVESTMENTS..................................... 51,976 31,040
INVESTMENT IN UNCONSOLIDATED AFFILIATE..................... 5 3,016
NOTES RECEIVABLE, NET...................................... 11,200 10,780
OTHER ASSETS............................................... 25,454 17,111
-------- --------
$874,367 $809,612
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt... $ 43,196 $ 13,746
Accounts payable......................................... 46,872 48,088
Accrued payroll and related expenses..................... 66,866 60,089
Accrued property taxes................................... 5,342 4,995
Patient trust funds...................................... 3,799 3,768
Accrued income taxes payable............................. 6,231 16,921
Other accrued expenses................................... 12,819 20,741
-------- --------
TOTAL CURRENT LIABILITIES.............................. 185,125 168,348
LONG-TERM DEBT, NET OF CURRENT MATURITIES.................. 252,763 262,702
LONG-TERM INSURANCE RESERVES............................... 27,555 26,093
MINORITY INTERESTS......................................... 733 289
DEFERRED INCOME TAXES AND OTHER NONCURRENT LIABILITIES..... 32,908 22,865
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 shares
authorized; 60,803,760 shares issued.................... 608 608
Capital surplus.......................................... 226,972 227,766
Retained earnings........................................ 164,650 120,733
Unrealized gain (loss) on securities available-for-sale.. 244 (18)
Treasury stock at cost--2,004,444 and 2,301,159 shares... (17,191) (19,774)
-------- --------
TOTAL STOCKHOLDERS' EQUITY............................. 375,283 329,315
-------- --------
$874,367 $809,612
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
NET REVENUES
Nursing home revenue:
Net patient services..................... $ 742,046 $ 767,747 $724,924
Other.................................... 6,004 8,799 13,556
Non-nursing home revenue:
Pharmacy services........................ 196,748 127,439 92,843
Therapy services......................... 179,506 205,785 59,278
Home health, hospice, and other.......... 15,984 4,721 3,268
---------- ---------- --------
1,140,288 1,114,491 893,869
COSTS AND EXPENSES:
Salaries and wages......................... 438,693 455,702 360,571
Employee benefits.......................... 98,070 96,716 82,007
Nursing, dietary and other supplies........ 53,531 60,427 55,991
Ancillary services......................... 224,912 188,937 148,746
General and administrative................. 161,795 168,333 134,697
Depreciation and amortization.............. 39,309 39,214 31,158
Provision for bad debts.................... 26,282 16,666 11,220
Life insurance proceeds.................... -- (2,015) --
Gain on sale............................... -- (22,451) --
Impairment of long-lived assets............ -- 20,489 --
Other expenses............................. -- 2,917 --
Merger and acquisition costs............... 2,588 -- 12,474
---------- ---------- --------
1,045,180 1,024,935 836,864
---------- ---------- --------
INCOME FROM OPERATIONS................. 95,108 89,556 57,005
INTEREST EXPENSE, NET:
Interest expense........................... 21,492 16,750 15,073
Interest income............................ (4,640) (4,289) (4,256)
---------- ---------- --------
16,852 12,461 10,817
---------- ---------- --------
INCOME BEFORE INCOME TAXES AND EQUITY
EARNINGS/MINORITY INTEREST............ 78,256 77,095 46,188
PROVISION FOR INCOME TAXES................... 33,604 33,759 21,750
---------- ---------- --------
INCOME BEFORE EQUITY EARNINGS/ MINORITY
INTEREST.............................. 44,652 43,336 24,438
EQUITY EARNINGS/MINORITY INTEREST............ (735) (156) (204)
---------- ---------- --------
NET INCOME................................... $ 43,917 $ 43,180 $ 24,234
========== ========== ========
PRO FORMA DATA (UNAUDITED):
INCOME BEFORE PRO FORMA TAXES.............. $ 43,917 $ 43,180 $ 24,234
PRO FORMA TAXES............................ -- -- 599
---------- ---------- --------
PRO FORMA NET INCOME................... $ 43,917 $ 43,180 $ 23,635
========== ========== ========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING.......................... 59,325 60,945 57,102
========== ========== ========
EARNINGS PER SHARE........................... $ 0.74 $ 0.71 $ 0.42
========== ========== ========
PRO FORMA EARNINGS PER SHARE................. $ 0.74 $ 0.71 $ 0.41
========== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK GAIN 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,
1994................... 51,405 $514 $119,500 $54,802 -- 525 $(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........ 8,625 86 98,975 99,061
Issuance of stock as
consideration for TMI
merger transaction..... 774 8 8,315 8,323
Funding of employee
benefit plans.......... 656 (132) 678 1,334
Funding of options
exercised under 1992
Employee Stock Option
Plan, net of tax....... 146 (162) 861 1,007
------ ---- -------- -------- ---- ----- -------- --------
BALANCE, SEPTEMBER 30,
1995................... 60,804 608 226,694 77,553 -- 231 (1,259) 303,596
Net income.............. 43,180 43,180
Funding of employee
benefit plans.......... 736 (138) 846 1,582
Funding of options
exercised under 1992
Employee Stock Option
Plan, net of tax....... 336 (120) 639 975
Purchase of treasury
stock.................. 2,328 (20,000) (20,000)
Unrealized loss on
securities available-
for-sale............... (18) (18)
------ ---- -------- -------- ---- ----- -------- --------
BALANCE, SEPTEMBER 30,
1996................... 60,804 608 227,766 120,733 (18) 2,301 (19,774) 329,315
Net income.............. 43,917 43,917
Funding of employee
benefit plans.......... 92 (177) 1,521 1,613
Funding of options
exercised under 1992
Employee Stock Option
Plan, net of tax....... (15) (21) 191 176
Issuance of treasury
stock in exchange for
warrants............... (871) (99) 871 0
Unrealized gain on
securities available-
for-sale............... 262 262
------ ---- -------- -------- ---- ----- -------- --------
BALANCE, SEPTEMBER 30,
1997................... 60,804 $608 $226,972 $164,650 $244 2,004 $(17,191) $375,283
====== ==== ======== ======== ==== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 43,917 $ 43,180 $ 24,234
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 39,309 39,214 31,158
Income taxes deferred...................... (753) (9,141) (3,429)
Equity earnings/minority interest.......... 735 156 204
Provision for bad debts.................... 26,282 16,666 11,220
Gain on sale............................... -- (22,451) --
Impairment of long-lived assets............ -- 20,489 --
Changes in noncash working capital:
Receivables................................ (44,362) (69,634) (35,387)
Receivable from affiliates................. -- 2,698 (844)
Supplies................................... (3,984) (519) 258
Prepayments, including insurance........... 1,227 4,053 (4,106)
Other current assets....................... (1,032) (221) (2,073)
Accounts payable........................... (2,073) (13,774) 34,194
Accrued expenses and other current
liabilities............................... (5,673) 17,465 8,860
Changes in long-term insurance reserves...... 1,462 3,107 1,321
Other........................................ (215) 520 824
-------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES...... 54,840 31,808 66,434
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisitions and investments................. (30,548) (68,710) (87,602)
Purchases of property and equipment.......... (36,961) (53,366) (38,946)
Proceeds from sale of DevCon................. -- 47,500 --
Disposals of property, equipment and other
assets...................................... 8,365 2,690 7,022
Restricted investments....................... (20,543) 5,564 (19,822)
Additions to notes receivable................ (2,069) (1,519) (3,488)
Collections on notes receivable.............. 4,649 981 3,173
Other........................................ (211) 209 (198)
-------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES.......... (77,318) (66,651) (139,861)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt................. 1,875 1,469 219,342
Net draws under credit line.................. 22,685 194,615 1,955
Repayment of long-term debt.................. (9,297) (138,708) (247,461)
Proceeds from additional public offering..... -- -- 99,061
Purchase of treasury stock................... -- (20,000) --
Shareholder distributions.................... -- -- (2,381)
Funding of options under 1992 employee stock
option plan and employee benefit plans...... 176 975 1,007
-------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES...... 15,439 38,351 71,523
INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS......................................... (7,039) 3,508 (1,904)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD. 21,394 17,886 19,790
-------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD....... $ 14,355 $ 21,394 $ 17,886
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Paragon Health Network, Inc. ("Paragon"), formerly known as Living Centers
of America, Inc. ("LCA"), was formed in November 1997 through the
recapitalization by merger of LCA with a newly-formed entity owned by certain
affiliates of Apollo Management, L.P. and certain other investors (the
"Recapitalization Merger"), and the subsequent merger of GranCare, Inc.
("GranCare") with a wholly-owned subsidiary of LCA (the "GranCare Merger" and
collectively with the Recapitalization Merger, the "Mergers"). See Note 19.
The accompanying consolidated financial statements include the accounts of LCA
and its subsidiaries and all significant intercompany accounts and
transactions have been eliminated. The accompanying consolidated financial
statements do not give effect to the Mergers as they occurred subsequent to
September 30, 1997 and are not indicative of the consolidated financial
statements following the Mergers.
References to the "Company" herein refer to LCA and its operations prior to
the consummation of the Mergers and to Paragon and its operations following
the consummation of the Mergers. The Company's continuum of post-acute care
services encompasses skilled nursing, subacute and medically complex care as
well as a variety of related ancillary services. These ancillary services
include pharmacy, rehabilitation, and hospital program management. The Company
operates in 38 states with significant concentration of facilities and beds in
its key markets.
Effective July 31, 1995, the Company issued approximately 19,437,000 shares
(6,479,000 shares prior to the three-for-one stock split, see Note 19) of its
common stock in a merger transaction with The Brian Center Corporation ("BCC")
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 Company's 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 $13.4 million and $14.5 million at
September 30, 1997 and 1996, 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% and maturities through 2012, including
approximately $9.8 million due after 2000. Notes receivable, net, at September
30, 1997 and 1996, include reserves for potential uncollectible amounts of
$1.2 million and $3.5 million, respectively. Management believes the
collateral values are sufficient to recover the net carrying amount of these
notes in the event of default.
Supplies
Supplies, consisting principally of pharmaceutical and medical supplies, are
valued at the lower of cost (first-in, first-out) or market.
38
<PAGE>
PARAGON HEALTH NETWORK, 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 $0.3 million, $0.2
million and none for the three years ended September 30, 1997, 1996 and 1995,
respectively. Maintenance and repairs are charged to operations as incurred
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 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, 1997 and 1996 was $20.3 million and $11.7 million, respectively.
Amortization of goodwill charged to expense was $7.3 million, $5.6 million and
$2.8 million for the three years ended September 30, 1997, 1996 and 1995,
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 fair value.
See Note 4.
Investment in Unconsolidated Affiliate
Investment in unconsolidated affiliate at September 30, 1996 primarily
consisted of a 50% owned interest in Heart of America Hospice, LLC, ("HOA") a
Kansas-based hospice which was recorded under the equity method. The remaining
50% interest of HOA was purchased during fiscal 1997. See Note 3.
39
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 for the year
ended September 30, 1995 which included pre-merger (non-BCC entities)
operations and has continued to file on a consolidated basis for subsequent
years. Federal and state income tax payments made (including the BCC Entities)
for the three years ended September 30, 1997, 1996 and 1995 were $40.0
million, $31.5 million and $21.2 million, respectively.
The various corporations (exclusive of the S corporations) included in the
BCC Entities filed consolidated tax returns through the date of the BCC
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 BCC merger were 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 LCA.
Treasury Stock
During fiscal year 1996, the Company acquired 2,327,220 shares of treasury
stock (775,740 shares prior to the three-for-one stock split) on the open
market for a total cost of $20.0 million. The shares repurchased were
primarily intended to be used as part of a plan to fund the employer's
contributions 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.
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%, 26% and 24% and Medicaid revenues
represented 41%, 43% and 51% of net revenue for the three years ended
September 30, 1997, 1996 and 1995, respectively.
40
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company is aware of one current
investigation and an additional possible investigation involving allegations
of potential wrongdoing. See Note 11. While the Company believes that it is in
compliance with all applicable laws and regulations, compliance with such laws
and regulations can be subject to future government review and interpretation
as well as significant regulatory action including fines, penalties, and
exclusion from the Medicare and Medicaid programs.
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 are required to provide pro forma
disclosures of net income and earnings per share as if the fair-value method
of accounting had been applied. See Note 16 for the pro forma effects on the
Company's reported net income and earnings per share assuming the election had
been made to recognize compensation expense on stock-based awards in
accordance with SFAS 123.
Earnings per Share
In February 1997 the Financial Accounting Standards Board adopted Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 is designed to simplify the standards for computing earnings per
share and increase the comparability of earnings per share data on an
international basis. The Company will implement SFAS 128 in the first quarter
of fiscal year 1998. The earnings per share impact of this implementation has
not yet been determined.
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 1997
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 retained a small ownership interest in the
recapitalized company. Proceeds from the divestiture were utilized to reduce
debt related to various acquisitions.
41
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. ACQUISITIONS
Fiscal Year 1997 Acquisitions
During fiscal year 1997 the Company acquired the remaining 50% interest in
Heart of America Hospice, L.L.C., a Kansas based hospice company, for $3.3
million in cash. This transaction was recorded using the purchase method of
accounting.
The Company also acquired institutional pharmacies, home health agencies,
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 1996 Acquisitions
In May 1996, the Company acquired a 50% interest in Heart of America
Hospice, L.L.C., 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 $2.0 million was
paid during 1997 in connection with this acquisition based on the achievement
of predetermined earnings targets and an additional $1.5 million may be paid
if predetermined earnings targets are achieved during the subsequent two
years. Additional consideration is included in goodwill when paid.
Effective September 1, 1996, the Company acquired the stock of Allied
Pharmacy Management, Inc., which operated five institutional pharmacies and a
home health care business in Florida, for $29.6 million in cash.
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, LCA 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 $36.0 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 included approximately
$81.9 million of goodwill which will be amortized over a 30-year period.
Effective August 1, 1995 the Company issued approximately 774,000 shares
(258,000 shares prior to the three-for-one stock split) 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 included approximately $7.9 million of goodwill. The goodwill was
subsequently written off in September, 1996. See Notes 7 and 8.
42
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following information presents the results of operations on a pro forma
basis as though the Rehability and TMI transactions all occurred on October 1,
1994. 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>
YEAR ENDED
SEPTEMBER 30, 1995
------------------
<S> <C>
Net revenues .......................................... $1,041,228
Net income............................................. 26,893(a)
Earnings per share..................................... $ 0.46(a)
</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 $0.67, respectively.
On July 31, 1995, the Company acquired all of the outstanding stock of the
BCC Entities in exchange for approximately 19,437,000 shares (6,479,000 shares
prior to the three-for-one stock split) 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) have been reclassified to
Capital Surplus.
Separate results of operations of the companies prior to the acquisition are
summarized below (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS ENDED
JULY 31, 1995
--------------------------
LIVING BCC
CENTERS ENTITIES COMBINED
-------- -------- --------
<S> <C> <C> <C>
Net Revenues........................................ $529,405 183,127 $712,532
Income from Operations (a).......................... $ 37,310 10,004 $ 47,314
Net Income.......................................... $ 20,110 2,109 $ 22,219
Pro Forma Net Income................................ $ 20,110 1,510 $ 21,620
</TABLE>
- --------
(a) Includes merger and acquisition expenses of $4.5 million for LCA and $1.3
million for BCC Entities.
In addition to the above, the Company 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.
43
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. RESTRICTED INVESTMENTS
Restricted investments at September 30, 1997 and 1996 included the
following:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1997 COST GAINS LOSSES VALUE
- ------------------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury Notes................... $36,234 $234 $ (9) $36,459
Asset-backed securities............... 2,604 32 (2) 2,634
Corporate debt securities............. 5,073 68 -- 5,141
Mortgage-backed securities............ 4,273 54 (2) 4,325
Repurchase Pooling Arrangement........ 539 -- -- 539
Cash.................................. 2,878 -- -- 2,878
------- ---- ---- -------
Total............................... $51,601 $388 $(13) $51,976
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1996 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>
Proceeds from the sale and maturities of investments were $19.1 million,
$14.5 million and $3.7 million for the three years ended September 30, 1997,
1996 and 1995, respectively. Gross gains (losses) of ($0.2) million, $0.1
million and $0.1 million were realized for the three years ended September 30,
1997, 1996 and 1995, respectively.
The amortized cost and estimated fair value of debt securities and other
investments at September 30, 1997 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 FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 7,044 $ 7,047
Due after one year through five years....................... 26,579 26,752
Due after five years through ten years...................... 7,684 7,801
------- -------
41,307 41,600
Asset-backed securities..................................... 2,604 2,634
Mortgage-backed securities.................................. 4,273 4,325
Repurchase Pooling Arrangement.............................. 539 539
Cash........................................................ 2,878 2,878
------- -------
Total..................................................... $51,601 $51,976
======= =======
</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.
44
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. DEBT
Long-term debt at September 30, 1997 and 1996 is summarized in the following
table (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Bank Credit Facility........................................ $255,000 $225,315
SouthTrust Bank of Alabama, NA.............................. 20,000 20,000
Variable Annuity Life Insurance Company..................... 10,000 10,000
NationsBank of Texas, NA.................................... 3,000 10,000
Mortgage notes (6% to 10.75% due through 2014).............. 609 1,444
Other notes payable (8% to 10% due through 2008)............ 3,547 5,688
-------- --------
292,156 272,447
Obligations under capital leases ........................... 3,803 4,001
-------- --------
295,959 276,448
Less short-term notes payable and current portion........... (43,196) (13,746)
-------- --------
Total long-term debt........................................ $252,763 $262,702
======== ========
</TABLE>
Interest expense paid was $21.8 million, $19.3 million and $17.7 million
during the three years ended September 30, 1997, 1996 and 1995, respectively.
Substantially all of the above indebtedness was refinanced in connection with
the Mergers. See Note 19.
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 working capital financing and expansion
capital 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 LCA,
including a $350 million five-year revolving credit and competitive advance
facility ("Tranche 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 LCA 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
LCA's leverage ratio at the quarter-end immediately preceding the borrowing.
LCA 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. The Tranche B balance at August 18, 1997 of
$140.0 million was converted to a term loan and scheduled to be 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, 1997 and 1996 (after giving consideration to outstanding letters
of credit of $4.7 million) were $230.3 million and $270.0 million,
respectively. As of September 30, 1997 and 1996, the announced base rate of
NationsBank was 8.5% and 8.25%, 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, 1997, the Company had outstanding three interest rate swap
agreements with commercial banks having a total notional principal amount of
$60 million. These
45
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1997, 1996, and 1995 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 interest
expense 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.
In October 1993 the Company borrowed $20 million from SouthTrust Bank of
Alabama, NA which 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.
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 $10 million promissory note with
NationsBank of Texas, N.A. Subject to NationsBank'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 original maturity date of the earlier of demand or
May 1995 was extended by several subsequent extension agreements to November
1997. The interest rate on each advance is quoted separately based on market
conditions that exist at that time. At September 30, 1997, there was $3.0
million outstanding under the note agreement.
Long-term debt maturing in the next five fiscal years, prior to the Mergers
(see Note 19), is presented below (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
1998................................................. $43,196
1999................................................. 5,468
2000................................................. 4,990
2001................................................. 222,541
2002................................................. 4,913
</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 and limitations on dividends. See Note 19 which
details long-term debt subsequent to the Mergers.
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 represent 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 $3.5 million, $2.2 million and $1.8 million for the
three years ended September 30, 1997, 1996 and 1995, respectively.
46
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
In the third quarter of fiscal year 1996 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.
NOTE 8. IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER EXPENSES
In the fourth quarter of fiscal year 1996 the Company adopted SFAS 121 which
resulted in the identification and measurement of an impairment loss of $20.5
million related to nursing facilities with a history of cash flow losses,
certain other nursing facilities where management believed an impairment
existed as a result of the competitive environment, goodwill (primarily
attributable to TMI), and other assets to be disposed. 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. Goodwill associated with an
impaired asset was included with the carrying value of that asset in
performing both the impairment test and in measuring the amount of impairment
loss related to the asset. 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. The facilities with a history of cash flow losses operated at a loss
for periods ranging from one to four years. The undiscounted cash flows for
TMI were estimated based on the operating results of TMI subsequent to the
death of the President of the rehabilitation services group (founder of TMI)
and adjusted for the loss of contracts and impending business changes as a
result of his death. See Note 7. The decision regarding the disposition of
certain nursing facilities, which had operating losses of $0.4 million during
fiscal 1996, was completed at the time of adoption of SFAS 121. Facilities to
be disposed of had a carrying value of $1.5 million and $4.8 million at
September 30, 1997 and 1996, respectively.
The Company also recorded other charges of $2.9 million in the fourth
quarter of fiscal year 1996 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.
47
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. RESTRUCTURING PLAN
On June 14, 1996, the Company finalized and approved a plan originating in
June 1995 to restructure the operations and exit certain activities of ARS.
This plan included 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 was recorded in June 1996 and included an
accrual for estimated exit costs of $4.4 million related to
termination/severance for displaced employees and $4.2 million related to
future lease costs for abandoned real property. During the fourth quarter of
fiscal year 1997 the Company lowered its original estimate of the accrual for
exit costs which resulted in a reduction to the original purchase price of
$1.9 million. The revised increase in purchase price as a result of the
restructuring plan includes the following:
<TABLE>
<S> <C>
Termination/severance for displaced employees..................... $3,760
Future lease costs for abandoned real property.................... 2,561
Write off of abandoned tangible and intangible assets at closed
locations........................................................ 1,920
------
Total........................................................... $8,241
======
</TABLE>
Through September 30, 1997 the Company has charged $3.3 million against the
accrual for termination/severance for approximately 350 displaced employees
and $1.5 million against the accrual for future lease costs. The restructuring
was substantially completed by March 31, 1997. At September 30, 1997, the
Company believes the remaining accruals for the restructuring are adequate.
NOTE 10. INCOME TAXES
The provision for income taxes is presented in the table below (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER
30,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................ $34,214 $38,326 $21,982
State & Local...................................... 5,370 5,141 4,237
------- ------- -------
39,584 43,467 26,219
Deferred:
Federal............................................ (4,922) (8,276) (3,698)
State & Local...................................... (1,058) (1,432) (771)
------- ------- -------
(5,980) (9,708) (4,469)
------- ------- -------
Total............................................ $33,604 $33,759 $21,750
======= ======= =======
</TABLE>
48
<PAGE>
PARAGON HEALTH NETWORK, 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,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal statutory income tax rate................ 35.0% 35.0% 35.0%
Increased (decrease) in taxes resulting from:
State & local taxes, net of federal tax
benefits...................................... 3.6 3.4 4.9
Permanent book/tax differences, primarily
resulting from goodwill....................... 2.7 7.0 2.0
Work opportunity/targeted job tax credits...... (0.3) -- (2.7)
Non-deductible merger and acquisition cost..... 1.0 -- 7.2
Other, net....................................... 1.3 (1.6) 0.7
-------- -------- --------
Effective tax rate............................... 43.3% 43.8% 47.1%
======== ======== ========
</TABLE>
The components of deferred income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER
30,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Reserves for potential claims....................... $ 907 $(2,134) $(1,984)
Purchase accounting................................. (1,835) (1,749) (1,828)
FAS 121 asset valuation............................. 1,669 (4,030) --
Tax depreciation under book......................... (1,066) (1,822) (1,023)
Bad debts........................................... (6,841) (1,295) (761)
Texas Occupational Injury accrual................... -- 1,847 835
Net operating losses................................ (59) (262) --
Other, net.......................................... 1,186 (525) 292
Changes in valuation allowance...................... 59 262 --
------- ------- -------
Total............................................. $(5,980) $(9,708) $(4,469)
======= ======= =======
</TABLE>
49
<PAGE>
PARAGON HEALTH NETWORK, 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,
------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Amounts relating to property and equipment................ $(32,967) $(34,773)
Other..................................................... (5,107) (1,596)
-------- --------
Total deferred tax liabilities ....................... (38,074) (36,369)
-------- --------
Deferred tax assets:
Financial reserves not yet deductible for tax purposes:
Asset valuation......................................... 3,552 4,243
Insurance............................................... 7,261 8,524
Notes receivable allowance.............................. -- 821
Payroll and benefits.................................... 4,362 4,884
Bad debts............................................... 13,429 6,572
Restructuring reserve................................... 863 3,159
NOL carryforwards....................................... 1,844 1,785
Other miscellaneous..................................... 6,183 5,243
Timing differences in Medicare.......................... 1,716 1,592
-------- --------
Total deferred tax assets............................. 39,210 36,823
Less valuation allowances................................... (1,844) (1,785)
-------- --------
Net deferred tax liability.................................. $ (708) $ (1,331)
======== ========
</TABLE>
The net change in the valuation allowance for deferred tax assets was an
increase of $59 and $977 at September 30, 1997 and 1996, respectively.
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,
----------------
1997 1996
------- -------
<S> <C> <C>
Facilities operating under capital leases............... $12,551 $12,551
Less accumulated amortization........................... (5,799) (5,084)
------- -------
$ 6,752 $ 7,467
======= =======
</TABLE>
In October 1996 the Company entered into a leasing program, initially
totaling $70.0 million and subsequently increased to $100.0 million, to be
used as a funding mechanism for future assisted living and skilled nursing
facility construction, lease conversions, and other facility acquisitions. The
lease is an unconditional "triple net" lease for a period of seven years with
the annual lease obligation a function of the amount spent by the lessor to
acquire or construct the project, a variable interest rate, and commitment and
other fees. The Company guarantees a minimum of approximately 83% of the
residual value of the leased property and also has an option to purchase the
properties at any time prior to the maturity date at a price sufficient to pay
the entire amount financed, accrued interest, and certain expenses. At
September 30, 1997, approximately $28.9 million of this leasing arrangement
was utilized. The leasing program is accounted for as an operating lease.
50
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rental expense, net of sublease rent income, for all operating leases was
$42.5 million, $44.2 million and $36.9 million for the three years ended
September 30, 1997, 1996 and 1995, 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 $6.5
million, $6.9 million and $6.1 million for the three years ended September 30,
1997, 1996 and 1995, respectively. Contingent rent based primarily on revenues
was $1.8 million, $1.6 million and $1.4 million for the three years ended
September 30, 1997, 1996 and 1995, respectively.
The table below presents a schedule of the future minimum rental commitments
and sublease income under all noncancellable leases as of September 30, 1997
(in thousands):
<TABLE>
<CAPTION>
SUBLEASE
OPERATING INCOME CAPITAL
--------- -------- -------
<S> <C> <C> <C>
1998.......................................... $ 36,383 $ 6,869 $1,281
1999.......................................... 30,371 4,881 953
2000.......................................... 24,181 1,656 853
2001.......................................... 21,697 1,675 658
2002.......................................... 18,507 1,467 664
Subsequent years.............................. 77,629 6,503 --
-------- ------- ------
Total minimum rental obligations.............. $208,768 $23,051 4,409
======== =======
Less amount representing interest............. (606)
------
Present value of capital leases............... 3,803
Less current portion.......................... (1,097)
------
Long-term obligations under capital leases.... $2,706
======
</TABLE>
As is typical in the healthcare industry, the Company is and will be subject
to claims that its services have resulted in resident injury or other adverse
effects, the risks of which will be greater for higher acuity residents
receiving services from the Company than for other long-term care residents.
The Company is, from time to time, subject to such negligence claims and other
litigation. In addition, resident, visitor, and employee injuries will also
subject the Company to the risk of litigation. From time to time, the Company
and its subsidiaries have been parties to various legal proceedings in the
ordinary course of their respective business. In the opinion of management,
except as described below, there are currently no proceedings which,
individually or in the aggregate, if determined adversely to the Company and
after taking into account the insurance coverage maintained by the Company,
would have a material adverse effect on the Company's financial position or
results of operations.
The Company received a letter dated September 5, 1997 from an Assistant
United States Attorney ("AUSA") in the United States Attorney's Office for the
Eastern District of Texas (Beaumont) advising that the office is involved in
an investigation of allegations that services provided at some of the
Company's facilities may violate the Civil False Claims Act. The AUSA informed
the Company that the investigation is the result of a qui tam complaint (which
involves a private citizen requesting the federal government to intervene in
an action because of an alleged violation of a federal statute) filed under
seal against the Company, and the AUSA is investigating the allegations in
order to determine if the United States will intervene in the proceedings. The
AUSA has requested that the Company voluntarily produce a substantial amount
of documents, including medical records of former residents. Counsel for the
Company has met with the AUSA, and the parties are currently engaged in
discussions on whether the voluntarily production of former residents' medical
records can be accomplished without violating the residents' rights to privacy
and confidentiality. Based upon the information currently known about the
complaint, the Company believes that given an opportunity to address the
51
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
allegations, the AUSA will find intervention by the United States is without
merit. The Company will vigorously contest the alleged claims if the complaint
is pursued.
The Department of Justice ("DOJ") has advised the Company that the United
States has declined to intervene in the qui tam complaint filed against The
Brian Center Corporation ("BCC") and one of its subsidiaries, Med-Therapy
Rehabilitation Services, Inc. ("Med-Therapy"), both wholly-owned subsidiaries
of the Company (and of LCA before the Mergers) in the federal district court
for the Western District of North Carolina. The Company does not know whether
the individual plaintiff will continue to pursue the alleged claims that BCC
and Med-Therapy caused certain therapists to make improper therapy record
entries with respect to screening services, and that any claims filed with
Medicare for payments based upon such improper record entries should be viewed
as false claims under the Civil False Claims Act. The Company will vigorously
contest any claims which the individual plaintiff pursues. No assurance can be
given that, if the plaintiff were to prevail in his claim, the resulting
judgement would not have a material adverse effect on the Company. Moreover,
in connection with the Company's acquisition of BCC, the primary stockholder
(Donald C. Beaver) agreed to indemnify and hold harmless the Company 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 the Company
common stock held by him.
The Company was served with a Petition, Cause No. 97-1500-G, Community
Healthcare Services of America, Inc., v. Rehability Health Services, Inc. and
Living Centers of America, Inc., in the 319th Judicial District Court of
Nueces County, Texas, seeking $5.0 million in damages, filed by Community
Health Services, Inc. ("Community"), in connection with a home health agency
management agreement entered into between Community and a subsidiary of the
Company. Such subsidiary operated a Texas home health agency which Community
managed. The Company is vigorously defending the allegations of Community that
the Company breached the agreement by terminating Community's management
services and has filed a lawsuit against Community for breach of the
agreement, Cause No. 97-03569; Rehability Health Services, Inc. v. Community
Healthcare Services, Inc., in the 353rd Judicial District Court of Travis
County, Texas. The Nueces County action was transferred to Travis County and
the two cases have been consolidated into Cause No. 97-03569.
NOTE 12. INSURANCE COVERAGES
The Company insures automobile, 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
business written by LCA Insurance Company, Ltd. is the reinsurance of policies
providing coverage for nursing home professional liability, automobile
liability, and workers' compensation. All of these are occurrence policies
which cover only the Company and its subsidiaries and their employees.
Pursuant to the reinsurance agreements, LCA Insurance Company, Ltd. is
responsible to pay all losses which are incurred by the company issuing the
policies. The maximum loss exposure with respect to these policies is $0.5
million per occurrence (policy periods prior to July 1, 1996) and $1.0 million
per occurrence (policy periods subsequent to July 1, 1996) for nursing home
professional liability; $0.25 million per occurrence for automobile liability;
and $0.5 million per occurrence for workers' compensation liability.
The liabilities for incurred losses are estimated by independent actuaries
on an undiscounted basis. The obligations of LCA Insurance Company, Ltd. under
the reinsurance agreements are collateralized through a security trust account
which has 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, 1997 and 1996 designated to pay such
claims were $52.0 million and $31.0 million, respectively.
52
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 BCC Entities 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 BCC Entities 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, 1997 and 1996. 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
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.
Interest Rate Swap Agreements
Fair values for the Company's various interest rate swap agreements were
based on market quotes which would be required to terminate the agreement. See
Note 5.
53
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated values of the Company's financial instruments as of September
30, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------
1997 1996
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents............. $14,355 $14,355 $21,394 $21,394
Notes receivable...................... 13,423 14,172 14,536 15,517
Restricted investments................ 51,976 51,976 31,040 31,040
Long-term debt........................ 295,959 298,843 276,448 277,413
Interest rate swap agreements......... -- (1,622) -- 341
</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 three years ended
September 30, 1997, 1996 and 1995. 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 for ARS and $1.9 million for TMI. All significant intercompany
purchases from these two subsidiaries since their acquisition have been
eliminated.
NOTE 15. EARNINGS PER COMMON SHARE
On November 24, 1997, the Board of Directors declared a three-for-one stock
split to be distributed on December 30, 1997 to shareholders of record on
December 15, 1997. See Note 19. The table below represents a reconciliation of
the number of weighted average common shares used in computing primary
earnings per share (in thousands) and reflects the stock split identified
above.
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Common shares outstanding, end of period...... 58,794 58,503 60,570
Effect of using weighted average shares
outstanding.................................. (180) 1,869 (4,020)
Effect of using treasury stock method on stock
options...................................... 711 573 552
------ ------ ------
Shares used in computing earnings per share... 59,325 60,945 57,102
====== ====== ======
</TABLE>
In February 1995, the Company issued an additional 8,625,000 shares
(2,875,000 shares prior to the three-for-one stock split) 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 $0.42, respectively.
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 4,200,000 shares (1,400,000
shares prior to the three-for-one stock split) of the Company's common stock.
The exercise
54
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1997 and 1996, there were 3,901,404 and
3,778,644, respectively (1,300,468 and 1,259,548 prior to the three-for-one
stock split, respectively), options granted and outstanding. All of these
options were converted into cash or shares of Company common stock in
connection with the Mergers. See Note 19.
The following is a summary of the stock option activity and related
information which has been adjusted to reflect the three-for-one stock split:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------ -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 3,778,644 $9.18 2,338,875 $ 8.27 1,793,325 $ 6.62
Granted................. 645,972 8.30 2,074,620 10.23 1,002,750 11.08
Exercised............... (21,831) 6.86 (118,302) 6.28 (162,030) 6.14
Forfeited............... (501,381) 9.95 (516,549) 9.87 (295,170) 8.99
------------ ----- ------------ ------ ------------ ------
Outstanding at end of
period................. 3,901,404 8.95 3,778,644 9.18 2,338,875 8.27
============ ============ ============ ======
Exercisable at end of
period................. 1,567,092 7.71 951,033 6.99 621,840 5.46
============ ============ ============ ======
Price range............. $4.42-$12.92 $4.42-$12.92 $4.42-$12.92
============ ============ ============
Weighted average fair
value of options
granted during the
year................... $5.00 $ 5.59 $ 6.28
===== ====== ======
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the
55
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
following weighted-average assumptions for 1997, 1996 and 1995: risk-free
interest rates ranging from 5.99% to 6.11%; a dividend yield of 0%; volatility
factors of the expected market price of the Company's common stock of 0.42;
and a weighted-average expected life of the option of eight years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED REMAINING
AVERAGE CONTRACTUAL
EXERCISE LIFE
RANGE OPTIONS PRICE (YEARS)
----- --------- -------- -----------
<S> <C> <C> <C>
$4.42--$5.83............................... 631,260 $ 4.82 4.83
$6.75--$8.25............................... 1,107,042 $ 7.89 9.08
$8.58--$9.88............................... 501,255 $ 9.48 7.58
$10.54--$10.96............................. 1,061,100 $10.62 7.83
$11.79--$12.92............................. 600,747 $11.86 8.42
---------
3,901,404
=========
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for earnings per
share information):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Pro forma net income............................. $42,489 $42,405 $23,920
Pro forma earnings per share..................... $ 0.72 $ 0.70 $ 0.42
</TABLE>
The Company established an Employee Stock Purchase Plan in 1993. The plan
authorizes the purchase of up to 360,000 shares (120,000 shares prior to the
three-for-one stock split) 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, 1997 and 1996, a total of 177,789 and 129,480 shares,
respectively, (59,263 and 43,160 prior to the three-for-one stock split) had
been issued under the plan. The Employee Stock Purchase Plan was terminated
effective September 17, 1997.
56
<PAGE>
PARAGON HEALTH NETWORK, 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, 1997 and 1996 (in thousands, except per share amounts) and
has been adjusted to reflect the three-for-one stock split. See Note 19.
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
1997 QUARTER QUARTER QUARTER QUARTER
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues...................... $286,335 $288,433 $285,318 $280,202
Income from operations............ 19,126 (a) 28,456 25,844 21,682
Income before income taxes and
equity earnings/minority
interests........................ 15,198 23,968 21,462 17,628
Equity earnings/minority interest. (330) (223) (119) (63)
Net income........................ $ 7,709 $ 13,669 $ 12,214 $ 10,325
======== ======== ======== ========
Earnings per share................ $ 0.13 $ 0.23 $ 0.21 $ 0.18
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding.... 59,796 59,658 59,241 58,797
======== ======== ======== ========
- --------
(a) Includes $2.6 million merger and acquisition costs (or $0.04 per share
expense after tax.)
<CAPTION>
FOURTH THIRD SECOND FIRST
1996 QUARTER QUARTER QUARTER QUARTER
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues...................... $284,838 $281,217 $278,056 $270,380
Income from operations............ 21,172 (b) 22,951(b) 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................ $ 0.12 $ 0.21 $ 0.20 $ 0.18
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding.... 59,739 61,503 61,509 61,080
======== ======== ======== ========
</TABLE>
- --------
(b) Includes $2.0 million income and $0.9 million expense of non-recurring
items in the third and fourth quarters, respectively (or $0.03 per share
income and $0.06 per share expense after tax, respectively)
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 $0.01 per share, for an exercise price of $160, subject to adjustment.
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
57
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
rights may be redeemed by the Company for $0.01 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. On May 7, 1997, LCA's
Board of Directors amended the Rights Agreement under which the rights were
granted such that the Rights Agreement terminated immediately prior to the
Mergers. See Note 19.
NOTE 19. SUBSEQUENT EVENTS
Recapitalization Merger Agreement
During 1997 the Company entered into a Recapitalization Merger Agreement
(the "Recapitalization Merger") with Apollo Management, L.P. ("Apollo") and
one of its affiliates which was completed effective November 1, 1997. In
connection with the Recapitalization Merger, certain affiliates of Apollo and
certain other investors (the "Apollo Investors") invested $240 million to
purchase approximately 5.9 million shares of newly issued common stock of LCA
(see below). Concurrent with the Recapitalization Merger, LCA changed its name
to Paragon Health Network, Inc. ("Paragon").
Also effective November 1, 1997, Paragon sold $275 million of its 9.5%
Senior Subordinated Notes due 2007, at a price of 99.5% of face value and $294
million of its 10.5% Senior Subordinated Discount Notes due 2007, at a price
of 59.6% of face value (collectively the "Notes"), in a private offering to
institutional investors. Concurrent with the private Notes offering, Paragon
entered into a new Senior Credit Facility which is composed of $740 million in
Term Loans and a Revolving Credit Facility which provides for borrowings up to
an additional $150 million. The Term Loans consist of (i) a $240 million Term
Loan for 6 1/2-years, (ii) a $250 million Term Loan for 7 1/2-years, and (iii)
a $250 million Term Loan for 8 1/2-years. Borrowings under the Senior Credit
Facility are at the Chase Manhattan, N.A. base rate or LIBOR plus an
applicable margin ranging from 0.75% to 2.75% depending upon the respective
term loan tenor and the Company's leverage ratio. The Senior Credit Facility
imposes restrictions on the Company's ability to make capital expenditures and
both the Senior Credit Facility and the indenture governing the Notes limit
the Company's ability to incur additional indebtedness. The covenants
contained in the Senior Credit Facility also, among other things, restrict the
ability of the Company to dispose of assets, repay other indebtedness or amend
other debt instruments, pay dividends, and make acquisitions. Annual
maturities of Paragon's long-term debt in the next five fiscal years are
expected to be as follows: $3.3 million in 1998, $29.4 million in 1999, $50.9
million in 2000, $53.3 million in 2001, $52.8 million in 2002, and $1.1
billion thereafter.
Paragon used the $240 million invested by Apollo Investors, the $1.189
billion of net proceeds provided by the Notes offering and the Term Loans to
(i) purchase approximately 90.5% of the issued and outstanding common stock of
the Company for a per share price of $40.50 (prior to the three-for-one stock
split), (ii) to repay substantially all amounts outstanding under the
Company's and under GranCare Inc.'s (see below for description of the
GranCare, Inc. merger acquisition) previous credit facilities and (iii) pay
for certain costs associated with the Mergers.
GranCare Purchase Business Combination
Effective November 1, 1997, and subsequent to the Company's
recapitalization, Paragon completed the merger acquisition of GranCare, Inc.
("GranCare") pursuant to the terms of the previously announced GranCare Merger
Agreement. In the merger acquisition, GranCare common stock was exchanged for
0.2346 of a share of Paragon common stock. The acquisition was accounted for
under the purchase method. Following the recapitalization and acquisition, the
Apollo Investors and certain other investors owned approximately 44.0%, prior
GranCare shareholders owned approximately 41.9% and prior LCA shareholders
retained approximately 14.1% of the outstanding shares of Paragon common
stock.
The Recapitalization Merger and the GranCare Merger effectively reduced the
Company's total stockholders' equity from $375 million at September 30, 1997
to approximately $77 million following the Mergers.
58
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Paragon Stock Split
On November 24, 1997, the Board of Directors of Paragon declared a three-
for-one stock split on Paragon's (formerly LCA's) common stock. In all
instances throughout the financial statements and footnotes, common stock and
additional paid-in capital as of September 30, 1997 and 1996 have been
restated to reflect this split. The number of shares issued at September 30,
1997 and 1996 after giving effect to the split was 60,803,760 shares
(20,267,920 shares before the split).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on directors of the registrant will appear in the Company's
Proxy Statement for the 1998 annual meeting of stockholders, which will 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 Item 4 of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation will appear in the Company's Proxy
Statement for the 1998 annual meeting of stockholders, which will 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 will appear
in the Company's Proxy Statement for the 1998 annual meeting of stockholders,
which will 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 will appear in
the Company's Proxy Statement for the 1998 annual meeting of stockholders,
which will be filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
59
<PAGE>
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............................................ 33
Consolidated Balance Sheets at September 30, 1996 and 1997................ 34
Consolidated Statements of Income for Fiscal Years 1995, 1996 and 1997.... 35
Consolidated Statements of Stockholders' Equity for Fiscal Years 1995,
1996 and 1997............................................................ 36
Consolidated Statements of Cash Flows for Fiscal Years 1995, 1996 and
1997..................................................................... 37
Notes to Consolidated Financial Statements................................ 38
FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Accounts and Reserves............... 69
</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.
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
*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 Form 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 America, Inc. and Living Centers/Brian
Care Company and the Brian Care Center Corporation, The Beaver
Property Entities and Donald C. Beaver, as amended (filed as Exhibit
2.1 of the Fourth Amendment to the 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 to Registrant's Registration Statement on Form S-3,
Registration No. 33-97616, and incorporated herein by reference).
*2.5 Recapitalization Agreement, as amended, by and among Living Centers
of America, Inc., DevCon Holding Company, Living Centers-DevCon,
Inc., and Golber, Thoma, Cressey, Raimer Fund IV, L.P. (filed as
Exhibit 2.7 to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996, File No. 001-10968, and
incorporated herein by reference).
*2.6 Amended and Restated Agreement and Plan of Merger dated September
17, 1997 among Apollo Management, L.P. ("Apollo"), Apollo LCA
Acquisition Corp. and Living Centers of America, Inc. (filed as
Annex I to Registrant's Registration Statement on Form S-4,
Registration No. 333-36525, and incorporated herein by reference).
<CAPTION>
*2.7 Amended and Restated Agreement and Plan of Merger dated September
17, 1997 among Living Centers of America, Inc., GranCare, Inc.
("GranCare"), Apollo and LCA Acquisition Sub, Inc. (filed as Annex
II to Registrant's Registration Statement on Form S-4, Registration
No. 333-36525, and incorporated herein by reference).
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
*3.1 Amended and Restated Certificate of Incorporation of Paragon Health
Network, Inc. (filed as Annex III to Registrant's Registration
Statement on Form S-4, Registration No. 333-36525, and incorporated
herein by reference).
*3.2 Amended and Restated Bylaws of Paragon Health Network, Inc. (filed
as Annex IV to Registrant's Registration Statement on Form S-4,
Registration No. 333-36525, and incorporated herein by reference).
4.1 Amended and Restated Certificate of Incorporation of Paragon Health
Network, Inc. (filed as Exhibit 3.1 hereto).
4.2 Amended and Restated Bylaws of Paragon Health Network, Inc. (filed
as Exhibit 3.2 hereto).
*4.3 Stockholders' Agreement by and among Paragon Health Network, Inc.,
Apollo and certain other investors (filed as Annex V to Registrant's
Registration Statement on Form S-4, Registration No. 333-36525, and
incorporated herein by reference).
*4.4 Registration Rights Agreement among Paragon Health Network, Inc. and
certain investors (filed as Exhibit 4.7 to Registrant's Registration
Statement on Form S-4, Registration No. 333-36525, and incorporated
herein by reference).
4.5 Indenture dated as of November 4, 1997, between Paragon Health
Network, Inc. and IBJ Schroder Bank & Trust Company.
4.6 Exchange and Registration Rights Agreement dated as of November 4,
1997, among Paragon Health Network, Inc., Chase Securities, Inc.,
Smith Barney Inc. and Credit Suisse First Boston Corporation.
4.7 Form of Common Stock Certificate of Paragon Health Network, Inc.
4.8 10 1/2% Senior Subordinated Discount Note Due 2007 pertaining to
CUSIP No. 698940 AB 9.
4.9 10 1/2% Senior Subordinated Discount Note Due 2007 pertaining to
CUSIP No. U69879 AB 7.
4.10 10 1/2% Senior Subordinated Discount Note Due 2007 pertaining to
CUSIP No. 698940 AD 5.
4.11 9 1/2% Senior Subordinated Note Due 2007 pertaining to CUSIP No.
698940 AA 1.
4.12 9 1/2% Senior Subordinated Note Due 2007 pertaining to CUSIP No.
U69879 AA 9.
4.13 9 1/2% Senior Subordinated Note Due 2007 pertaining to CUSIP No.
698940 AC 7.
10.1 +Employment Agreement between Paragon Health Network, Inc. and Keith
B. Pitts.
10.2 +Employment Agreement between Paragon Health Network, Inc. and John
D. Lee.
10.3 +Employment Agreement between Paragon Health Network, Inc. and Susan
Thomas Whittle.
10.4 +Employment Agreement between Paragon Health Network, Inc. and
William R. Korslin.
10.5 +Employment Agreement between Paragon Health Network, Inc. and
Dennis G. Johnston.
10.6 +Employment Agreement between Paragon Health Network, Inc. and David
W. Budke.
10.7 +Employment Agreement between Paragon Health Network, Inc. and David
L. Ward.
10.8 +Employment Agreement between Paragon Health Network, Inc. and
Charles B. Carden.
10.9 +Employment Agreement between Paragon Health Network, Inc. and Aruna
Poddatoori.
10.10 +Employment Agreement between Paragon Health Network, Inc. and Leroy
D. Williams.
10.11 +Employment Agreement between Paragon Health Network, Inc. and R.
Jeffrey Taylor.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
10.12 +Form of Employment Agreement entered into between Paragon Health
Network, Inc. and its Vice Presidents.
*10.13 +1992 Stock Option Plan of Living Centers of America, Inc., as
amended (filed as Exhibit 10.1 to Registrant's Registration
Statement Form S-8, Registration Statement No. 333-09707, and
incorporated herein by reference).
*10.14 +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. 001-
10968, and incorporated herein by reference).
*10.15 +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. 001-10968,
and incorporated herein by reference).
*10.16 +Employee Stock Purchase Plan of Living Centers of America, Inc.
(filed as Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1993, File No.
001-10968, and incorporated herein by reference).
10.17 +Paragon Health Network, Inc. 1997 Long-Term Incentive Plan.
10.18 +Paragon Health Network, Inc. Incentive Compensation Plan.
*10.19 +GranCare, Inc. 1996 Stock Incentive Plan (filed with Amendment No.
1 to GranCare's Registration Statement on Form S-1, Registration No.
333-19097, and incorporated herein by reference).
*10.20 +GranCare, Inc. 1996 Replacement Stock Option Plan (filed with
Amendment No. 1 to GranCare's Registration Statement on Form S-1,
Registration No. 333-19097, and incorporated herein by reference).
*10.21 +GranCare, Inc. Outside Directors' Stock Incentive Plan (filed with
Amendment No. 1 to GranCare's Registration Statement on Form S-1,
Registration No. 333-19097, and incorporated herein by reference).
*10.22 +Executive Deferred Compensation Plan (filed with Amendment No. 1 to
GranCare's Registration Statement on Form S-1, Registration No. 333-
19097, and incorporated herein by reference).
*10.23 +GranCare, Inc. 401(k) Savings Plan and Trust (filed with GranCare's
Annual Report on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference).
*10.24 +Assignment, Assumption and Amendment of the GranCare, Inc. 401(k)
Savings Plan (filed with Amendment No. 1 to GranCare's Registration
Statement on Form S-1, Registration No. 333-19097, and incorporated
herein by reference).
*10.25 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 Registrant's Registration Statement on Form
S-1, Registration No. 33-44726, and incorporated herein by
reference).
*10.26 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 Registrant's Registration Statement on Form
S-1, Registration No. 33-44726, and incorporated herein by
reference).
10.27 Purchase Agreement dated October 30, 1997, by and among Living
Centers of America, Inc. and Chase Securities, Inc., Smith Barney
Inc. and Credit Suisse First Boston Corporation.
10.28 Termination Release Agreement dated as of September 3, 1997, by and
among GranCare, Manor Care, Inc. and Vitalink Pharmacy Services,
Inc., Apollo Management, L.P. and Living Centers of America, Inc.
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
10.29 Letter Agreement regarding Liquidated Damages Calculation in
Pharmaceutical Supply Agreements dated September 3, 1997, by and
among GranCare, Inc., TeamCare, Inc. and Vitalink Pharmacy
Services, Inc.
10.30 Letter Agreement regarding Preferred Provider Arrangement dated
August 29, 1997, by and among Vitalink Pharmacy Services, Inc. and
GranCare.
10.31 Amendment to AMS Properties, Inc. Facility Leases dated as of
October 31, 1997 between Health and Retirement Properties Trust
("HRPT") and AMS Properties, Inc. ("AMS").
10.32 Collateral Pledge Agreement dated as of October 31, 1997 by and
between Paragon Health Network, Inc. and HRPT.
10.33 Guaranty by GranCare dated as of October 31, 1997 by GranCare in
favor of HRPT.
10.34 Guaranty by Paragon Health Network, Inc. dated as of October 31,
1997 by Paragon Health Network, Inc. in favor of HRPT.
10.35 Restructure and Asset Exchange Agreement dated as of October 31,
1997 among HRPT, GranCare, AMS and GCI Health Care Centers, Inc.
10.36 Subordination Agreement dated as of October 31, 1997 by and among
HRPT and the corporations listed on the signature page thereto.
10.37 Amendment to GCI Health Care Centers, Inc. Facility Leases dated as
of October 31, 1997.
*10.38 Amendment to Acquisition Agreement, Agreement to Lease and Mortgage
Loan Agreement dated as of December 29, 1993 among HRPT, GranCare,
AMS and GCI Health Care Centers, Inc. (filed with GranCare's
Current Report on Form 8-K filed January 13, 1994, and incorporated
herein by reference).
*10.39 Master Lease Document dated December 28, 1990, between HRPT and AMS
Properties, Inc. ("AMS") (filed with GranCare's Registration
Statement on Form S-1, Registration No. 33-42595, and incorporated
herein by reference).
*10.40 Form of Guaranty dated December 28, 1990, by American Medical
Services, Inc. and each of its subsidiaries in favor of HRPT (filed
with GranCare's Registration Statement on Form S-1, Registration
No. 33-42595, and incorporated herein by reference).
*10.41 Amendment to Master Lease between HRPT and AMS dated as of December
29, 1993 (filed with GranCare's Current Report on Form 8-K filed
January 13, 1994, and incorporated herein by reference).
*10.42 Amendment to Master Lease Document and Facility Lease between GCI
Health Care Center, Inc. and HRPT dated as of October 31, 1994
(filed with GranCare's Annual Report on Form 10-K for the year
ended December 31, 1995, and incorporated herein by reference).
*10.43 Amendment to Master Lease Document and Facility Lease between AMS
and HRPT dated as of October 31, 1994 (filed with GranCare's Annual
Report on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference).
*10.44 Promissory Note from AMS to HRPT in the principal amount of $11.5
million, dated October 1, 1994 (filed with GranCare's Annual Report
on Form 10-K for the year ended December 31, 1995, and incorporated
herein by reference).
*10.45 Mortgage and Security Agreement from AMS to HRPT for the Northwest
and River Hills West Health Care Centers dated as of March 31, 1995
(filed with GranCare's Annual Report on Form 10-K for the year
ended December 31, 1995, and incorporated herein by reference).
*10.46 Assumption Agreement by GranCare in favor of HRPT (filed with
GranCare's Amendment No. 1 to Registration Statement on Form S-1,
Registration No. 333-19097, and incorporated herein by reference).
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
*10.47 Consent and Amendment to Transaction Documents dated as of December
31, 1996 (the "Consent and Amendment") among GCI Health Care
Centers, Inc., GranCare, Vitalink Pharmacy Services, Inc., HRPT and
AMS (filed with GranCare's Amendment No. 1 to Registration
Statement on Form S-1, Registration No. 333-19097, and incorporated
herein by reference).
10.48 Credit Agreement for $890,000,000 dated as of November 4, 1997, by
and among Paragon Health Network, Inc., as Borrower, The Chase
Manhattan Bank, as Administrative Agent, NationsBank, N.A., as
Documentation Agent, and the several lenders from time to time
parties thereto
10.49 Guarantee and Collateral Agreement dated as of November 4, 1997, by
and among Paragon Health Network, Inc. and certain of its
subsidiaries in favor of The Chase Manhattan Bank, as Collateral
Agent.
10.50 Amended and Restated Participation Agreement dated November 4,
1997, by and among Living Centers Holding Company, as Lessee, FBTC
Leasing Corp., as Lessor, The Chase Manhattan Bank, as Agent for
the Lenders, the Fuji Bank Limited (Houston Agency), as Co-Agent,
and the Lenders parties thereto.
10.51 Amended and Restated Guaranty dated November 4, 1997, by and among
Paragon Health Network, Inc. and certain other guarantors signatory
thereto in favor of The Chase Manhattan Bank, as Administrative
Agent.
10.52 Lease dated October 10, 1996, between FBTC Leasing Corp., as
Lessor, and Living Centers Holding Company, as Lessee.
10.53 Amendment to Lease dated as of November 4, 1997 between FBTC
Leasing Corp. and Living Centers Holding Company.
*10.54 Form of Mortgage and Security Agreement with respect to five of
GranCare's facilities located in the State of Illinois to secure a
loan in the aggregate principal amount of $16.5 million from Health
Care Capital Finance, Inc. (the "Health Care Capital Loan"), each
agreement dated as of March 23, 1995 (filed with GranCare's Annual
Report on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference).
*10.55 Master Settlement Agreement between GranCare and the Service
Employees International Union ("SEIU"), dated as of November 6,
1995 (filed with GranCare's Annual Report on Form 10-K for the year
ended December 31, 1995).
*10.56 Settlement Agreement between GranCare and the SEIU with respect to
four of GranCare's facilities located in the State of Michigan,
dated as of January 29, 1996 (filed with GranCare's Annual Report
on Form 10-K for the year ended December 31, 1995).
*10.57 Settlement Agreement between GranCare and the SEIU with respect to
seven of GranCare's facilities located in the State of Wisconsin
(filed with GranCare's Annual Report on Form 10-K for the year
ended December 31, 1995).
*10.58 Settlement Agreement between GranCare and the SEIU with respect to
seven of GranCare's facilities located in the State of California
(filed with GranCare's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.59 +Agreement Respecting Termination of Employee--Employer
Relationship between Paragon Health Network, Inc. and Keith Krein
dated November 4, 1997.
10.60 +Agreement Respecting Termination of Employee--Employer
Relationship between Paragon Health Network, Inc. and Edward L.
Kuntz dated November 4, 1997.
11 Statement regarding computation of earnings per share.
21 Subsidiaries of Paragon Health Network, Inc.
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
23 Consent of Ernst & Young LLP.
24 Power 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(d)(10)(iii) of Regulation S-K.
Paragon Health Network, Inc. will furnish a copy of any exhibit described
above to any beneficial holder of its securities upon receipt of a written
request therefor, provided that such request sets forth a good faith
representation that as of December 18, 1997, the date of record for its 1998
annual stockholders' meeting to be held on February 19, 1998, such beneficial
owner is entitled to vote at such meeting, and provided further that such
holder pays to Paragon Health Network, Inc. a fee compensating it for its
reasonable expenses in furnishing such exhibits.
(B) REPORTS ON FORM 8-K.
There were no reports filed on Form 8-K during the quarter ended September
30, 1997.
(C) EXHIBITS
The response to this portion of Item 14 is contained in Item 14(a)(3) of
this report.
(D) FINANCIAL STATEMENT SCHEDULE
The response to this portion of Item 14 is contained in Item 8 of this
report.
65
<PAGE>
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.
PARAGON HEALTH NETWORK, INC.
(Registrant)
By: /s/ Susan Thomas Whittle
-----------------------------------
Susan Thomas Whittle
Senior Vice President, General
Counsel and Secretary
Date: December 29, 1997
66
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Keith B. Pitts Chairman of the Board, December 29, 1997
- ------------------------------------ President and Chief
Keith B. Pitts Executive Officer
(Principal Executive
Officer)
/s/ Charles B. Carden Executive Vice President and December 29, 1997
- ------------------------------------ Chief Financial Officer
Charles B. Carden (Principal Financial
Officer)
* Director December 29, 1997
- ------------------------------------
Donald C. Beaver
* Director December 29, 1997
- ------------------------------------
Laurence M. Berg
* Director December 29, 1997
- ------------------------------------
Gene E. Burleson
* Director December 29, 1997
- ------------------------------------
Peter P. Copses
* Director December 29, 1997
- ------------------------------------
Jay M. Gillert
* Director December 29, 1997
- ------------------------------------
Joel S. Kanter
* Director December 29, 1997
- ------------------------------------
John H. Kissick
* Director December 29, 1997
- ------------------------------------
Baltej S. Maini, M.D.
* Director December 29, 1997
- ------------------------------------
William G. Petty, Jr.
* Director December 29, 1997
- ------------------------------------
Robert L. Rosen
/s/ Ronald W. Fleming Vice President, Controller December 29, 1997
- ------------------------------------ and Chief Accounting
Ronald W. Fleming Officer (Principal
Accounting Officer)
</TABLE>
*Executed on behalf of the aforementioned directors by Susan Thomas Whittle
pursuant to the powers of attorney included in Exhibit 24.
<TABLE>
<S> <C>
/s/ Susan Thomas Whittle December 29, 1997
- -------------------------------
Susan Thomas Whittle
</TABLE>
67
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
PARAGON HEALTH NETWORK, 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 1997:
Allowance for doubtful
accounts............... $17,405 $27,760 $(12,027) $ -- $ 33,138
======= ======= ======== ====== ========
Notes receivable
reserves............... $ 3,516 $(1,478)(a) $ (850) $ -- $ 1,188
======= ======= ======== ====== ========
Fiscal Year 1996:
Allowance for doubtful
accounts............... $13,332 $16,666 $(14,702) $2,109 $ 17,405
======= ======= ======== ====== ========
Notes receivable
reserves............... $ 3,550 $ -- $ (34) $ -- $ 3,516
======= ======= ======== ====== ========
Fiscal Year 1995:
Allowance for doubtful
accounts............... $ 6,632 $10,520 $(11,659) $7,839 $ 13,332
======= ======= ======== ====== ========
Notes receivable
reserves............... $ 2,850 $ 700 $ -- $ -- $ 3,550
======= ======= ======== ====== ========
</TABLE>
- --------
(a) Includes reversal of reserves based on collections of notes previously
considered doubtful.
68
<PAGE>
EXHIBIT 4.5
================================================================================
PARAGON HEALTH NETWORK, INC.,
as Issuer
and
IBJ SCHRODER BANK & TRUST COMPANY,
as Trustee
____________________
INDENTURE
Dated as of November 4, 1997
_____________________
9 1/2% Senior Subordinated Notes due 2007
9 1/2% Series B Senior Subordinated Notes due 2007
10 1/2% Senior Subordinated Discount Notes due 2007
10 1/2% Series B Senior Subordinated Discount Notes due 2007
================================================================================
<PAGE>
RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT
OF 1939 AND INDENTURE, DATED AS OF NOVEMBER 4, 1997/***/
<TABLE>
<CAPTION>
TRUST INDENTURE
ACT SECTION INDENTURE SECTION
<S> <C>
(S) 310(a)(1) ................................... 608
(a)(2) ................................... 608
(b) ................................... 609
(S) 312(a) ................................... 701
(c) ................................... 702
(S) 313(a) ................................... 703
(c) ................................... 703
(S) 314(a)(4) ................................... 1010(a)
(c)(1) ................................... 102
(c)(2) ................................... 102
(e) ................................... 102
(S) 315(a) ................................... 601(a)
(b) ................................... 602
(c) ................................... 601(b)
(d) ................................... 601(c), 603
316(a)(last sentence).................................
101 ("Outstanding")
(a)(1)(A) ................................... 502, 512
(a)(1)(B) ................................... 513
(b) ................................... 508
(c) ................................... 104(d)
(S) 317(a)(1) ................................... 503
(a)(2) ................................... 504
(b) ................................... 1003
(S) 318(a) ................................... 111
</TABLE>
____________________________
/***/Note: This reconciliation and tie shall not, for any purpose, be deemed
to be a part of the Indenture.
<PAGE>
TABLE OF CONTENTS/***/
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE ONE. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. Definitions..................................................................... 1
SECTION 102. Compliance Certificates and Opinions............................................ 18
SECTION 103. Form of Documents Delivered to Trustee.......................................... 18
SECTION 104. Acts of Holders................................................................. 19
SECTION 105. Notices, Etc., to Trustee, the Company and any Guarantor........................ 19
SECTION 106. Notice to Holders; Waiver....................................................... 20
SECTION 107. Effect of Headings and Table of Contents........................................ 20
SECTION 108. Successors and Assigns.......................................................... 20
SECTION 109. Separability Clause............................................................. 20
SECTION 110. Benefits of Indenture........................................................... 21
SECTION 111. Governing Law................................................................... 21
SECTION 112. Legal Holidays.................................................................. 21
SECTION 113. No Personal Liability of Directors, Officers, Employees, Stockholders
or Incorporators......................................................................... 21
SECTION 114. Counterparts.................................................................... 21
SECTION 115. Communications by Holders with Other Holders.................................... 21
ARTICLE TWO. NOTE FORMS
SECTION 201. Forms Generally................................................................. 22
SECTION 202. Restrictive Legends............................................................. 22
SECTION 203. OID Legend...................................................................... 25
SECTION 204. Form of Senior Subordinated Note................................................ 25
SECTION 205. Form of Senior Subordinated Discount Note....................................... 38
SECTION 206. Form of Trustee's Certificate of Authentication................................. 50
ARTICLE THREE. THE NOTES
SECTION 301. Title and Terms................................................................. 50
SECTION 302. Denominations................................................................... 51
SECTION 303. Execution, Authentication, Delivery and Dating.................................. 51
SECTION 304. Temporary Notes................................................................. 52
SECTION 305. Registration, Registration of Transfer and Exchange............................. 52
SECTION 306. Book-Entry Provisions for Global Notes.......................................... 53
SECTION 307. Special Transfer Provisions..................................................... 54
SECTION 308. Form of Certificate to Be Delivered in Connection with Transfers to
Institutional Accredited Investors....................................................... 56
SECTION 309. Form of Certificate to Be Delivered in Connection with Transfers
Pursuant to Regulation S................................................................. 58
SECTION 310. Mutilated, Destroyed, Lost and Stolen Notes..................................... 59
SECTION 311. Payment of Interest; Interest Rights Preserved.................................. 59
SECTION 312. Persons Deemed Owners........................................................... 60
SECTION 313. Cancellation.................................................................... 60
</TABLE>
___________________
/***/ Note: This table of contents shall not, for any purpose, be deemed to be
a part of the Indenture.
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 314. Computation of Interest......................................................... 61
SECTION 315. CUSIP Numbers................................................................... 61
ARTICLE FOUR. SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of
Indenture................................................................................ 61
SECTION 402. Application of Trust Money...................................................... 62
ARTICLE FIVE. REMEDIES
SECTION 501. Events of Default............................................................... 63
SECTION 502. Acceleration of Maturity; Rescission and Annulment.............................. 64
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee................. 65
SECTION 504. Trustee May File Proofs of Claim................................................ 65
SECTION 505. Trustee May Enforce Claims Without Possession of Notes.......................... 66
SECTION 506. Application of Money Collected.................................................. 66
SECTION 507. Limitation on Suits............................................................. 66
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and
Interest................................................................................. 67
SECTION 509. Restoration of Rights and Remedies.............................................. 67
SECTION 510. Rights and Remedies Cumulative.................................................. 67
SECTION 511. Delay or Omission Not Waiver.................................................... 67
SECTION 512. Control by Holders.............................................................. 68
SECTION 513. Waiver of Past Defaults......................................................... 68
SECTION 514. Waiver of Stay or Extension Laws................................................ 68
SECTION 515. Undertaking for Costs........................................................... 69
ARTICLE SIX. THE TRUSTEE
SECTION 601. Certain Duties and Responsibilities............................................. 69
SECTION 602. Notice of Defaults.............................................................. 70
SECTION 603. Certain Rights of Trustee....................................................... 70
SECTION 604. Trustee Not Responsible for Recitals or Issuance of Notes....................... 71
SECTION 605. May Hold Notes.................................................................. 72
SECTION 606. Money Held in Trust............................................................. 72
SECTION 607. Compensation and Reimbursement.................................................. 72
SECTION 608. Corporate Trustee Required; Eligibility......................................... 73
SECTION 609. Resignation and Removal; Appointment of Successor............................... 73
SECTION 610. Acceptance of Appointment by Successor.......................................... 74
SECTION 611. Merger, Conversion, Consolidation or Succession to Business..................... 74
SECTION 612. Trustee's Application for Instructions from the Company......................... 75
ARTICLE SEVEN. HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. Company to Furnish Trustee Names and Addresses.................................. 75
SECTION 702. Disclosure of Names and Addresses of Holders.................................... 75
SECTION 703. Reports by Trustee.............................................................. 75
ARTICLE EIGHT. MERGER, CONSOLIDATION, OR SALE OF ASSETS
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms............................ 76
SECTION 802. Successor Substituted........................................................... 76
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE NINE. SUPPLEMENTS AND AMENDMENTS TO INDENTURE
SECTION 901. Supplemental Indentures Without Consent of Holders.............................. 77
SECTION 902. Supplemental Indentures with Consent of Holders................................. 77
SECTION 903. Execution of Supplemental Indentures............................................ 78
SECTION 904. Effect of Supplemental Indentures............................................... 78
SECTION 905. Conformity with Trust Indenture Act............................................. 78
SECTION 906. Reference in Notes to Supplemental Indentures................................... 79
SECTION 907. Notice of Supplemental Indentures............................................... 79
SECTION 908. Effect on Senior Indebtedness................................................... 79
ARTICLE TEN. COVENANTS
SECTION 1001. Payment of Principal, Premium, if any, and Interest............................ 79
SECTION 1002. Maintenance of Office or Agency................................................ 79
SECTION 1003. Money for Note Payments to Be Held in Trust.................................... 80
SECTION 1004. Corporate Existence............................................................ 81
SECTION 1005. Payment of Taxes and Other Claims.............................................. 81
SECTION 1006. Maintenance of Properties...................................................... 81
SECTION 1007. Insurance...................................................................... 81
SECTION 1008. Compliance with Laws........................................................... 81
SECTION 1009. Limitation on Restricted Payments.............................................. 82
SECTION 1010. Limitation on Indebtedness..................................................... 83
SECTION 1011. Limitation on Layering......................................................... 84
SECTION 1012. Limitation on Affiliate Transactions........................................... 85
SECTION 1013. Limitation on Restrictions on Distributions from Restricted
Subsidiaries............................................................................. 85
SECTION 1014. Limitation on Sale or Issuance of Preferred Stock of Restricted
Subsidiaries............................................................................. 86
SECTION 1015. Limitation on Liens............................................................ 86
SECTION 1016. Change of Control.............................................................. 87
SECTION 1017. Limitation on Sales of Assets.................................................. 87
SECTION 1018. Statement by Officers as to Default............................................ 89
SECTION 1019. Reporting Requirements......................................................... 89
SECTION 1020. Limitations on Issuances of Guarantees of Indebtedness by Restricted
Subsidiaries..................................................................
SECTION 1021. Designation of Unrestricted Subsidiaries....................................... 90
ARTICLE ELEVEN. REDEMPTION OF NOTES
SECTION 1101. Optional Redemption............................................................ 90
SECTION 1102. Applicability of Article....................................................... 90
SECTION 1103. Election to Redeem; Notice to Trustee.......................................... 90
SECTION 1104. Selection by Trustee of Notes to Be Redeemed................................... 90
SECTION 1105. Notice of Redemption........................................................... 91
SECTION 1106. Deposit of Redemption Price.................................................... 92
SECTION 1107. Notes Payable on Redemption Date............................................... 92
SECTION 1108. Notes Redeemed in Part......................................................... 92
ARTICLE TWELVE. LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1201. Company's Option to Effect Legal Defeasance or Covenant Defeasance............. 92
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1202. Legal Defeasance and Discharge................................................. 92
SECTION 1203. Covenant Defeasance............................................................ 93
SECTION 1204. Conditions to Legal Defeasance or Covenant Defeasance.......................... 93
SECTION 1205. Deposited Money and Government Obligations to Be Held in Trust;
Other Miscellaneous Provisions........................................................... 95
SECTION 1206. Reinstatement.................................................................. 95
ARTICLE THIRTEEN. SUBORDINATION OF NOTES
SECTION 1301. Notes Subordinate to Senior Indebtedness....................................... 95
SECTION 1302. Payment over of Proceeds upon Dissolution, Etc................................. 96
SECTION 1303. Suspension of Payment When Senior Indebtedness in Default...................... 96
SECTION 1304. Acceleration of Notes.......................................................... 97
SECTION 1305. When Distribution Must Be Paid Over............................................ 97
SECTION 1306. Notice by Company.............................................................. 97
SECTION 1307. Payment Permitted If No Default................................................ 97
SECTION 1308. Subrogation to Rights of Holders of Senior Indebtedness........................ 97
SECTION 1309. Provisions Solely to Define Relative Rights.................................... 98
SECTION 1310. Trustee to Effectuate Subordination............................................ 98
SECTION 1311. Subordination May Not Be Impaired by Company................................... 98
SECTION 1312. Distribution or Notice to Representative....................................... 98
SECTION 1313. Notice to Trustee.............................................................. 99
SECTION 1314. Reliance on Judicial Order or Certificate of Liquidating Agent................. 99
SECTION 1315. Rights of Trustee as a Holder of Senior Indebtedness; Preservation of
Trustee's Rights......................................................................... 100
SECTION 1316. Article Applicable to Paying Agents............................................ 100
SECTION 1317. No Suspension of Remedies...................................................... 100
SECTION 1318. Modification of Terms of Senior Indebtedness................................... 100
SECTION 1319. [Intentionally Omitted]........................................................ 100
SECTION 1320. Trust Moneys Not Subordinated.................................................. 100
SIGNATURES......................................................................................... 124
</TABLE>
<PAGE>
INDENTURE, dated as of November 4, 1997, between PARAGON HEALTH
NETWORK, INC., a Delaware corporation (the "Company"), having its principal
office at One Ravinia Drive, Suite 1500, Atlanta, Georgia 30346, and IBJ
SCHRODER BANK & TRUST COMPANY, a New York banking corporation, as trustee (the
"Trustee"), having its Corporate Trust Office at 1 State Street, New York, New
York 10004.
RECITALS OF THE COMPANY
The Company has duly authorized the creation of and issuance of (i)
the Company's 9 1/2% Senior Subordinated Notes due 2007 (the "Senior
Subordinated Notes"), (ii) the Company's 10 1/2% Senior Subordinated Discount
Notes due 2007 (the "Senior Subordinated Discount Notes", and together with the
Senior Subordinated Notes, the "Initial Notes"), (iii) if and when issued in
exchange for Senior Subordinated Notes as provided in the Registration Rights
Agreement (as defined herein), the Company's 9 1/2% Series B Senior Subordinated
Notes due 2007 (the "Senior Subordinated Exchange Notes") and (iv) if and when
issued in exchange for Senior Subordinated Discount Notes as provided in the
Registration Rights Agreement, the Company's 10 1/2% Series B Senior
Subordinated Discount Notes due 2007 (the "Senior Subordinated Exchange Discount
Notes", and together with the Senior Subordinated Exchange Notes, the "Exchange
Notes") (collectively, the Initial Notes and the Exchange Notes are referred to
herein as the "Notes"), of substantially the tenor and amount hereinafter set
forth, and to provide therefor the Company has duly authorized the execution and
delivery of this Indenture.
Upon the issuance of the Exchange Notes, if any, or the effectiveness
of the Shelf Registration Statement (as defined herein), this Indenture will be
subject to, and shall be governed by, the provisions of the Trust Indenture Act
of 1939, as amended, that are required or deemed to be part of and to govern
indentures qualified thereunder.
All things necessary have been done to make the Notes, when executed
and duly issued by the Company and authenticated and delivered hereunder by the
Trustee or the Authenticating Agent, the valid obligations of the Company and to
make this Indenture a valid agreement of the Company in accordance with their
and its terms.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Notes, as follows:
ARTICLE ONE. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION 100.
SECTION 101. Definitions.
-----------
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and words in the singular include the plural as well
as the singular, and words in the plural include the singular as well as
the plural;
<PAGE>
2
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, or defined by
Commission rule and not otherwise defined herein have the meanings assigned
to them therein, and the terms "cash transaction" and "self-liquidating
paper", as used in TIA Section 311, shall have the meanings assigned to
them in the rules of the Commission adopted under the Trust Indenture Act;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP (as defined herein);
(d) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision;
(e) the word "or" is not exclusive; and
(f) provisions of this Indenture apply to successive events and
transactions.
Certain terms, used principally in Articles Two, Ten, Twelve and
Thirteen, are defined in those Articles.
"Accreted Value" with respect to any Senior Subordinated Discount Note
means, as of the date of issuance of the Senior Subordinated Discount Notes,
59.557% of the stated principal amount at maturity of such Senior Subordinated
Discount Note, and as of any date after such date of issuance and prior to
November 1, 2002 as of which the Accreted Value is being calculated (the
"Calculation Date"), (i) if the Calculation Date is a May 1 or November 1
interest payment date, the percentage of the stated principal amount of such
Senior Subordinated Discount Note as of such date as shown in the table below or
(ii) if the Calculation Date is not a May 1 or a November 1 interest payment
date, an amount equal to the sum of (A) the Accreted Value of such Senior
Subordinated Discount Note (as shown in the table below) as of the May 1 or
November 1, as the case may be, immediately preceding the Calculation Date plus
(B) the accrued amortization of the original issue discount from (but excluding)
such immediately preceding May 1 or November 1 to (and including) the
Calculation Date, calculated as the product of (x) 5.285% of the Accreted Value
of such Senior Subordinated Discount Note as of such immediately preceding May 1
or November 1 and (y) a fraction, the numerator of which is the number of days
from (but excluding) such immediately preceding May 1 or November 1 to (and
including) the Calculation Date (assuming a 360-day year of twelve 30-day
months), and the denominator of which is 180. The Accreted Value of each Senior
Subordinated Discount Note as of each May 1 and November 1 on or prior to
November 1, 2002 shall be an amount in dollars equal to a percentage of the
stated principal amount of such Senior Subordinated Discount Note as set forth
below:
<TABLE>
<CAPTION>
MAY 1 INTEREST NOVEMBER 1 INTEREST
PAYMENT DATE PAYMENT DATE
-------------- -------------------
<S> <C> <C>
1998.......................... 62.740% 66.055%
1999.......................... 69.547% 73.222%
2000.......................... 77.092% 81.166%
2001.......................... 85.456% 89.972%
2002.......................... 94.727% 99.733%
</TABLE>
Thereafter, the Accreted Value of each Senior Subordinated Discount
Note increases, such that on the Stated Maturity, the Accreted Value shall be
equal to 100% of the stated principal amount thereof.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) to be used by the Company or a Restricted
Subsidiary in a Related Business; (ii) the Capital Stock
<PAGE>
3
of a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by the Company or another Restricted Subsidiary; (iii)
Capital Stock of any Person that at such time is a Restricted Subsidiary,
acquired from a third party; provided, however, that, in the case of clauses
(ii) and (iii), such Restricted Subsidiary is primarily engaged in a Related
Business; or (iv) Capital Stock or Indebtedness of any Person which is primarily
engaged in a Related Business; provided, however, for purposes of the covenant
described under Section 1017, (A) the aggregate amount of Net Available Cash
permitted to be invested pursuant to this clause (iv) shall not exceed at any
one time outstanding 5% of Consolidated Tangible Assets and (B) the aggregate
amount invested pursuant to this clause (iv) and clause (vi) of paragraph (b) of
Section 1009 shall not exceed at any one time outstanding 10% of Consolidated
Tangible Assets.
"Affiliate" of any specified Person means any other Person, directly
or indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
Chase and its Affiliates shall not be deemed an Affiliate of the Company.
"Apollo" means Apollo Management, L.P., Apollo Advisors, L.P., Lion
Advisors, L.P. or any entity controlled thereby or any of the partners and
associates thereof.
"Apollo Stockholders Agreement" means the Stockholders Agreement to be
dated as of the Issue Date among the Company and the Investors.
"Asset Disposition" means any sale, lease, transfer or other
disposition of shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares), property or other assets (each referred to for
the purposes of this definition as a "disposition") by the Company or any of its
Restricted Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction) other than (i) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Restricted Subsidiary, (ii) a disposition of inventory,
equipment, obsolete assets or surplus personal property in the ordinary course
of business, (iii) the sale of Temporary Cash Investments or Cash Equivalents in
the ordinary course or business, (iv) a transaction or a series of related
transactions in which either (x) the fair market value of the assets disposed
of, in the aggregate, does not exceed 2.5% of the Consolidated Tangible Assets
of the Company or (y) the EBITDA related to such assets does not, in the
aggregate, exceed 2.5% of the Company's EBITDA, (v) the sale or discount (with
or without recourse, and on commercially reasonable terms) of accounts
receivable or notes receivable arising in the ordinary course of business, or
the conversion or exchange of accounts receivable for notes receivable, (vi) the
licensing of intellectual property in the ordinary course of business, (vii) a
Healthcare Facility Swap, (viii) for purposes of the covenant contained in
Section 1017 only, a disposition subject to the covenant contained in Section
1009 or (ix) a disposition of property or assets that is governed by the
provisions of Article 8.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means,
as of the time of determination, the present value (discounted at the interest
rate assumed in making calculations in accordance with FAS 13) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of the numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Indebtedness or Preferred
Stock multiplied by the amount of such payment by (ii) the sum of all such
payments.
<PAGE>
4
"Bank Indebtedness" means any and all amounts, whether outstanding on
the Issue Date or thereafter incurred, payable under or in respect of the Senior
Credit Facility, including, without limitation, principal, premium (if any),
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company or any Restricted
Subsidiary whether or not a claim for postfiling interest is allowed in such
proceedings), fees, charges, expenses, reimbursement obligations, guarantees,
other monetary obligations of any nature and all other amounts payable
thereunder or in respect thereof.
"Board of Directors" means the Board of Directors of the Company or
any committee thereof duly authorized to act on behalf of such Board.
"Business Day" means a day other than a Saturday, Sunday or other day
on which commercial banking institutions are authorized or required by law to
close in New York City.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligation" means an obligation that is required to
be classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
"Cash Equivalents" means any of the following: (i) securities issued
or fully guaranteed or insured by the United States Government or any agency or
instrumentality thereof, (ii) time deposits, certificates of deposit or bankers'
acceptances of (A) any lender under the Senior Credit Agreement or (B) any
commercial bank having capital and surplus in excess of $500,000,000 and the
commercial paper of the holding company of which is rated at least A-2 or the
equivalent thereof by S&P or at least P-2 or the equivalent thereof by Moody's
(or if at such time neither is issuing ratings, then a comparable rating of
another nationally recognized rating agency), (iii) commercial paper rated at
least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent
thereof by Moody's (or if at such time neither is issuing ratings, then a
comparable rating of another nationally recognized rating agency) and (iv)
investments in money market funds complying with the risk limiting conditions of
Rule 2a-7 or any successor rule of the SEC under the Investment Company Act.
"Change of Control" means (i) any "Person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted
Holders, is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5
under the Exchange Act) directly or indirectly, of more than 50% of the Voting
Stock of the Company or a Successor Company (as defined below) (including,
without limitation, through a merger or consolidation or purchase of Voting
Stock of the Company); provided that the Permitted Holders do not have the right
or ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of the
Company was approved by (A) Apollo in accordance with the Apollo Stockholders
Agreement or (B) a vote of a majority of the directors of the Company then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors then in office; (iii)
the sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any Person or group of related Persons (a "Group") (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act)
<PAGE>
5
other than a Permitted Holder; or (iv) the adoption of a plan relating to the
liquidation or dissolution of the Company.
"Chase" means The Chase Manhattan Bank.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means Paragon Health Network, Inc., a Delaware corporation.
"Consolidated Coverage Ratio" as of any date of determination means
the ratio of (i) the aggregate amount of EBITDA of the Company and its
Restricted Subsidiaries for the period of the most recent four consecutive
fiscal quarters ending prior to the date of such determination for which
consolidated financial statements of the Company are available to (ii)
Consolidated Interest Expense for such four fiscal quarters (in each of clause
(i) and (ii), determined, for each fiscal quarter (or portion thereof) of the
four fiscal quarters ending prior to the Issue Date, on a pro forma basis to
give effect to the Transactions as if they had occurred at the beginning of such
four-quarter period); provided, however, that: (1) if the Company or any
Restricted Subsidiary (x) has Incurred any Indebtedness since the beginning of
such period that remains outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated Coverage Ratio
is an Incurrence of Indebtedness, EBITDA and Consolidated Interest Expense for
such period shall be calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first day of such
period (except that in making such computation, the amount of Indebtedness under
any revolving credit facility outstanding on the date of such calculation shall
be computed based on (A) the average daily balance of such Indebtedness during
such four fiscal quarters or such shorter period for which such facility was
outstanding or (B) if such facility was created after the end of such four
fiscal quarters, the average daily balance of such Indebtedness during the
period from the date of creation of such facility to the date of such
calculation) and the discharge of any other Indebtedness repaid, repurchased,
defeased or otherwise discharged with the proceeds of such new Indebtedness as
if such discharge had occurred on the first day of such period, or (y) has
repaid, repurchased, defeased or otherwise discharged any Indebtedness since the
beginning of the period that is no longer outstanding on such date of
determination, or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio involves a discharge of Indebtedness (in each case
other than Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid), EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving effect on a pro forma
basis to such discharge of such Indebtedness, including with the proceeds of
such new Indebtedness, as if such discharge had occurred on the first day of
such period; (2) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition of any company or
any business or any group of assets constituting an operating unit of a
business, the EBITDA for such period shall be reduced by an amount equal to the
EBITDA (if positive) directly attributable to the assets that are the subject of
such Asset Disposition for such period or increased by an amount equal to the
EBITDA (if negative) directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (and, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale); (3) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Person that thereby becomes a Restricted Subsidiary, or otherwise acquired
any company or any business or any group of assets constituting an operating
unit of a business, including any such acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any Indebtedness
and including the pro forma expenses and cost reductions calculated on a basis
consistent
<PAGE>
6
with Regulation S-X of the Securities Act) as if such Investment or acquisition
occurred on the first day of such period; and (4) if since the beginning of such
period any Person (that subsequently became a Restricted Subsidiary or was
merged with or into the Company or any Restricted Subsidiary since the beginning
of such period) shall have made any Asset Disposition or any Investment or
acquisition of assets that would have required an adjustment pursuant to clause
(2) or (3) above if made by the Company or a Restricted Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset Disposition,
Investment or acquisition of assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be
given to an Asset Disposition, Investment or acquisition of assets, or any
transaction governed by the provisions of Article 8, or the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred or repaid, repurchased, defeased or
otherwise discharged in connection therewith, the pro forma calculations in
respect thereof shall be as determined in good faith by a responsible financial
or accounting officer of the Company, based on reasonable assumptions. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term as at the
date of determination in excess of 12 months). If any Indebtedness bears, at the
option of the Company or a Restricted Subsidiary, a fixed or floating rate of
interest and is being given pro forma effect, the interest expense on such
Indebtedness shall be computed by applying, at the option of the Company or such
Restricted Subsidiary, either a fixed or floating rate. If any Indebtedness
which is being given pro forma effect was Incurred under a revolving credit
facility, the interest expense on such Indebtedness shall be computed based upon
the average daily balance of such Indebtedness during the applicable period.
"Consolidated Interest Expense" means, as to any Person, for any
period, the total consolidated interest expense of such Person and its
Subsidiaries determined in accordance with GAAP, minus, to the extent included
in such interest expense, amortization or write-off of financing costs and cash
dividends paid to the Company with respect to its investment in Health and
Retirement Properties Trust, plus, to the extent incurred by such Person and its
Subsidiaries in such period but not included in such interest expense, without
duplication, (i) interest expense attributable to Capitalized Lease Obligations
and the interest component of rent expense associated with Attributable Debt in
respect of the relevant lease giving rise thereto, determined as if such lease
were a capitalized lease, in accordance with GAAP, (ii) amortization of debt
discount, (iii) interest in respect of indebtedness of any other Person that has
been Guaranteed by such Person or any Subsidiary, but only to the extent that
such interest is actually paid by such Person or any Restricted Subsidiary, (iv)
non-cash interest expense, (v) net costs associated with Hedging Obligations,
(vi) the product of (A) mandatory Preferred Stock cash dividends in respect of
all Preferred Stock of Subsidiaries of such Person and Disqualified Stock of
such Person held by Persons other than such Person or a Subsidiary multiplied by
(B) a fraction, the numerator of which is one and the denominator of which is
one minus the then current combined federal, state and local statutory tax rate
of such Person, expressed as a decimal, in each case, determined on a
consolidated basis in accordance with GAAP; and (vii) the cash contributions to
any employee stock ownership plan or similar trust to the extent such
contributions are used by such plan or trust to pay interest to any Person
(other than the referent Person or any Subsidiary thereof) in connection with
Indebtedness Incurred by such plan or trust; provided, however, that as to the
Company, there shall be excluded therefrom any such interest expense of any
Unrestricted Subsidiary to the extent the related Indebtedness is not Guaranteed
or paid by the Company or any Restricted Subsidiary. For purposes of the
foregoing, gross interest expense shall be determined after giving effect to any
net payments made or received by such Person and its Subsidiaries with respect
to Interest Rate Agreements.
"Consolidated Net Income" means, as to any Person, for any period, the
consolidated net income (loss) of such Person and its Subsidiaries, determined
in accordance with GAAP; provided, however,
<PAGE>
7
that there shall not be included in such Consolidated Net Income: (i) any net
income (loss) of any Person if such Person is not (as to the Company) a
Restricted Subsidiary and (as to any other Person) an unconsolidated Person,
except that (A) subject to the limitations contained in clause (iv) below, the
referent Person's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate amount of
cash actually distributed by such Person during such period to the referent
Person or a Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution to a Subsidiary, to the limitations
contained in clause (iii) below) and (B) the net loss of such Person shall be
included to the extent of the aggregate Investment of the referent Person or any
of its Subsidiaries in such Person; (ii) any net income (loss) of any Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition; (iii) any net income (loss) of any Restricted Subsidiary
(as to the Company) or of any Subsidiary (as to any other Person) if such
Subsidiary is subject to restrictions, directly or indirectly, on the payment of
dividends or the making of distributions by such Subsidiary, directly or
indirectly, to the Company, except that (A) subject to the limitations contained
in (iv) below, such Person's equity in the net income of any such Subsidiary for
such period shall be included in Consolidated Net Income up to the aggregate
amount of cash that could have been distributed by such Subsidiary during such
period to such Person or another Subsidiary as a dividend (subject, in the case
of a dividend that could have been made to another Restricted Subsidiary, to the
limitation contained in this clause) and (B) the net loss of such Subsidiary
shall be included in determining Consolidated Net Income; (iv) any charges for
costs and expenses associated with the Mergers; (v) any extraordinary gain or
loss; (vi) the cumulative effect of a change in accounting principles; and (vii)
non-recurring items related to (A) costs and expenses incurred in connection
with acquisitions and dispositions of assets and (B) costs related to the
discharge of legal judgments or settlement costs related to the settlement of a
bona fide dispute between the Company and a third party.
"Consolidated Tangible Assets" means, as of any date of determination,
the total assets, less goodwill and other intangibles (other than patents,
trademarks, copyrights, licenses and other intellectual property), shown on the
balance sheet of the Company and its Restricted Subsidiaries as of the most
recent date for which such a balance sheet is available, determined on a
consolidated basis in accordance with GAAP less all write-ups (other than write-
ups in connection with acquisitions) subsequent to the date of this Indenture in
the book value of any asset (except any such intangible assets) owned by the
Company or any of its Restricted Subsidiaries.
"Consolidation" means the consolidation of the accounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP;
provided, however, that "Consolidation" will not include consolidation of the
accounts of any Unrestricted Subsidiary, but the interest of the Company in any
Unrestricted Subsidiary will be accounted for as an Investment. The term
"Consolidated" has a correlative meaning.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement or arrangement
(including derivative agreements or arrangements) as to which such Person is a
party or a beneficiary.
"Default" means any event or condition that is, or after notice or
passage of time or both would be, an Event of Default.
"Depositary" means The Depository Trust Company, its nominees and
their respective successors and assigns, or such other depository institution
hereinafter appointed by the Company.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and
(ii) any other Senior Indebtedness which, at the date of determination, has an
aggregate principal amount of, or under which, at the date of determination, the
holders thereof are committed to lend up to, at least $25.0 million and is
specifically designated by the Company in the instrument evidencing or governing
such Senior Indebtedness as "Designated Senior Indebtedness" for purposes of
this Indenture.
<PAGE>
8
"Disqualified Stock" means, with respect to any Person, any Capital
Stock that by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable or exercisable) or upon the
happening of any event (i) matures or is mandatorily redeemable pursuant to a
sinking fund obligation or otherwise, (ii) is convertible or exchangeable for
Indebtedness or Disqualified Stock or (iii) is redeemable at the option of the
holder thereof, in whole or in part, in each case on or prior to the 91st day
after the Stated Maturity of the Notes.
"EBITDA" means, as to any Person, for any period, the Consolidated Net
Income for such period, plus the following to the extent included in calculating
such Consolidated Net Income: (i) income tax expense, (ii) Consolidated
Interest Expense, (iii) depreciation expense, (iv) amortization of intangibles,
(v) other non-cash charges or non-cash losses and (vi) the rent expense
associated with Sale/Leaseback Transactions to the extent not included in
Consolidated Interest Expense and minus any gain (but not loss) realized upon
the sale or other disposition of any asset of the Company or its Restricted
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) that is not
sold or otherwise disposed of in the ordinary course of business.
"Equity Offering" means a primary public or private offering or sale
of common stock of the Company, the proceeds of which shall be at least $25.0
million.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect on the Issue Date (for purposes of the
definitions of the terms "Consolidated Coverage Ratio," "Consolidated Interest
Expense," "Consolidated Net Income" and "EBITDA," all defined terms in this
Indenture to the extent used in or relating to any of the foregoing definitions,
and all ratios and computations based on any of the foregoing definitions) and
as in effect from time to time (for all other purposes of this Indenture),
including those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations based on GAAP
contained in this Indenture shall be computed in conformity with GAAP.
"GranCare Merger" means the merger of LCA Acquisition Sub, Inc. with
and into GranCare, Inc.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other
nonfinancial obligation of any other Person, including any such obligation,
direct or indirect, contingent or otherwise, of such Person (i) to purchase or
pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or such other obligation of such other Person (whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, that the term "Guarantee" shall not
include endorsements for collection, or deposits made, in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Guarantor" means each Subsidiary of the Company that executes a
Guarantee in respect of the Notes in accordance with the covenant described
under Section 1020, and their respective successors and assigns.
"Healthcare Facility" means (i) a hospital, outpatient clinic, nursing
center, assisted or independent living community, long-term care facility or any
other facility that is used or useful in the
<PAGE>
9
provision of healthcare or custodial care services, (ii) any healthcare business
affiliated or associated with a Healthcare Facility described in clause (i) of
this definition or (iii) any business related or ancillary to the provision of
healthcare services or the operation of a Healthcare Facility, including, but
not limited to, contract therapy services such as rehabilitation, pharmacy,
respiratory, speech and occupational therapy services, as well as hospice and
home care services.
"Healthcare Facility Swap" means an exchange of assets (including
Capital Stock of a Subsidiary or the Company) by the Company or a Restricted
Subsidiary for one or more Healthcare Facilities or for Capital Stock,
Indebtedness or other securities (including cash, provided, however, that any
cash received must be applied in accordance with the covenant contained in
Section 1017 as if such cash were Net Available Cash) of any Person owning or
operating one or more Healthcare Facilities and primarily engaged in Related
Business.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered in the Register.
"HRPT Agreements" means collectively, (i) the Restructure and Asset
Exchange Agreement to be dated on or about November 4, 1997 among Health and
Retirement Properties Trust ("HRPT"), GranCare, Inc., AMS Properties, Inc. and
GCI Health Care Centers, Inc., (ii) the Master Lease Document General Terms and
Conditions dated as of December 28, 1990, and related facility leases, as
amended, between HRPT and AMS Properties, Inc., (iii) the Master Lease Document
General Terms and Conditions dated as of June 30, 1992, and the related facility
leases, as amended, between HRPT and GCI Health Care Centers, Inc., and (iv) all
documents and agreements contemplated therein and executed in connection
therewith.
"Incur" means issue, assume, enter into any Guarantee, incur or
otherwise become liable for; provided, however, that any Indebtedness or Capital
Stock of a Person existing at the time such Person becomes a Subsidiary (whether
by merger, consolidation, acquisition or otherwise) shall be deemed to be
Incurred by such Subsidiary at the time it becomes a Subsidiary. Any
Indebtedness issued at a discount (including Indebtedness on which interest is
payable through the issuance of additional Indebtedness) shall be deemed
incurred at the time of original issuance of the Indebtedness at the initial
accreted amount thereof.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication): (i) the principal of indebtedness of such
Person for borrowed money, (ii) the principal of obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments, (iii) all
reimbursement obligations of such Person (including reimbursement obligations)
in respect of letters of credit or other similar instruments (the amount of such
obligations being equal at any time to the aggregate then undrawn and unexpired
amount of such letters of credit or other instruments plus the aggregate amount
of drawings thereunder that have not then been reimbursed), (iv) all obligations
of such Person to pay the deferred and unpaid purchase price of property or
services (except Trade Payables), which purchase price is due more than one year
after the date of placing such property in final service or taking final
delivery and title thereto or the completion of such services, (v) all
Capitalized Lease Obligations and Attributable Debt of such Person, (vi) the
redemption, repayment or other repurchase amount of such Person with respect to
any Disqualified Stock or (if such Person is a Subsidiary of the Company) any
Preferred Stock of such Subsidiary, but excluding, in each case, any accrued
dividends (the amount of such obligation to be equal at any time to the maximum
fixed involuntary redemption, repayment or repurchase price for such Capital
Stock, or if such Capital Stock has no fixed price, to the involuntary
redemption, repayment or repurchase price therefor calculated in accordance with
the terms thereof as if then redeemed, repaid or repurchased, and if such price
is based upon or measured by the fair market value of such Capital Stock, such
fair market
<PAGE>
10
value shall be as determined in good faith by the Board of Directors or the
board of directors of the issuer of such Capital Stock), (vii) all Indebtedness
of other Persons secured by a Lien on any asset of such Person, whether or not
such Indebtedness is assumed by such Person; provided, however, that the amount
of Indebtedness of such Person shall be the lesser of (A) the fair market value
of such asset at such date of determination and (B) the amount of such
Indebtedness of such other Persons, (viii) all Indebtedness of other Persons to
the extent Guaranteed by such Person, and (ix) to the extent not otherwise
included in this definition, net Hedging Obligations of such Person (such
obligations to be equal at any time to the termination value of such agreement
or arrangement giving rise to such Hedging Obligation that would be payable by
such Person at such time). Notwithstanding the preceding sentence, obligations
arising under (i) the Master Lease Agreement dated October 10, 1996 between FBTC
Leasing Corp. and Living Centers Holding Company and the related agreements (as
amended) and (ii) the HRPT Agreements, in each case without giving effect to any
amendment or other modification thereto relating to the total amount of such
obligations, shall not be deemed Indebtedness for the purposes of this
Indenture.
The amount of Indebtedness of any Person at any date shall be
determined as set forth above or otherwise provided in this Indenture, or
otherwise in accordance with GAAP.
"Indenture" means this Indenture as amended or supplemented from time
to time.
"Interest Rate Agreement" means with respect to any Person any
interest rate protection agreement, interest rate future agreement, interest
rate option agreement, interest rate swap agreement, interest rate cap
agreement, interest rate collar agreement, interest rate hedge agreement or
other similar agreement or arrangement (including derivative agreement or
arrangements) as to which such Person is party or a beneficiary; provided,
however, any such agreements entered into in connection with the Notes shall not
be included.
"Investment" in any Person by any other Person means any direct or
indirect advance, loan or other extension of credit (other than to customers,
directors, officers or employees of any Person in the ordinary course of
business) or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), or any purchase or acquisition of Capital Stock, Indebtedness or
other similar instruments issued by, such Person. If the Company or any
Restricted Subsidiary of the Company sells or otherwise disposes of any Capital
Stock of any direct or indirect Restricted Subsidiary of the Company such that,
after giving effect to any such sale or disposition, such entity is no longer a
Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Capital Stock of such Subsidiary not sold or disposed of.
"Investors" means Apollo, Chase Venture Partners L.P., Healthcare
Equity Partners L.P., Healthcare Equity QP Partners L.P., Walnut Growth
Partners, L.P., Keith B. Pitts, Key Capital Corporation and Key Equity Partners
97.
"Issue Date" means the date on which the Initial Notes are originally
issued.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any conditional sale or other title
retention agreement or lease in the nature thereof).
"Mergers" means the Recapitalization Merger and the GranCare Merger.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Cash" from an Asset Disposition means cash payments
received (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in
<PAGE>
11
the form of assumption by the acquiring person of Indebtedness or other
obligations relating to the properties or assets that are the subject of such
Asset Disposition or received in any other noncash form) therefrom, in each case
net of (i) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred (including, without limitation, fees and expenses of
legal counsel, accountants and financial advisors), and all federal, state,
provincial, foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness that is secured by any assets subject to such
Asset Disposition, in accordance with the terms of any Lien upon such assets, or
that must by its terms, or in order to obtain a necessary consent to such Asset
Disposition, or by applicable law be repaid out of the proceeds from such Asset
Disposition, (iii) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition or to any other Person (other than the Company or a Restricted
Subsidiary) owning a beneficial interest in the assets disposed of in such Asset
Disposition and (iv) appropriate amounts to be provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with the
assets disposed of in such Asset Disposition and retained by the Company or any
Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds" means, with respect to any issuance or sale of any
securities of the Company or any Subsidiary by the Company or any Subsidiary, or
any capital contribution, the cash proceeds of such issuance, sale or
contribution net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees actually incurred in connection with such issuance, sale or
contribution and net of taxes paid or payable as a result thereof.
"Non-Recourse Debt" means indebtedness (i) as to which neither the
Company nor any Restricted Subsidiary (A) provides any guarantee or credit
support of any kind (including any undertaking, guarantee, indemnity, agreement
or instrument that would constitute Indebtedness) or (B) is directly or
indirectly liable (as a guarantor or otherwise) and (ii) no default with respect
to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity.
"Offering Memorandum" means the Offering Memorandum dated October 30,
1997 relating to the Initial Notes.
"Officer" means the Chief Executive Officer, President, Chief
Financial Officer, any Vice President, Controller, Secretary or Treasurer of the
Company.
"Officer's Certificate" means a certificate signed by one Officer.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Business Venture" means a Person other than a Restricted
Subsidiary (i) that is engaged in a Related Business; (ii) no debt or equity
interest (except any director's qualifying shares) of which is or will be
directly or indirectly held by (A) an officer or director of either the Company
or any Restricted Subsidiary or (B) any other Affiliate of the Company; and
(iii) unless the Investment by the Company or a Restricted Subsidiary is less
than $5.0 million, the Company and/or any Restricted Subsidiary has at least a
35% ownership interest in each such Person, provided, however, that in no event
shall the aggregate amount of all Investments by the Company and all Restricted
Subsidiaries in Permitted Business Ventures wherein the ownership interest of
the Company or such Restricted Subsidiary is less than 35% exceed $20.0 million
in the aggregate.
<PAGE>
12
"Permitted Holders" means the Investors, their respective Affiliates
and successors or assigns and any Person acting in the capacity of an
underwriter in connection with a public or private offering of the Company's
Capital Stock.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in any of the following:
(i) a Restricted Subsidiary, the Company or a Person that
will, upon the making of such Investment, become a Restricted Subsidiary;
(ii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or
conveys all or substantially all its assets to, the Company or a Restricted
Subsidiary;
(iii) Temporary Cash Investments or Cash Equivalents;
(iv) receivables owing to the Company or any Restricted
Subsidiary, if created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary trade terms;
provided, however, that such trade terms may include such concessionary
trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances;
(v) securities or other Investments received in connection
with any Healthcare Facility Swaps or as consideration in sales or other
dispositions of property or assets, including Asset Dispositions made in
compliance with the covenant contained in Section 1017;
(vi) securities or other Investments received in settlement of
debts created in the ordinary course of business and owing to the Company
or any Restricted Subsidiary, or as a result of foreclosure, perfection or
enforcement of any Lien, or in satisfaction of judgments, including in
connection with any bankruptcy proceeding or other reorganization of
another Person;
(vii) binding written commitments in existence on the Issue
Date;
(viii) Currency Agreements, Interest Rate Agreements and
related Hedging Obligations, which obligations are Incurred in compliance
with the covenant contained in Section 1017;
(ix) pledges or deposits (A) provided to third parties in the
ordinary course of business with respect to leases or utilities or (B)
otherwise described in the definition of "Permitted Liens";
(x) Investments made on commercially reasonable terms by
wholly owned insurance subsidiaries of the Company that are permitted
pursuant to federal, state or local regulations governing the investment
activities of such Persons; and
(xi) other Investments in an aggregate amount outstanding at
any time not to exceed $10.0 million.
"Permitted Liens" means: (i) Liens for taxes, assessments or other
governmental charges not yet delinquent or the nonpayment of which in the
aggregate would not be reasonably expected to have a material adverse effect on
the Company and its Restricted Subsidiaries, or that are being contested in good
faith and by appropriate proceedings if adequate reserves with respect thereto
are maintained on the books of the Company or such Subsidiary, as the case may
be, in accordance with GAAP; (ii) carriers', warehousemen's, mechanics',
landlords', materialmen's, repairmen's or other like Liens arising in the
<PAGE>
13
ordinary course of business in respect of obligations that are not overdue for a
period of more than 60 days or that are bonded or that are being contested in
good faith and by appropriate proceedings; (iii) pledges, deposits or liens in
connection with workers' compensation, unemployment insurance and other social
security legislation and/or similar legislation or other insurance-related
obligations (including without limitation, pledges or deposits securing
liability to insurance carriers under insurance or self-insurance arrangements);
(iv) pledges, deposits or liens to secure the performance of bids, tenders,
trade, government or other contracts (other than for borrowed money),
obligations for or under or in respect of utilities, leases, licenses, statutory
obligations, surety, judgment and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business; (v)
easements (including reciprocal easement agreements), rights-of-way, building,
zoning and similar restrictions, utility agreements, covenants, reservations,
restrictions, encroachments, changes, and other similar encumbrances or title
defects incurred, or leases or subleases granted to others, in the ordinary
course of business, which do not in the aggregate materially interfere with the
ordinary conduct of the business of the Company and its Subsidiaries, taken as a
whole; (vi) Liens existing on, or provided for under written arrangements
existing on, the Issue Date, or (in the case of any such Liens securing
Indebtedness of the Company or any of its Subsidiaries existing or arising under
written arrangements existing on the Issue Date) securing any Refinancing
Indebtedness in respect of such Indebtedness so long as the Lien securing such
Refinancing Indebtedness is limited to all or part of the same property or
assets (plus improvements, accessions, proceeds or dividends or distributions in
respect thereof) that secured (or under such written arrangements could secure)
the original Indebtedness; (vii) Liens securing Hedging Obligations Incurred in
compliance with the covenant contained in Section 1010; (viii) Liens arising out
of judgments, decrees, orders or awards in respect of which the Company shall in
good faith be prosecuting an appeal or proceedings for review which appeal or
proceedings shall not have been finally terminated, or the period within which
such appeal or proceedings may be initiated shall not have expired; (ix) Liens
securing (A) Indebtedness incurred in compliance with clause (i), (iv) or (v) of
the second paragraph of Section 1010 or clause (iii) thereof (other than,
Refinancing Indebtedness Incurred in respect of Indebtedness described in the
first paragraph thereof) or (B) Bank Indebtedness; (x) Liens on properties or
assets of the Company securing Senior Indebtedness; (xi) Liens existing on
property or assets of a Person at the time such Person becomes a Subsidiary of
the Company (or at the time the Company or a Restricted Subsidiary acquires such
property or assets); provided, however, that such Liens are not created in
connection with, or in contemplation of, such other Person becoming such a
Subsidiary (or such acquisition of such property or assets), and that such Liens
are limited to all or part of the same property or assets (plus improvements,
accessions, proceeds or dividends or distributions in respect thereof) that
secured (or, under the written arrangements under which such Liens arose, could
secure) the obligations to which such Liens relate, (xii) Liens on Capital Stock
of an Unrestricted Subsidiary that secure Indebtedness or other obligations of
such Unrestricted Subsidiary; (xiii) Liens securing the Notes; and (xiv) Liens
securing Refinancing Indebtedness Incurred in respect of any Indebtedness
secured by, or securing any refinancing, refunding, extension, renewal or
replacement (in whole or in part) of any other obligation secured by, any other
Permitted Liens, provided that any such new Lien is limited to all or part of
the same property or assets (plus improvements, accessions, proceeds or
dividends or distributions in respect thereof) that secured (or, under the
written arrangements under which the original Lien arose, could secure) the
obligations to which such Liens relate.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) that is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Purchase Money Obligations" means any Indebtedness of the Company or
any Restricted Subsidiary incurred to finance the acquisition, construction or
capital improvement of any property or
<PAGE>
14
business (including Indebtedness incurred within 90 days following such
acquisition or construction), including Indebtedness of a Person existing at the
time such Person becomes a Restricted Subsidiary or assumed by the Company or a
Restricted Subsidiary in connection with the acquisition of assets from such
Person; provided, however, that any Lien on such Indebtedness shall not extend
to any property other than the property so acquired or constructed.
"Recapitalization Merger" means the merger of Apollo LCA Acquisition
Corp. with and into Living Centers of America, Inc. (renamed Paragon Health
Network, Inc.).
"Refinancing Indebtedness" means Indebtedness that is Incurred to
refund, refinance, replace, renew, repay or extend (including pursuant to any
defeasance or discharge mechanism) (collectively, "refinances" and "refinanced"
shall have a correlative meaning) any Indebtedness existing on the date of this
Indenture or Incurred in compliance with this Indenture (including Indebtedness
of the Company that refinances Indebtedness of any Restricted Subsidiary (to the
extent permitted in this Indenture) and Indebtedness of any Restricted
Subsidiary that refinances Indebtedness of another Restricted Subsidiary)
including Indebtedness that refinances Refinancing Indebtedness; provided,
however, that (i) the Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being refinanced, (ii) the
Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being refinanced and (iii) such Refinancing Indebtedness is
Incurred in an aggregate principal amount (or if issued with original issue
discount, an aggregate issue price) that is equal to or less than the aggregate
principal amount (or if issued with original issue discount, the aggregate
accreted value) then outstanding of the Indebtedness being refinanced, plus
fees, underwriting discounts, premiums and other costs and expenses incurred in
connection with such Refinancing Indebtedness; provided further, however, that
Refinancing Indebtedness shall not include (x) Indebtedness of a Restricted
Subsidiary that refinances Indebtedness of the Company or (y) Indebtedness of
the Company or a Restricted Subsidiary that refinances Indebtedness of an
Unrestricted Subsidiary.
"Registration Rights Agreement" means the Registration Rights
Agreement dated as of November 4, 1997 among the Company, Chase Securities Inc.,
Smith Barney Inc. and Credit Suisse First Boston Corporation.
"Regular Record Date" means, with respect to any Interest Payment
Date, the April 15 or October 15 (whether or not a Business Day), as the case
may be, next preceding such Interest Payment Date.
"Related Business" means those businesses in which the Company or any
of its Subsidiaries is engaged on the date of this Indenture or that are
reasonably related or incidental thereto, including any aspect of the healthcare
or assisted living industry.
"Representative" means the trustee, agent or representative (if any)
of an issue of Senior Indebtedness.
"Restricted Subsidiary" means any Subsidiary of the Company other than
an Unrestricted Subsidiary.
"Revolving Credit Facility" means the revolving credit facility under
the Senior Credit Facility (which may include any swing line or letter of credit
facility or subfacility thereunder).
"Sale/Leaseback Transaction" means an arrangement relating to property
now owned or hereafter acquired by the Company or a Restricted Subsidiary
whereby the Company or such Restricted Subsidiary transfers such property to a
Person and the Company or such Restricted Subsidiary leases it from such Person,
other than leases (i) between the Company and a Restricted Subsidiary or between
<PAGE>
15
Restricted Subsidiaries or (ii) required to be classified and accounted for as
capitalized leases for financial reporting purposes in accordance with GAAP.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured
by a Lien.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Credit Agreement" means the credit agreement dated as of
November 4, 1997, among the Company, the banks and other financial institutions
party thereto from time to time, and Chase, as administrative agent, as such
agreement may be assumed by any successor in interest, and as such agreement may
be amended, supplemented, waived or otherwise modified from time to time, or
refunded, refinanced, restructured, replaced, renewed, repaid, increased or
extended front time to time (whether in whole or in part, whether with the
original agent and lenders or other agents and lenders or otherwise, and whether
provided under the original Senior Credit Agreement or otherwise).
"Senior Credit Facility" means the collective reference to the Senior
Credit Agreement, any Loan Documents (as defined therein), any notes and letters
of credit issued pursuant thereto and any guarantee and collateral agreement,
patent and trademark security agreement, mortgages, letter of credit
applications and other security agreements and collateral documents, and other
instruments and documents, executed and delivered pursuant to or in connection
with any of the foregoing, in each case as the same may be amended,
supplemented, waived or otherwise modified from time to time, or refunded,
refinanced, restructured, replaced, renewed, repaid, increased or extended from
time to time (whether in whole or in part, whether with the original agent and
lenders or other agents and lenders or otherwise, and whether provided under the
original Senior Credit Agreement or otherwise). Without limiting the generality
of the foregoing, the term "Senior Credit Facility" shall include any agreement
(i) changing the maturity of any Indebtedness Incurred thereunder or
contemplated thereby, (ii) adding Subsidiaries of the Company as additional
borrowers or guarantors thereunder, (iii) increasing the amount of Indebtedness
Incurred thereunder or available to be borrowed thereunder or (iv) otherwise
altering the terms and conditions thereof.
"Senior Indebtedness" means the following obligations, whether
outstanding on the date of this Indenture or thereafter issued, without
duplication: (i) all obligations consisting of Bank Indebtedness; and (ii) all
obligations consisting of the principal of and premium, if any, and accrued and
unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company regardless
of whether postfiling interest is allowed in such proceeding) on, and fees and
other amounts owing in respect of, all other Indebtedness of the Company,
unless, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that the obligations in respect of such
Indebtedness are not superior in right of payment to the Notes; provided,
however, that Senior Indebtedness shall not include (A) any obligation of the
Company to any Subsidiary or any other Affiliate of the Company, or any such
Affiliate's Subsidiaries, (B) any liability for federal, state, foreign, local
or other taxes owed or owing by the Company, (C) any accounts payable or other
liability to trade creditors arising in the ordinary course of business
(including Guarantees thereof or instruments evidencing such liabilities) or
other current liabilities (other than current liabilities which constitute Bank
Indebtedness or the current portion of any long-term Indebtedness which would
constitute Senior Indebtedness but for the operation of this clause (C)), (D)
any Indebtedness, Guarantee or obligation of the Company that is expressly
subordinate or junior to any other Indebtedness, Guarantee or obligation of the
Company, (E) Indebtedness which is represented by Disqualified Stock or (F) that
portion of any Indebtedness that is Incurred in violation of this Indenture. If
any Designated Senior Indebtedness is disallowed, avoided or subordinated
pursuant to the provisions of Section 548 of Title 11 of the United States Code
or any applicable state fraudulent conveyance law, such Designated Senior
Indebtedness nevertheless will constitute Senior Indebtedness.
<PAGE>
16
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that (i) specifically provides that such
Indebtedness is to rank pari passu with the Notes or is otherwise entitled
Senior Subordinated Indebtedness and (ii) is not subordinated by its terms to
any Indebtedness or other obligation of the Company that is not Senior
Indebtedness.
"Shelf Registration Statement" has the meaning ascribed thereto in the
Registration Rights Agreement.
"Significant Subsidiary" means each Restricted Subsidiary that for the
most recent fiscal year of such Restricted Subsidiary had consolidated revenues
greater than $10.0 million or as at the end of such fiscal year had assets or
liabilities greater than $10.0 million.
"S&P" means Standard & Poor's Ratings Service, a division of The
McGraw-Hill Companies, Inc. and its successors.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the payment of principal
of such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company
(whether outstanding on the date of this Indenture or thereafter Incurred) which
is subordinate or junior in right of payment to the Notes pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) 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 (i) such Person or (ii) one or
more Subsidiaries of such Person.
"Successor Company" shall have the meaning assigned thereto in Section
801.
"Temporary Cash Investments" means any of the following: (i) any
investment in direct obligations (x) of the United States of America or any
agency thereof or obligations Guaranteed by the United States of America or any
agency thereof or (y) of any foreign country recognized by the United States of
America rated at least "A" by S&P or "A-1" by Moody's, (ii) investments in time
deposit accounts, certificates of deposit and money market deposits maturing
within 180 days of the date of acquisition thereof issued by a bank or trust
company that is organized under the laws of the United States of America, any
state thereof or any foreign country recognized by the United States of America
having capital and surplus aggregating in excess of $250
<PAGE>
17
million (or the foreign currency equivalent thereof), and whose long-term debt
is rated "A" by S&P or "A-1" by Moody's, (iii) repurchase obligations with a
term of not more than 180 days for underlying securities of the types described
in clause (i) or (ii) above entered into with a bank meeting the qualifications
described in clause (ii) above, (iv) Investments in commercial paper, maturing
not more than 180 days after the date of acquisition, issued by a corporation
(other than an Affiliate of the Company) organized and in existence under the
laws of the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any Investment
therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher)
according to S&P, (v) Investments in securities with maturities of six months or
less from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by S&P or "A" by
Moody's, (vi) any money market deposit accounts issued or offered by a domestic
commercial bank or a commercial bank organized and located in a country
recognized by the United States of America, in each case, having capital and
surplus in excess of $250 million (or the foreign currency equivalent thereof),
or investments in money market funds complying with the risk limiting conditions
of Rule 2a-7 (or any short-term successor rule) of the SEC, under the Investment
Company Act of 1940, as amended, and (vii) similar short-term investments
approved by the Board of Directors in the ordinary course of business.
"Term Loan Facility" means the term loan facilities provided under the
Senior Credit Facility.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-
77bbbb) as in effect on the date of this Indenture.
"Trade Payables" means, with respect to any Person, any accounts
payable or any Indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person arising in the ordinary course of business
in connection with the acquisition of goods or services.
"Transactions," means collectively the Mergers, the offering of the
Initial Notes, the initial borrowings under the Senior Credit Facility, and all
other transactions relating to the Mergers or the financing thereof.
"Transfer Restricted Notes" means Notes that bear or are required to
bear the legend set forth in Section 202 hereof.
"Trustee" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor.
"Trust Officer" means an officer of the Trustee assigned by the
Trustee to administer its corporate trust matters or to any other officer of the
Trustee to whom such matter is referred because of his knowledge of and
familiarity with the particular subject.
"Uniform Commercial Code" means the New York Uniform Commercial Code
as in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; provided, however,
that either (A) the Subsidiary to be so designated has total consolidated assets
of $10,000 or less or (B) if such Subsidiary has consolidated assets greater
than $10,000, then such designation would be permitted under Section 1009. The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation, (x) the Company could Incur at least $1.00 of additional
Indebtedness under the first paragraph in the covenant contained in Section 1010
and (y) no Default or Event of Default shall have occurred and be continuing.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the resolution of the Company's
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable or redeemable at the issuer's option.
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18
"Voting Stock" of an entity means all classes of Capital Stock of such
entity then outstanding and normally entitled to vote in the election of
directors or all interests in such entity with the ability to control the
management or actions of such entity.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the
Company, all of the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or another Wholly Owned Subsidiary.
SECTION 102. Compliance Certificates and Opinions.
------------------------------------
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company and any Guarantor
(if applicable) and any other obligor on the Notes (if applicable) shall furnish
to the Trustee an Officers' Certificate in form and substance reasonably
acceptable to the Trustee stating that all conditions precedent, if any,
provided for in this Indenture (including any covenant compliance with which
constitutes a condition precedent) relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (including certificates
provided pursuant to Section 1018(a)) shall include:
(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual or such
firm, he or it has made such examination or investigation as is necessary
to enable him or it to express an informed opinion as to whether or not
such covenant or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 103. Form of Documents Delivered to Trustee.
--------------------------------------
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company, any Guarantor
or other obligor on the Notes may be based, insofar as it relates to legal
matters, upon a certificate or opinion of, or representations by, counsel,
unless such officer knows, or in the exercise of reasonable care should know,
that the certificate or opinion or representations with respect to the matters
upon which his certificate or opinion is based are erroneous. Any such
certificate or Opinion of Counsel may be based, insofar as it relates to factual
matters, upon a certificate or opinion of, or representations by, an officer or
officers of the Company, any Guarantor or other obligor on the Notes stating
that the information with respect to such factual matters is in the possession
of the Company, any Guarantor or other obligor on the Notes unless
<PAGE>
19
such counsel knows, or in the exercise of reasonable care should know, that the
certificate or opinion or representations with respect to such matters are
erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 104. Acts of Holders.
---------------
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agents duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and conclusive in favor of the Trustee and the Company, if made in the
manner provided in this Section 104.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where
such execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner that the Trustee deems sufficient.
(c) The principal amount and serial numbers of Notes held by any
Person, and the date of holding the same, shall be proved by the Note Register.
(d) If the Company shall solicit from the Holders any request,
demand, authorization, direction, notice, consent, waiver or other Act, the
Company may, at its option, by or pursuant to a Board Resolution, fix in advance
a record date for the determination of Holders entitled to give such request,
demand, authorization, direction, notice, consent, waiver or other Act, but the
Company shall have no obligation to do so. Notwithstanding TIA Section 316(c),
such record date shall be the record date specified in or pursuant to such Board
Resolution, which shall be a date not earlier than the date 30 days prior to the
first solicitation of Holders generally in connection therewith and not later
than the date such solicitation is completed. If such a record date is fixed,
such request, demand, authorization, direction, notice, consent, waiver or other
Act may be given before or after such record date, but only the Holders of
record at the close of business on such record date shall be deemed to be
Holders for the purposes of determining whether Holders of the requisite
proportion of Outstanding Notes have authorized or agreed or consented to such
request, demand, authorization, direction, notice, consent, waiver or other Act,
and for that purpose the Outstanding Notes shall be computed as of such record
date; provided that no such authorization, agreement or consent by the Holders
on such record date shall be deemed effective unless it shall become effective
pursuant to the provisions of this Indenture not later than six months after the
record date.
(e) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Note shall bind every future Holder of
the same Note and the Holder of every Note issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof (including in
accordance with Section 310) in respect of anything done, omitted or suffered to
be done by the Trustee, any Paying Agent or the Company or any Guarantor in
reliance thereon, whether or not notation of such action is made upon such Note.
<PAGE>
20
SECTION 105. Notices, Etc., to Trustee, the Company and any
----------------------------------------------
Guarantor.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company or any Guarantor or
any other obligor on the Notes shall be sufficient for every purpose
hereunder if made, given, furnished or delivered in writing and mailed,
first-class postage prepaid, or delivered by recognized overnight courier,
to or with the Trustee and received at its Corporate Trust Office,
Attention: Corporate Trust Administration.
(2) the Company or any Guarantor by the Trustee or by any Holder
shall be sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if made, given, furnished or delivered, in writing, or
mailed, first-class postage prepaid, or delivered by recognized overnight
courier, to the Company or such Guarantor addressed to it and received at
the address of its principal office specified in the first paragraph of
this Indenture, or at any other address previously furnished in writing to
the Trustee by the Company or such Guarantor.
SECTION 106. Notice to Holders; Waiver.
-------------------------
Where this Indenture provides for notice of any event to Holders by
the Company or the Trustee, such notice shall be sufficiently given (unless
otherwise herein expressly provided) if in writing and mailed, first-class
postage prepaid, to each Holder affected by such event, at his address as it
appears in the Note Register, not later than the latest date, and not earlier
than the earliest date, prescribed for the giving of such notice. Neither the
failure to mail such notice, nor any defect in any notice so mailed, to any
particular Holder shall affect the sufficiency of such notice with respect to
other Holders. Any notice mailed to a Holder in the manner herein prescribed
shall be conclusively deemed to have been received by such Holder, whether or
not such Holder actually receives such notice. Where this Indenture provides
for notice in any manner, such notice may be waived in writing by the Person
entitled to receive such notice, either before or after the event, and such
waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Trustee, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver.
In case by reason of the suspension of or irregularities in regular
mail service or by reason of any other cause, it shall be impracticable to mail
notice of any event to Holders when such notice is required to be given pursuant
to any provision of this Indenture, then any manner of giving such notice as
shall be satisfactory to the Trustee shall be deemed to be a sufficient giving
of such notice for every purpose hereunder.
If the Company mails any notice or communication to any Holder, it
shall mail a copy to the Trustee at the same time.
SECTION 107. Effect of Headings and Table of Contents.
----------------------------------------
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
SECTION 108. Successors and Assigns.
----------------------
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.
<PAGE>
21
SECTION 109. Separability Clause.
-------------------
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 110. Benefits of Indenture.
---------------------
Nothing in this Indenture or in the Notes, express or implied, shall
give to any Person, (other than the parties hereto, any agent and their
successors hereunder and each of the Holders and, with respect to any provisions
hereof relating to the subordination of the Notes or the rights of holders of
Senior Indebtedness, the holders of Senior Indebtedness) any benefit or any
legal or equitable right, remedy or claim under this Indenture.
SECTION 111. Governing Law.
-------------
THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST
EXTENT PERMISSIBLE BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF
THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. UPON THE
ISSUANCE OF THE EXCHANGE NOTES OR THE EFFECTIVENESS OF THE SHELF REGISTRATION
STATEMENT, THIS INDENTURE SHALL BE SUBJECT TO THE PROVISIONS OF THE TRUST
INDENTURE ACT THAT ARE REQUIRED TO BE PART OF THIS INDENTURE AND SHALL, TO THE
EXTENT APPLICABLE, BE GOVERNED BY SUCH PROVISIONS. EACH OF THE PARTIES HERETO
AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND
THE U.S. FEDERAL COURTS, IN EACH CASE SITTING IN THE BOROUGH OF MANHATTAN, AND
WAIVES ANY OBJECTION AS TO VENUE OR FORUM NON CONVENIENS.
SECTION 112. Legal Holidays.
--------------
In any case where any interest payment date, any date established for
payment of Defaulted Interest pursuant to Section 311 or redemption date or
Stated Maturity of any Note shall not be a Business Day, then (notwithstanding
any other provision of this Indenture or of the Notes) payment of principal (or
premium, if any) or interest need not be made on such date, but may be made on
the next succeeding Business Day with the same force and effect as if made on
the interest payment date or date established for payment of Defaulted Interest
pursuant to Section 311, Redemption Date, or at the Stated Maturity or Maturity;
provided that no interest shall accrue for the period from and after such
interest payment date, redemption date or date established for payment of
Defaulted Interest pursuant to Section 311, Stated Maturity or Maturity, as the
case may be, to the next succeeding Business Day.
SECTION 113. No Personal Liability of Directors, Officers, Employees,
--------------------------------------------------------
Stockholders or Incorporators.
- -----------------------------
No director, officer, employee, incorporator or stockholders, as such,
of the Company or any Guarantor of the Notes shall have any liability for any
obligations of the Company or such Guarantor under the Notes, this Indenture or
any Guarantee of the Notes or for any claim based on, in respect of, or by
reason of, such obligations or their creations. Each Holder by accepting a Note
waives and releases all such liability. Such waiver and release are part of the
consideration for the issuance of the Notes.
<PAGE>
22
SECTION 114. Counterparts.
------------
This Indenture may be executed in any number of counterparts, each of
which shall be original; but such counterparts shall together constitute but one
and the same instrument.
SECTION 115. Communications by Holders with Other Holders.
--------------------------------------------
Holders may communicate pursuant to TIA (S) 312(b) with other Holders
with respect to their rights under this Indenture or the Notes. The Company,
the Trustee, the Note Registrar and anyone else shall have the protection of TIA
(S) 312(c).
ARTICLE TWO. NOTE FORMS
200.
SECTION 201. Forms Generally.
---------------
The Notes and the Trustee's certificate of authentication shall be in
substantially the forms set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture, and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with applicable laws or the rules of any securities exchange
or as may, consistently herewith, be determined by the officers executing such
Notes, as evidenced by their execution of the Notes. Any portion of the text of
any Note may be set forth on the reverse thereof, with an appropriate reference
thereto on the face of the Note. Each Note shall be dated the date of its
authentication.
Initial Notes offered and sold to the qualified institutional buyers
(as defined in Rule 144A under the Securities Act) in the United States of
America ("Rule 144A Note") will be issued on the Issue Date in the form of a
permanent global Note substantially in the form set forth in Sections 204 and
205 (a "Rule 144A Global Note") deposited with the Trustee, as custodian for the
Depositary, duly executed by the Company and authenticated by the Trustee as
hereinafter provided. The Rule 144A Global Note may be represented by more than
one certificate, if so required by the Depositary's rules regarding the maximum
principal amount to be represented by a single certificate. The aggregate
principal amount of the Rule 144A Global Note may from time to time be increased
or decreased by adjustments made on the records of the Trustee, as custodian for
the Depositary or its nominee, as hereinafter provided.
Initial Notes offered and sold outside the United States of America
("Regulation S Note") in reliance on Regulation S shall be issued in the form of
a permanent global Note substantially in the form set forth in Sections 204 and
205 (a "Regulation S Global Note"). The Regulation S Global Note will be
deposited with the Trustee, as custodian for the Depositary, duly executed by
the Company and authenticated by the Trustee as hereinafter provided. The
Regulation S Global Note may be represented by more than one certificate, if so
required by the Depositary's rules regarding the maximum principal amount to be
represented by a single certificate. The aggregate principal amount of the
Regulation S Global Note may from time to time be increased or decreased by
adjustments made on the records of the Trustee, as custodian for the Depositary
or its nominee, as hereinafter provided.
Initial Notes offered and sold to institutional "accredited investors"
(as defined in Rule 501(a)(1), (2), (3) and (7) under the Securities Act) in the
United States of America ("Institutional Accredited Investor Note") will be
issued in the form of a permanent global Note substantially in the form set
forth in Sections 204 and 205 (a "Institutional Accredited Investor Global
Note") deposited with the Trustee, as custodian for the Depositary, duly
executed by the Company and authenticated by the Trustee as hereinafter
provided. The Institutional Accredited Investor Global Note may be represented
by more than one certificate, if so required by the Depositary's rules regarding
the maximum principal amount to be represented by a single certificate. The
aggregate principal amount of the Institutional Accredited Investor Global Note
may
<PAGE>
23
from time to time be increased or decreased by adjustments made on the records
of the Trustee, as custodian for the Depositary or its nominee, as hereinafter
provided.
The Rule 144A Global Note, the Regulation S Global Note and the
Institutional Accredited Investor Global Note are sometimes collectively herein
referred to as the "Global Notes".
The definitive Notes shall be printed, lithographed or engraved on
steel-engraved borders or may be produced in any other manner, all as determined
by the officers of the Company executing such Notes, as evidenced by their
execution of such Notes.
<PAGE>
24
SECTION 202. Restrictive Legends.
-------------------
Unless and until (i) an Initial Note is sold under an effective
Registration Statement or (ii) an Initial Note is exchanged for an Exchange Note
in connection with an effective Registration Statement, in each case pursuant to
the Registration Rights Agreement, such Rule 144A Global Note and the
Institutional Accredited Investor Global Notes shall bear the following legend
(the "Private Placement Legend") on the face thereof:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS.
NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION
IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER,
SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR
OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION
STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C)
FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A
UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A
"QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR
ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO
WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE
144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES
WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN
INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR
ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED
INVESTOR, IN EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL
AMOUNT OF $250,000 OF SUCH SECURITIES, FOR INVESTMENT PURPOSES AND NOT WITH
A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN
VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT
TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR
TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO REQUIRE THE DELIVERY
OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION
SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING CLAUSE (E),
A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS
SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND
THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER
AFTER THE RESALE RESTRICTION TERMINATION DATE.
The Regulation S Global Note shall bear the following legend on the
face thereof:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY
ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A U.S.
PERSON AND IS
<PAGE>
25
ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION, (2) BY ITS ACCEPTANCE
HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO
THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS
AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON
WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS
SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY,
(B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE
UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE
FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE
144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE
IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR
OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE
SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE
MEANING OF SECTION 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT
IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH
AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A TRANSACTION
INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF SUCH SECURITIES, FOR
INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN
CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F)
PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT
PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR
(F) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION
AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF
THE FOREGOING CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING
ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE
TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED
AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND INCLUDING THE LATER OF (A) THE
DAY ON WHICH THE SECURITIES ARE OFFERED TO PERSONS OTHER THAN DISTRIBUTORS
(AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE CLOSING OF THE
ORIGINAL OFFERING. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION",
"UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY
REGULATION S UNDER THE SECURITIES ACT.
The Global Notes, whether or not an Initial Note, shall also bear the
following legend on the face thereof:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED
IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT
HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DTC), ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF
<PAGE>
26
THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH
THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE.
SECTION 203. OID Legend.
----------
The Senior Subordinated Discount Notes shall also bear the following
legend on the face thereof:
THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR THE
PURPOSES OF SECTIONS 1271-1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.
THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE AND YIELD TO
MATURITY OF THE NOTES MAY BE OBTAINED BY CONTACTING THE ISSUER'S INVESTORS
RELATIONS DEPARTMENTS, TELEPHONE NO. (___) ________.
SECTION 204. Form of Senior Subordinated Note.
--------------------------------
No. [___] Principal Amount $[______________]
CUSIP NO. ____________
9 1/2% [Series B]/1/ Senior Subordinated Note due 2007
Paragon Health Network, Inc., a Delaware corporation promises to pay
to [___________], or registered assigns, the principal sum of
[__________________] Dollars on November 1, 2007.
Interest Payment Dates: May 1 and November 1.
Record Dates: April 15 and October 15.
Additional provisions of this Note are set forth on the other side of
this Note.
Dated: PARAGON HEALTH NETWORK, INC.
By:_________________________________
[Title]
By:_________________________________
[Title]
__________________________________
/1/ Include only for the Exchange Notes
<PAGE>
27
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
IBJ SCHRODER BANK & TRUST COMPANY
as Trustee, certifies
that this is one of the
Notes referred to
in the Indenture.
By________________________________
Authorized Signatory November 4, 1997
<PAGE>
28
[FORM OF REVERSE SIDE OF SENIOR SUBORDINATED NOTE]
9 1/2% [Series B]/2/ Senior Subordinated Note due 2007
1. Interest
--------
Paragon Health Network, Inc., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company")) promises to pay interest on the
principal amount of this Note at the rate per annum shown above.
The Company will pay interest semiannually in cash and in arrears to
Holders of record at the close of business on the April 15 and October 15
immediately preceding the interest payment date on May 1 and November 1 of each
year, commencing May 1, 1998. Interest on the Senior Subordinated Notes will
accrue from the most recent date to which interest has been paid on the Senior
Subordinated Notes or, if no interest has been paid, from November 4, 1997. The
Company shall pay interest on overdue principal or premium, if any (plus
interest on such interest to the extent lawful), at the rate borne by the Senior
Subordinated Notes to the extent lawful. Interest will be computed on the basis
of a 360-day year of twelve 30-day months.
2. Method of Payment
-----------------
By at least 10:00 a.m. (New York City time) on the date on which any
principal of or interest on the Notes is due and payable, the Company shall
irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay
such principal, premium, if any, and/or interest. The Company will pay interest
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the April 15 or October 15 next preceding the
interest payment date even if the Notes are cancelled, repurchased or redeemed
after the record date and on or before the interest payment date. Holders must
surrender Notes to a Paying Agent to collect principal payments. The Company
will pay principal and interest in money of the United States that at the time
of payment is legal tender for payment of public and private debts. However,
the Company may pay interest by check payable in such money. It may mail an
interest check to a Holder's registered address.
3. Trustee, Paying Agent and Registrar
-----------------------------------
Initially, IBJ Schroder Bank & Trust Company, a New York banking
corporation (the "Trustee"), will act as Trustee, Paying Agent and Registrar.
The Company may appoint and change any Paying Agent, Registrar or co-registrar
without notice to any Noteholder. The Company or any of its domestically
incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-
registrar.
4. Indenture
---------
The Company issued the Notes under an Indenture dated as of November
4, 1997 (as it may be amended or supplemented from time to time in accordance
with the terms thereof, the "Indenture"), among the Company and the Trustee.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
------
(S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Capitalized terms used herein and not defined herein have the meanings ascribed
thereto in the Indenture. The Notes are subject to all such terms, and
Noteholders are referred to the Indenture and the Act for a statement of those
terms.
__________________________________
/2// Include only for the Initial Notes
-
<PAGE>
29
The Notes are general unsecured senior subordinated obligations of the
Company limited to $275 million aggregate principal amount (subject to Section
310 of the Indenture). This Note is one of the [Initial]/3/ Notes referred to
in the Indenture. The Notes include the Initial Notes and any Exchange Notes
issued in exchange for the Initial Notes pursuant to the Indenture and the
Registration Rights Agreement. The Initial Notes and the Exchange Notes are
treated as a single class of securities under the Indenture. The Indenture
imposes certain limitations on the Incurrence of Indebtedness by the Company and
its Restricted Subsidiaries, the payment of dividends on, and the purchase or
redemption of, Capital Stock of the Company and its Restricted Subsidiaries,
certain purchases or redemptions of Subordinated Indebtedness, the sale or
transfer of assets and Capital Stock of Restricted Subsidiaries, investments of
the Company and its Restricted Subsidiaries and transactions with Affiliates.
In addition, the Indenture limits the ability of the Company and its
Subsidiaries to restrict distributions and dividends from Restricted
Subsidiaries.
5. Optional Redemption
-------------------
The Senior Subordinated Notes will be redeemable, at the Company's
option, in whole or in part, at any time and from time to time on and after
November 1, 2002 and prior to maturity, upon not less than 30 nor more than 90
days' prior notice mailed by first-class mail to each Holder's registered
address, at the following redemption prices (expressed as a percentage of
principal amount), plus accrued interest, if any, to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date), if redeemed during
the 12-month period commencing on November 1 of the years set forth below:
Year Redemption Price
---- ----------------
2002.............................. 104.750%
2003.............................. 103.167%
2004.............................. 101.583%
2005 and thereafter............... 100.000%
In addition, at any time and from time to time prior to November 1,
2000, the Company may redeem in the aggregate up to 33-% of the original
aggregate principal amount of the Senior Subordinated Notes with the proceeds of
one or more Equity Offerings by the Company at a redemption price (expressed as
a percentage of principal amount thereof) of 109.5% plus accrued interest, if
any, to the redemption date (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date); provided, however, that at least 50% of the original aggregate principal
amount of the Notes must remain outstanding after each such redemption and that
any such redemption occurs within 90 days following the closing of any such
Equity Offering.
The aggregate principal amount of the Notes and the Senior
Subordinated Discount Notes to be redeemed shall be allocated by the Company
between the Notes and the Senior Subordinated Discount Notes in the Company's
sole discretion.
6. Notice of Redemption
--------------------
Notice of redemption will be mailed at least 30 days but not more than
90 days before the redemption date to each Holder of Notes to be redeemed at his
registered address. Notes in denominations of principal amount larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of and accrued and unpaid interest on all
Notes (or portions thereof) to be redeemed on the redemption date is deposited
with the Paying Agent on or before the
___________________________________
/3/ Include only for the Initial Notes.
<PAGE>
30
redemption date and certain other conditions are satisfied, on and after such
date interest ceases to accrue on such Notes (or such portions thereof) called
for redemption.
7. Put Provisions
--------------
Upon a Change of Control, any Holder of Notes will have the right to
cause the Company to repurchase all or any part of the Notes of such Holder at a
repurchase price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase as provided in, and subject to the
terms of, the Indenture.
8. Subordination and Ranking
-------------------------
The Notes are subordinated to Senior Indebtedness, as defined in the
Indenture. To the extent provided in the Indenture, Senior Indebtedness must be
paid before the Notes may be paid. The Company agrees, and each Noteholder by
accepting a Note agrees, to the subordination provisions contained in the
Indenture and authorizes the Trustee to give them effect and appoints the
Trustee as attorney-in-fact for such purpose. The Notes and the Senior
Subordinated Discount Notes will in all respects rank pari passu with each other
and with all other Senior Subordinated Indebtedness of the Company.
9. Denominations; Transfer; Exchange
---------------------------------
The Notes are in registered form without coupons in denominations of
principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer
or exchange Notes in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements or transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not register the transfer of or exchange of (i)
any Note selected for redemption (except, in the case of a Note to be redeemed
in part, the portion of the Note not to be redeemed) for a period beginning 15
days before a selection of Notes to be redeemed and ending on the date of such
selection or (ii) any Notes for a period beginning 15 days before an interest
payment date and ending on such interest payment date.
10. Persons Deemed Owners
---------------------
The registered holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Defeasance
----------
Subject to certain conditions set forth in the Indenture, the Company
at any time may terminate some or all of its obligations under the Notes and the
Indenture if the Company deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Notes to redemption
or maturity, as the case may be. The Company in its sole discretion can defease
either or both of the Notes and the Senior Subordinated Discount Notes.
<PAGE>
31
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders of
at least a majority in principal amount of the outstanding Notes and (ii) any
default or noncompliance with any provision may be waived with the written
consent of the Holders of a majority in principal amount of the outstanding
Notes. Subject to certain exceptions set forth in the Indenture, without the
consent of any Noteholder, the Company and the Trustee may amend the Indenture
or the Notes to cure any ambiguity, omission, defect or inconsistency, or to
comply with Article 5 of the Indenture, or to provide for uncertificated Notes
in addition to or in place of certificated Notes, or to add guarantees with
respect to the Notes or to secure the Notes, or to add additional covenants or
surrender rights and powers conferred on the Company, or to comply with any
request of the SEC in connection with qualifying the Indenture under the Act, or
to make any change that does not adversely affect the rights of any Noteholder,
or to provide for the issuance of Exchange Notes. However, no amendment may be
made to the subordination provisions of the Indenture that adversely affects the
rights of any holder of Senior Indebtedness then outstanding unless the holders
of such Senior Indebtedness (or any group or representative thereof authorized
to give a consent) consent to such change.
The Notes and the Senior Subordinated Discount Notes will vote
together as a single class of securities under the Indenture with respect to
matters on which Holders are required or permitted to vote.
14. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) a default in any
payment of interest on any Note when due (whether or not such payment is
prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated Maturity,
upon optional redemption, upon required repurchase, upon declaration or
otherwise, whether or not such payment is prohibited by Article 13 of the
Indenture, (iii) the failure by the Company to comply with its obligations under
Section 801 of the Indenture, (iv) the failure by the Company to comply for 30
days after written notice with any of its obligations under Section 1016 of the
Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019
or 1020 of the Indenture (in each case, other than a failure to purchase Notes
when required under Sections 1016 or 1017 of the Indenture), (v) the failure by
the Company to comply for 60 days after notice with its other agreements
contained in the Notes or the Indenture, (vi) the failure by the Company or any
Significant Subsidiary to pay any Indebtedness within any applicable grace
period after final maturity or the acceleration of any such Indebtedness by the
holders thereof because of a default if the total amount of such Indebtedness
unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary, (viii)
the rendering of any judgment or decree for the payment of money in an amount
(net of any insurance or indemnity payments actually received in respect thereof
prior to or within 90 days from the entry thereof, or to be received in respect
thereof in the event any appeal thereof shall be unsuccessful) in excess of
$20.0 million against the Company or a Significant Subsidiary that is not
discharged, bonded or insured by a third Person if (A) an enforcement proceeding
thereon is commenced or (B) such judgment or decree remains outstanding for a
period of 90 days following such judgment or decree and is not discharged,
waived or stayed or (ix) the failure of any Guarantee of the Notes by a
Guarantor made pursuant to Section 1020 of the Indenture to be in full force and
effect (except as contemplated by the terms thereof or of the Indenture) or the
denial or disaffirmation in writing by any such Guarantor of its obligations
under the Indenture or any such Guarantee if such Default continues for 10 days.
If an Event of Default occurs and is continuing, the Trustee or the Holders of
at least a majority in principal amount of the outstanding applicable Notes may
declare all such Notes to be due and payable immediately. Certain events of
bankruptcy or insolvency are Events of Default which will result in the Notes
being due and payable immediately upon the occurrence of such Events of Default.
Noteholders may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Notes may
direct the
<PAGE>
32
Trustee in its exercise of any trust or power. The Trustee may withhold from
Noteholders notice of any continuing Default or Event of Default (except a
Default or Event of Default in payment of principal or interest) if it
determines that withholding notice is in their interest.
15. Trustee Dealings with the Company
---------------------------------
Subject to certain limitations set forth in the Indenture, the Trustee
under the Indenture, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with and collect obligations
owed to it by the Company or its affiliates and may otherwise deal with the
Company or its affiliates with the same rights it would have if it were not
Trustee.
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Noteholder waives and
releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
--------------
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent acting on its behalf) manually signs the
certificate of authentication on the other side of this Note.
<PAGE>
33
[18. Registration Rights
-------------------
The Holder of this Note is entitled to the benefits of the
Registration Rights Agreement, dated as of November 4, 1997 (the "Registration
Rights Agreement"), between the Company and the Initial Purchasers named
therein. In the event that either (i) an Exchange Offer Registration Statement
is not filed with the Commission on or prior to 60 days after the Issue Date,
(A) an Exchange Offer Registration Statement or a Shelf Registration Statement
is not declared effective within 150 days after the Issue Date, or (B) the
Exchange Offer is not consummated on or prior to 180 days after the Issue Date
in respect of tendered Notes and a Shelf Registration Statement has not been
declared effective or a Shelf Registration Statement is filed and declared
effective within 150 days after the Issue Date but shall thereafter cease to be
effective (at any time that the Company is obligated to maintain the
effectiveness thereof) without being succeeded within 45 days by an additional
Registration Statement filed and declared effective (each such event referred to
in clauses (A) and (B), a "Registration Default"), the Company will pay
liquidated damages to each holder of Transfer Restricted Securities (as defined
in the Registration Rights Agreement), during the period of one or more such
Registration Defaults, in an amount equal to $.192 per week per $1,000 principal
amount of the Notes constituting Transfer Restricted Securities held by such
holder until the applicable Registration Statement is filed or declared
effective, the Exchange Offer is consummated or the Shelf Registration Statement
again becomes effective, as the case may be, provided that, except in certain
limited circumstances, the Company's obligation to pay liquidated damages will
terminate upon consummation of the Exchange Offer. All accrued liquidated
damages shall be paid to holders in the same manner as interest payments on the
Notes on semi-annual payment dates which correspond to interest payment dates
for the Notes. Following the cure of all Registration Defaults, the accrual of
liquidated damages will cease.]/4//
-
19. Abbreviations
-------------
Customary abbreviations may be used in the name of a Noteholder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants
in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act).
20. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Noteholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
21. Governing Law
-------------
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY
LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF NEW YORK.
__________________________________
/4// Include only for the Initial Notes
-
<PAGE>
34
The Company will furnish to any Noteholder upon written request and
without charge to the Noteholder a copy of the Indenture. Requests may be made
to:
Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, GA 30346
Attention of General Counsel
<PAGE>
35
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Note on the books of the
Company. The agent may substitute another to act for him.
________________________________________________________________________________
Date:____________________ Your Signature:___________________
Signature Guarantee:_____________________________________
(Signature must be guaranteed)
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Note.
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for, STAMP), pursuant to S.E.C. Rule
17Ad-15.
[In connection with any transfer or exchange of any of the Notes evidenced by
this certificate occurring prior to the date that is two years after the later
of the date of original issuance of such Notes and the last date, if any, on
which such Notes were owned by the Company or any Affiliate of the Company, the
undersigned confirms that such Notes are being:
CHECK ONE BOX BELOW:
1 [_] acquired for the undersigned's own account, without transfer; or
2 [_] transferred to the Company; or
3 [_] transferred pursuant to and in compliance with Rule 144A under
the Securities Act of 1933; or
4 [_] transferred pursuant to an effective registration statement under
the Securities Act; or
5 [_] transferred pursuant to and in compliance with Regulation S under
the Securities Act of 1933; or
6 [_] transferred to an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of
1933), that has furnished to the Trustee a signed letter
containing certain representations and agreements (the form of
which letter appears as Exhibit E to the Indenture); or
<PAGE>
36
7 [_] transferred pursuant to another available exemption from the
registration requirements of the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee may refuse to register any of
the Notes evidenced by this certificate in the name of any person other than the
registered holder thereof; provided, however, that if box (5), (6) or (7) is
checked, the Trustee or the Company may require, prior to registering any such
transfer of the Notes, in their sole discretion, such legal opinions,
certifications and other information as the Trustee or the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933, such as the exemption provided by
Rule 144 under such Act.
_____________________________
Signature
Signature Guarantee:
____________________________________ _____________________________
(Signature must be guaranteed) Signature
_________________________________________________________________
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15]./5//
-
___________________________________
/5// Include only for the Initial Notes
-
<PAGE>
37
[TO BE ATTACHED TO GLOBAL NOTES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE
The following increases or decreases in this Global Note have been
made:
<TABLE>
<CAPTION>
Date of Exchange Amount of decrease in Amount of increase in Principal Amount of this Global Signature of authorized
Principal Amount of Principal Amount of Note following such decrease signatory of Trustee or
this Global Note this Global Note or increase Notes Custodian
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
38
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 1016 or 1017 of the Indenture, check the box:
[__]
If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 1016 or 1017 of the Indenture, state the amount in
principal amount (must be integral multiple of $1,000): $
Date: __________ Your Signature ____________________________________________
(Sign exactly as your name appears on the
other side of the Note)
Signature Guarantee: _______________________________________
(Signature must be guaranteed)
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
39
SECTION 205. Form of Senior Subordinated Discount Note.
-----------------------------------------
No. [___] Principal Amount $[______________]
CUSIP NO. ____________
101/2% [Series B]/6// Senior Subordinated Discount Note due 2007
-
Paragon Health Network, Inc., a Delaware corporation promises to pay
to [___________], or registered assigns, the principal sum of
[__________________] Dollars on November 1, 2007.
Interest Payment Dates: May 1 and November 1.
Record Dates: April 15 and October 15.
This Note shall not bear interest prior to November 1, 2002. From
November 4, 1997 through November 1, 2002, the Accreted Value of this Note will
increase as specified on the reverse side hereof.
Additional provisions of this Note are set forth on the other side of
this Note.
Dated: PARAGON HEALTH NETWORK, INC.
By:________________________________________
[Title]
By:________________________________________
[Title]
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
IBJ SCHRODER BANK & TRUST COMPANY
as Trustee, certifies
that this is one of
the Notes referred
to in the Indenture.
By_____________________________
Authorized Signatory November 4, 1997
_________________________
/6// Include only for the Exchange Notes
-
<PAGE>
40
[FORM OF REVERSE SIDE OF SENIOR SUBORDINATED DISCOUNT NOTE]
10 1/2% [Series B]/7/ Senior Subordinated Discount Note due 2007
-
1. Interest
--------
Paragon Health Network, Inc., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company")) promises to pay interest on the
principal amount of this Note as described below.
The Senior Subordinated Discount Notes due 2007 (the "Notes") will
accrete in value until November 1, 2002 at a rate of 10.57% per annum,
compounded semiannually, to an aggregate principal amount of $294,000,000. Cash
interest will not accrue on the Senior Subordinated Discount Notes prior to
November 1, 2002. Thereafter, interest will accrue at the rate of 10 1/2% per
annum and will be payable semiannually in cash and in arrears to the Holders of
record on each April 15 or October 15 immediately preceding the interest payment
date on May 1 and November 1 of each year, commencing May 1, 2003. Cash
interest on the Senior Subordinated Discount Notes will accrue from the most
recent interest payment date to which interest has been paid or, if no interest
has been paid, from November 1, 2002. Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months.
2. Method of Payment
-----------------
By at least 10:00 a.m. (New York City time) on the date on which any
principal of or interest on the Notes is due and payable, the Company shall
irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay
such principal, premium, if any, and/or interest. The Company will pay interest
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the April 15 or October 15 next preceding the
interest payment date even if the Notes are cancelled, repurchased or redeemed
after the record date and on or before the interest payment date. Holders must
surrender Notes to a Paying Agent to collect principal payments. The Company
will pay principal and interest in money of the United States that at the time
of payment is legal tender for payment of public and private debts. However,
the Company may pay interest by check payable in such money. It may mail an
interest check to a Holder's registered address.
3. Trustee, Paying Agent and Registrar
-----------------------------------
Initially, IBJ Schroder Bank & Trust Company, a New York banking
corporation ("Trustee"), will act as Trustee, Paying Agent and Registrar. The
Company may appoint and change any Paying Agent, Registrar or co-registrar
without notice to any Noteholder. The Company or any of its domestically
incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-
registrar.
4. Indenture
---------
The Company issued the Notes under an Indenture dated as of November
4, 1997 (as it may be amended or supplemented from time to time in accordance
with the terms thereof, the "Indenture"), among the Company and the Trustee.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
------
(S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Capitalized terms used herein and not defined herein have the meanings ascribed
thereto in the Indenture. The Notes are subject to all such terms, and
Noteholders are referred to the Indenture and the Act for a statement of those
terms.
__________________________________
/7// Include only for the Exchange Notes
-
<PAGE>
41
The Notes are general unsecured senior subordinated obligations of the
Company limited to $294 million aggregate principal amount (subject to Section
310 of the Indenture). This Note is one of the Initial Notes referred to in the
Indenture. The Notes include the Initial Notes and any Exchange Notes issued in
exchange for the Initial Notes pursuant to the Indenture and the Registration
Rights Agreement. The Initial Notes and the Exchange Notes are treated as a
single class of securities under the Indenture. The Indenture imposes certain
limitations on the Incurrence of Indebtedness by the Company and its Restricted
Subsidiaries, the payment of dividends on, and the purchase or redemption of,
Capital Stock of the Company and its Restricted Subsidiaries, certain purchases
or redemptions of Subordinated Indebtedness, the sale or transfer of assets and
Capital Stock of Restricted Subsidiaries, investments of the Company and its
Restricted Subsidiaries and transactions with Affiliates. In addition, the
Indenture limits the ability of the Company and its Subsidiaries to restrict
distributions and dividends from Restricted Subsidiaries.
5. Optional Redemption
-------------------
The Notes will be redeemable, at the Company's option, in whole or in
part, at any time and from time to time on and after November 1, 2002 and prior
to maturity, upon not less than 30 nor more than 90 days' prior notice mailed by
first class mail to each Holder's registered address, at the following
redemption prices (expressed as a percentage of the Accreted value thereof),
plus accrued and unpaid interest, if any, to the redemption date (subject to the
right of Holders of record on the relevant record dated to receive interest due
on the relevant interest payment date), if redeemed during the 12 month period
beginning on November 1 of the years indicated below:
Year Redemption Price
---- ----------------
2002.............................. 105.250%
2003.............................. 103.500%
2004.............................. 101.750%
2005 and thereafter............... 100.000%
In addition, at any time and from time to time prior to November 1,
2000, the Company may redeem up to 33% of the originally issued principal
amount at maturity of Notes at a redemption price equal to 110.5% of the
Accreted Value at the redemption date of the Notes so redeemed with the net
proceeds of one or more Equity Offerings by the Company; provided, however, that
at least 50% of the originally issued principal amount at maturity of Notes must
remain outstanding immediately after each such redemption and that any such
redemption occurs within 90 days following the closing of any such Equity
Offering.
The aggregate principal amount of the Notes and the Senior
Subordinated Notes to be redeemed shall be allocated by the Company between the
Notes and the Senior Subordinated Notes in the Company's sole discretion.
6. Notice of Redemption
--------------------
Notice of redemption will be mailed at least 30 days but not more than
90 days before the redemption date to each Holder of Notes to be redeemed at his
registered address. Notes in denominations of principal amount larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of and accrued and unpaid interest on all
Notes (or portions thereof) to be redeemed on the redemption date is deposited
with the Paying Agent on or before the redemption date and certain other
conditions are satisfied, on and after such date interest ceases to accrue on
such Notes (or such portions thereof) called for redemption.
<PAGE>
42
7. Put Provisions
--------------
Upon a Change of Control, any Holder of Notes will have the right to
cause the Company to repurchase all or any part of the Notes of such Holder at a
repurchase price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase as provided in, and subject to the
terms of, the Indenture.
8. Subordination and Ranking
-------------------------
The Notes are subordinated to Senior Indebtedness, as defined in the
Indenture. To the extent provided in the Indenture, Senior Indebtedness must be
paid before the Notes may be paid. The Company agrees, and each Noteholder by
accepting a Note agrees, to the subordination provisions contained in the
Indenture and authorizes the Trustee to give them effect and appoints the
Trustee as attorney-in-fact for such purpose. The Notes and the Senior
Subordinated Notes will in all respects rank pari passu with each other and with
all other Senior Subordinated Indebtedness of the Company.
9. Denominations; Transfer; Exchange
---------------------------------
The Notes are in registered form without coupons in denominations of
principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer
or exchange Notes in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements or transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not register the transfer of or exchange of (i)
any Note selected for redemption (except, in the case of a Note to be redeemed
in part, the portion of the Note not to be redeemed) for a period beginning 15
days before a selection of Notes to be redeemed and ending on the date of such
selection or (ii) any Notes for a period beginning 15 days before an interest
payment date and ending on such interest payment date.
10. Persons Deemed Owners
---------------------
The registered holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Defeasance
----------
Subject to certain conditions set forth in the Indenture, the Company
at any time may terminate some or all of its obligations under the Notes and the
Indenture if the Company deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Notes to redemption
or maturity, as the case may be. The Company in its sole discretion can defease
either or both of the Notes and the Senior Subordinated Notes.
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders of
at least a majority in principal amount of the outstanding Notes and (ii) any
default or noncompliance with any provision may be waived with the written
consent of the Holders of a majority in principal amount of the outstanding
Notes. Subject to certain
<PAGE>
43
exceptions set forth in the Indenture, without the consent of any Noteholder,
the Company and the Trustee may amend the Indenture or the Notes to cure any
ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the
Indenture, or to provide for uncertificated Notes in addition to or in place of
certificated Notes, or to add guarantees with respect to the Notes or to secure
the Notes, or to add additional covenants or surrender rights and powers
conferred on the Company, or to comply with any request of the SEC in connection
with qualifying the Indenture under the Act, or to make any change that does not
adversely affect the rights of any Noteholder, or to provide for the issuance of
Exchange Notes. However, no amendment may be made to the subordination
provisions of the Indenture that adversely affects the rights of any holder of
Senior Indebtedness then outstanding unless the holders of such Senior
Indebtedness (or any group or representative thereof authorized to give a
consent) consent to such change.
The Notes and the Senior Subordinated Notes will vote together as a
single class of securities under the Indenture with respect to matters on which
Holders are required or permitted to vote.
14. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) a default in any
payment of interest on any Note when due (whether or not such payment is
prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated Maturity,
upon optional redemption, upon required repurchase, upon declaration or
otherwise, whether or not such payment is prohibited by Article 13 of the
Indenture, (iii) the failure by the Company to comply with its obligations under
Section 801 of the Indenture, (iv) the failure by the Company to comply for 30
days after written notice with any of its obligations under Section 1016 of the
Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019
or 1020 of the Indenture (in each case, other than a failure to purchase Notes
when required under Sections 1016 or 1017 of the Indenture), (v) the failure by
the Company to comply for 60 days after notice with its other agreements
contained in the Notes or the Indenture, (vi) the failure by the Company or any
Significant Subsidiary to pay any Indebtedness within any applicable grace
period after final maturity or the acceleration of any such Indebtedness by the
holders thereof because of a default if the total amount of such Indebtedness
unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary, (viii)
the rendering of any judgment or decree for the payment of money in an amount
(net of any insurance or indemnity payments actually received in respect thereof
prior to or within 90 days from the entry thereof, or to be received in respect
thereof in the event any appeal thereof shall be unsuccessful) in excess of
$20.0 million against the Company or a Significant Subsidiary that is not
discharged, bonded or insured by a third Person if (A) an enforcement proceeding
thereon is commenced or (B) such judgment or decree remains outstanding for a
period of 90 days following such judgment or decree and is not discharged,
waived or stayed or (ix) the failure of any Guarantee of the Notes by a
Guarantor made pursuant to Section 1020 of the Indenture to be in full force and
effect (except as contemplated by the terms thereof or of the Indenture) or the
denial or disaffirmation in writing by any such Guarantor of its obligations
under the Indenture or any such Guarantee if such Default continues for 10 days.
If an Event of Default occurs and is continuing, the Trustee or the Holders of
at least a majority in principal amount of the outstanding applicable Notes may
declare all such Notes to be due and payable immediately. Certain events of
bankruptcy or insolvency are Events of Default which will result in the Notes
being due and payable immediately upon the occurrence of such Events of Default.
Noteholders may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Noteholders notice of any continuing Default or Event of Default
(except a Default or Event of Default in payment of principal or interest) if it
determines that withholding notice is in their interest.
15. Trustee Dealings with the Company
---------------------------------
<PAGE>
44
Subject to certain limitations set forth in the Indenture, the Trustee
under the Indenture, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with and collect obligations
owed to it by the Company or its affiliates and may otherwise deal with the
Company or its affiliates with the same rights it would have if it were not
Trustee.
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Noteholder waives and
releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
--------------
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent acting on its behalf) manually signs the
certificate of authentication on the other side of this Note.
[18. Registration Rights
-------------------
The Holder of this Note is entitled to the benefits of the
Registration Rights Agreement, dated as of November 4, 1997 (the "Registration
Rights Agreement"), between the Company and the Initial Purchasers named
therein. In the event that either (i) an Exchange Offer Registration Statement
is not filed with the Commission on or prior to 60 days after the Issue Date,
(A) an Exchange Offer Registration Statement or a Shelf Registration Statement
is not declared effective within 150 days after the Issue Date, or (B) the
Exchange Offer is not consummated on or prior to 180 days after the Issue Date
in respect of tendered Notes and a Shelf Registration Statement has not been
declared effective or a Shelf Registration Statement is filed and declared
effective within 150 days after the Issue Date but shall thereafter cease to be
effective (at any time that the Company is obligated to maintain the
effectiveness thereof) without being succeeded within 45 days by an additional
Registration Statement filed and declared effective (each such event referred to
in clauses (A) and (B), a "Registration Default"), the Company will pay
liquidated damages to each holder of Transfer Restricted Securities (as defined
in the Registration Rights Agreement), during the period of one or more such
Registration Defaults, in an amount equal to $.192 per week per $1,000 principal
amount of the Notes constituting Transfer Restricted Securities held by such
holder until the applicable Registration Statement is filed or declared
effective, the Exchange Offer is consummated or the Shelf Registration Statement
again becomes effective, as the case may be, provided that, except in certain
limited circumstances, the Company's obligation to pay liquidated damages will
terminate upon consummation of the Exchange Offer. All accrued liquidated
damages shall be paid to holders in the same manner as interest payments on the
Notes on semi-annual payment dates which correspond to interest payment dates
for the Notes. Following the cure of all Registration Defaults, the accrual of
liquidated damages will cease.]/8//
-
19. Abbreviations
-------------
Customary abbreviations may be used in the name of a Noteholder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants
in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act).
___________________________
/8// Include only for Initial Notes.
-
<PAGE>
45
20. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Noteholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
21. Governing Law
-------------
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY
LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF NEW YORK.
The Company will furnish to any Noteholder upon written request and
without charge to the Noteholder a copy of the Indenture. Requests may be made
to:
Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, GA 30346
Attention of General Counsel
<PAGE>
46
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Note on the books of the
Company. The agent may substitute another to act for him.
________________________________________________________________________________
Date:____________________ Your Signature:___________________
Signature Guarantee:______________________________
(Signature must be guaranteed)
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Note.
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule -15.
In connection with any transfer or exchange of any of the Notes evidenced by
this certificate occurring prior to the date that is two years after the later
of the date of original issuance of such Notes and the last date, if any, on
which such Notes were owned by the Company or any Affiliate of the Company, the
undersigned confirms that such Notes are being:
CHECK ONE BOX BELOW:
1[_] acquired for the undersigned's own account, without transfer; or
2[_] transferred to the Company; or
3[_] transferred pursuant to and in compliance with Rule 144A under
the Securities Act of 1933; or
4[_] transferred pursuant to an effective registration statement under
the Securities Act; or
5[_] transferred pursuant to and in compliance with Regulation S under
the Securities Act of 1933; or
6[_] transferred to an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of
1933), that has furnished to the Trustee a signed letter
containing certain representations and agreements (the form of
which letter appears as Exhibit E to the Indenture); or
<PAGE>
47
7[_] transferred pursuant to another available exemption from the
registration requirements of the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee may refuse to register any of
the Notes evidenced by this certificate in the name of any person other than the
registered holder thereof; provided, however, that if box (5), (6) or (7) is
checked, the Trustee or the Company may require, prior to registering any such
transfer of the Notes, in their sole discretion, such legal opinions,
certifications and other information as the Trustee or the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933, such as the exemption provided by
Rule 144 under such Act.
______________________________
Signature
Signature Guarantee:
__________________________________ ______________________________
(Signature must be guaranteed) Signature
____________________________________________________________
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
[TO BE ATTACHED TO GLOBAL NOTES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE
The following increases or decreases in this Global Note have been
made:
<TABLE>
Principal Amount of this Global Signature of authorized
Date of Amount of decrease in Principal Amount of increase in Principal Note following such decrease or signatory of Trustee or
Exchange Amount of this Global Note Amount of this Global Note increase Notes Custodian
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.6 or 4.8 of the Indenture, check the box:
[_]
If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 4.6 or 4.8 of the Indenture, state the amount in
principal amount (must be integral multiple of $1,000): $
Date: __________ Your Signature ___________________________________________
(Sign exactly as your name appears on
the other side of the Note)
Signature Guarantee: _______________________________________
(Signature must be guaranteed)
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
50
[THE FOLLOWING PROVISION TO BE INCLUDED
ON ALL 144A CERTIFICATES]
In connection with any transfer of this Note occurring prior to the
date that is the earlier of the date of an effective Registration Statement (as
defined in the Registration Rights Agreement dated as of November 4, 1997) or
November 4, 1999, the undersigned confirms that without utilizing any general
solicitation or general advertising that:
[Check One]
---------
[ ] (a) this Note is being transferred in compliance with the exemption from
registration under the Securities Act of 1933, as amended, provided
by Rule 144A thereunder.
or
--
[ ] (b) this Note is being transferred other than in accordance with (a)
above and documents are being furnished that comply with the
conditions of transfer set forth in this Note and the Indenture.
If neither of the foregoing boxes is checked, the Trustee or other Registrar
shall not be obligated to register this Note in the name of any Person other
than the Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 307 of the Indenture shall have
been satisfied.
Date: ________________ _______________________________________________________
NOTICE: The signature must correspond with the name
as written upon the face of the within-
mentioned instrument in every particular,
without alteration or any change whatsoever.
Signature Guarantee:_________________________________________
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, as amended, and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Date: ________________ _______________________________________________
NOTICE: To be executed by an executive officer.
<PAGE>
51
SECTION 206. Form of Trustee's Certificate of Authentication.
-----------------------------------------------
The Trustee's certificate of authentication shall be in substantially
the following form:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION.
This is one of the Notes referred to in the within-mentioned Indenture.
IBJ Schroder Bank & Trust
Company, as Trustee
By _____________________________
Authorized Signatory
Dated: __________________
ARTICLE THREE. THE NOTES
300.
SECTION 301. Title and Terms.
---------------
The aggregate principal amount of Notes which may be authenticated and
delivered under this Indenture is limited to $275 million, in the case of the
Senior Subordinated Notes, and $294 million, in the case of Senior Subordinated
Discount Notes, except for Notes authenticated and delivered upon registration
of transfer of, or in exchange for, or in lieu of, other Notes pursuant to
Section 304, 305, 306, 307, 310, 906, 1016, 1017 or 1108 or pursuant to an
Exchange Offer.
The Initial Notes shall be known and designated as the "9 1/2% Senior
Subordinated Notes due 2007" and "10 1/2% Senior Subordinated Discount Notes due
2007," as applicable, and the Exchange Notes shall be known and designated as
the "9 1/2% Series B Senior Subordinated Notes due 2007" and "10 1/2% Series B
Senior Subordinated Discount Notes," as applicable, in each case, of the
Company. The Stated Maturity of the Senior Subordinated Notes shall be November
1, 2007, and they shall bear interest at the rate of 9 1/2% per annum from
November 4, 1997, or from the most recent interest payment date to which
interest has been paid or duly provided for, payable semiannually in cash and in
arrears to the Person in whose name the Note (or any predecessor Note) is
registered at the close of business on the April 15 and October 15 immediately
preceding the interest payment date on May 1 and November 1 of each year,
commencing May 1, 1998. The Stated Maturity of the Senior Subordinated Discount
Notes shall be November 1, 2007, and they will accrete until November 1, 2002 at
a rate of 10.57% per annum, compounded semiannually. Cash interest will not
accrue on the Senior Subordinated Discount Notes prior to November 1, 2002.
Thereafter, interest will accrue at the rate of 10 1/2% per annum and will be
payable semiannually in cash and in arrears to the Person in whose name the Note
(or any predecessor Note) is registered at the close of business on the April 15
or October 15 next preceding such interest payment date, commencing May 1, 2003.
Cash interest on the Senior Subordinated Discount Notes will accrue from the
most recent interest payment date to which interest has been paid or, if no
interest has been paid, from November 1, 2002. All references to the principal
amount of the Senior Subordinated Discount Notes herein are references to the
principal amount at final maturity. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months, until the principal thereof is
paid or duly provided for. Interest on any overdue principal, interest (to the
extent lawful) or premium, if any, shall be payable on demand.
<PAGE>
52
The principal of (and premium, if any) and interest on the Notes shall
be payable at the office or agency of the Company maintained for such purpose in
The City of New York, or at such other office or agency of the Company as may be
maintained for such purpose; provided, however, that, at the option of the
Company, interest may be paid by check mailed to addresses of the Persons
entitled thereto as such addresses shall appear on the Note Register.
Holders shall have the right to require the Company to purchase their
Notes, in whole or in part, in the event of a Change of Control pursuant to
Section 1016.
The Notes shall be subject to repurchase by the Company pursuant to an
Asset Disposition as provided in Section 1017.
The Notes shall be redeemable as provided in Article Eleven and in the
Notes.
The Indebtedness evidenced by the Notes shall be subordinated in right
of payment to Senior Indebtedness as provided in Article Thirteen.
SECTION 302. Denominations.
-------------
The Notes shall be issuable only in fully registered form, without
coupons, and only in denominations of $1,000 and any integral multiple thereof.
SECTION 303. Execution, Authentication, Delivery and Dating.
----------------------------------------------
The Notes shall be executed on behalf of the Company by two Officers,
of which at least one Officer shall be the President or the Chief Financial
Officer of the Company. The signature of any Officer on the Notes may be manual
or facsimile signatures of the present or any future such authorized officer and
may be imprinted or otherwise reproduced on the Notes.
Notes bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Notes or did not hold
such offices at the date of such Notes.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Initial Notes executed by the Company to
the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Notes, and the Trustee in accordance with
such Company Order shall authenticate and deliver such Initial Notes directing
the Trustee to authenticate the Notes and certifying that all conditions
precedent to the issuance of Notes contained herein have been fully complied
with, and the Trustee in accordance with such Company Order shall authenticate
and deliver such Initial Notes. On Company Order, the Trustee shall
authenticate for original issue Exchange Notes in an aggregate principal amount
not to exceed $275,000,000, in the case of the Senior Subordinated Notes, and
$294,000,000, in the case of Senior Subordinated Discount Notes; provided that
such Exchange Notes shall be issuable only upon the valid surrender for
cancellation of Initial Notes of a like aggregate principal amount in accordance
with an Exchange Offer pursuant to the Registration Rights Agreement. In each
case, the Trustee shall be entitled to receive an Officers' Certificate and an
Opinion of Counsel of the Company that it may reasonably request in connection
with such authentication of Notes. Such order shall specify the amount of Notes
to be authenticated and the date on which the original issue of Initial Notes or
Exchange Notes is to be authenticated.
Each Note shall be dated the date of its authentication.
<PAGE>
53
No Note shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Note a
certificate of authentication substantially in the form provided for herein duly
executed by the Trustee by manual signature of an authorized signatory, and such
certificate upon any Note shall be conclusive evidence, and the only evidence,
that such Note has been duly authenticated and delivered hereunder and is
entitled to the benefits of this Indenture.
In case the Company or any Guarantor (if applicable), pursuant to
Article Eight, shall be consolidated or merged with or into any other Person or
shall convey, transfer, lease or otherwise dispose of its properties and assets
substantially as an entirety to any Person, and the successor Person resulting
from such consolidation, or surviving such merger, or into which the Company or
such Guarantor shall have been merged, or the Person which shall have received a
conveyance, transfer, lease or other disposition as aforesaid, shall have
executed an indenture supplemental hereto with the Trustee pursuant to Article
Eight, any of the Notes authenticated or delivered prior to such consolidation,
merger, conveyance, transfer, lease or other disposition may, from time to time,
at the request of the successor Person, be exchanged for other Notes executed in
the name of the successor Person with such changes in phraseology and form as
may be appropriate, but otherwise in substance of like tenor as the Notes
surrendered for such exchange and of like principal amount; and the Trustee,
upon Company Request of the successor Person, shall authenticate and deliver
Notes as specified in such request for the purpose of such exchange. If Notes
shall at any time be authenticated and delivered in any new name of a successor
Person pursuant to this Section 303 in exchange or substitution for or upon
registration of transfer of any Notes, such successor Person, at the option of
the Holders but without expense to them, shall provide for the exchange of all
Notes at the time Outstanding for Notes authenticated and delivered in such new
name.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Notes on behalf of the Trustee. Unless limited by the
terms of such appointment, an authenticating agent may authenticate Notes
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as any Note Registrar or Paying Agent
to deal with the Company and its Affiliates.
SECTION 304. Temporary Notes.
---------------
Pending the preparation of definitive Notes, the Company may execute,
and upon Company Order the Trustee shall authenticate and deliver, temporary
Notes which are printed, lithographed, typewritten, mimeographed or otherwise
produced, in any authorized denomination. Temporary Notes shall be
substantially of the tenor of the definitive Notes in lieu of which they are
issued and with such appropriate insertions, omissions, substitutions and other
variations as the officers executing such Notes may determine, as conclusively
evidenced by their execution of such Notes.
If temporary Notes are issued, the Company will cause definitive Notes
to be prepared without unreasonable delay. After the preparation of definitive
Notes, the temporary Notes shall be exchangeable for definitive Notes upon
surrender of the temporary Notes at the office or agency of the Company
designated for such purpose pursuant to Section 1002, without charge to the
Holder. Upon surrender for cancellation of any one or more temporary Notes, the
Company shall execute and the Trustee shall authenticate and deliver in exchange
therefor a like principal amount of definitive Notes of authorized
denominations. Until so exchanged, the temporary Notes shall in all respects be
entitled to the same benefits under this Indenture as definitive Notes.
SECTION 305. Registration, Registration of Transfer and Exchange.
---------------------------------------------------
The Company shall cause to be kept at the Corporate Trust Office of
the Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 1002 being herein sometimes
referred to as the "Note Register") in which, subject to such reasonable
regulations as it may prescribe, the Company shall provide for the registration
of Notes and of transfers of Notes. The
<PAGE>
54
Note Register shall be in written form or any other form capable of being
converted into written form within a reasonable time. At all reasonable times,
the Note Register shall be open to inspection by the Trustee. The Trustee is
hereby initially appointed as security registrar (the Trustee in such capacity,
together with any successor of the Trustee in such capacity, the "Note
Registrar") for the purpose of registering Notes and transfers of Notes as
herein provided.
Upon surrender for registration of transfer of any Note at the office
or agency of the Company designated pursuant to Section 1002, the Company shall
execute, and the Trustee shall authenticate and deliver, in the name of the
designated transferee or transferees, one or more new Notes of any authorized
denomination or denominations of a like aggregate principal amount.
Furthermore, any Holder of a Global Note shall, by acceptance of such
Global Note, agree that transfers of beneficial interest in such Global Note may
be effected only through a book-entry system maintained by the Holder of such
Global Note (or its agent), and that ownership of a beneficial interest in the
Note shall be required to be reflected in a book entry.
At the option of the Holder, Notes may be exchanged for other Notes of
any authorized denomination and of a like aggregate principal amount, upon
surrender of the Notes to be exchanged at such office or agency. Whenever any
Notes are so surrendered for exchange (including an exchange of Initial Notes
for Exchange Notes), the Company shall execute, and the Trustee shall
authenticate and deliver, the Notes which the Holder making the exchange is
entitled to receive; provided that no exchange of Initial Notes for Exchange
Notes shall occur until an Exchange Offer Registration Statement shall have been
declared effective by the Commission, the Trustee shall have received an
Officers' Certificate confirming that the Exchange Offer Registration Statement
has been declared effective by the Commission and the Initial Notes to be
exchanged for the Exchange Notes shall be cancelled by the Trustee.
All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Company, evidencing the same debt,
and entitled to the same benefits under this Indenture, as the Notes surrendered
upon such registration of transfer or exchange.
Every Note presented or surrendered for registration of transfer or
for exchange shall (if so required by the Company or the Note Registrar) be duly
endorsed, or be accompanied by a written instrument of transfer, in form
satisfactory to the Company and the Note Registrar, duly executed by the Holder
thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Notes, other than
exchanges pursuant to Section 304, 906, 1016, 1017 or 1108, not involving any
transfer.
The Register shall be in written form in the English language or in
any other form including computerized records, capable of being converted into
such form within a reasonable time.
SECTION 306. Book-Entry Provisions for Global Notes.
--------------------------------------
(a) Each Global Note initially shall (i) be registered in the name of
the Depositary for such global Note or the nominee of such Depositary, (ii) be
delivered to the Trustee as custodian for such Depositary and (iii) bear legends
as set forth in Section 202.
Members of, or participants in, the Depositary ("Agent Members") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depositary, or the Trustee as its custodian, or under the
Global Note, and the Depositary may be treated by the Company, the Trustee and
any agent of the Company or the Trustee as the absolute owner of such Global
Note for all purposes
<PAGE>
55
whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the
Company, the Trustee or any agent of the Company or the Trustee from giving
effect to any written certification, proxy or other authorization furnished by
the Depositary or shall impair, as between the Depositary and its Agent Members,
the operation of customary practices governing the exercise of the rights of a
Holder of any Note.
(b) Transfers of a Global Note shall be limited to transfers of such
Global Note in whole, but not in part, to the Depositary, its successors or
their respective nominees. Interests of beneficial owners in a Global Note may
be transferred in accordance with the rules and procedures of the Depositary and
the provisions of Section 307. If required to do so pursuant to any applicable
law or regulation, beneficial owners may obtain Notes in definitive form
("Physical Notes") in exchange for their beneficial interests in a Global Note
upon written request in accordance with the Depositary's and the Registrar's
procedures. In addition, Physical Notes shall be transferred to all beneficial
owners in exchange for their beneficial interests in a Global Note if (i) the
Depositary notifies the Company that it is unwilling or unable to continue as
Depositary for such Global Note or the Depositary ceases to be a clearing agency
registered under the Exchange Act, at a time when the Depositary is required to
be so registered in order to act as Depositary, and in each case a successor
depositary is not appointed by the Company within 90 days of such notice or,
(ii) the Company executes and delivers to the Trustee and Note Registrar an
Officers' Certificate stating that such Global Note shall be so exchangeable or
(iii) an Event of Default has occurred and is continuing and the Note Registrar
has received a request from the Depositary.
(c) In connection with any transfer of a portion of the beneficial
interest in a Global Note pursuant to subsection (b) of this Section to
beneficial owners who are required to hold Physical Notes, the Note Registrar
shall reflect on its books and records the date and a decrease in the principal
amount of such Global Note in an amount equal to the principal amount of the
beneficial interest in the Global Note to be transferred, and the Company shall
execute, and the Trustee shall authenticate and deliver, one or more Physical
Notes of like tenor and amount.
(d) In connection with the transfer of an entire Global Note to
beneficial owners pursuant to subsection (b) of this Section, such Global Note
shall be deemed to be surrendered to the Trustee for cancellation, and the
Company shall execute, and the Trustee shall authenticate and deliver, to each
beneficial owner identified by the Depositary in exchange for its beneficial
interest in such Global Note, an equal aggregate principal amount of Physical
Notes of authorized denominations.
(e) Any Physical Note delivered in exchange for an interest in a
Global Note pursuant to subsection (c) or subsection (d) of this Section shall,
except as otherwise provided by paragraph (a)(i)(x) and paragraph (f) of Section
307, bear the applicable legend regarding transfer restrictions applicable to
the Physical Note set forth in Section 202.
(f) The registered holder of a Global Note may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.
SECTION 307. Special Transfer Provisions.
---------------------------
(a) The following provisions shall apply with respect to any proposed
transfer of a Rule 144A Note or an Institutional Accredited Investor Note prior
to the expiration of the Resale Restriction Termination Date (as defined in
Section 202 hereof):
(i) a transfer of a Rule 144A Note or an Institutional
Accredited Investor Note or a beneficial interest therein to a QIB shall be
made upon the representation of the transferee that it is purchasing the
Note for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities
Act of 1933, as amended, and is aware that the sale to
<PAGE>
56
it is being made in reliance on Rule 144A and acknowledges that it has
received such information regarding the Company as the undersigned has
requested pursuant to Rule 144A or has determined not to request such
information and that it is aware that the transferor is relying upon its
foregoing representations in order to claim the exemption from registration
provided by Rule 144A;
(ii) a transfer of a Rule 144A Note or an Institutional
Accredited Investor Note or a beneficial interest therein to an
institutional accredited investor shall be made upon receipt by the Trustee
or its agent of a certificate substantially in the form set forth in
Section 308 hereof from the proposed transferee and, if requested by the
Company or the Trustee, the delivery of an opinion of counsel,
certification and/or other information satisfactory to each of them; and
(iii) a transfer of a Rule 144A Note or an Institutional
Accredited Investor Note or a beneficial interest therein to a Non-U.S.
Person shall be made upon receipt by the Trustee or its agent of a
certificate substantially in the form set forth in Section 309 hereof from
the proposed transferee and, if requested by the Company or the Trustee,
the delivery of an opinion of counsel, certification and/or other
information satisfactory to each of them.
(b) The following provisions shall apply with respect to any
proposed transfer of a Regulation S Note prior to the expiration of the
Restricted Period:
(i) a transfer of a Regulation S Note or a beneficial interest
therein to a QIB shall be made upon the representation of the transferee
that it is purchasing the Note for its own account or an account with
respect to which it exercises sole investment discretion and that it and
any such account is a "qualified institutional buyer" within the meaning of
Rule 144A under the Securities Act of 1933, as amended, and is aware that
the sale to it is being made in reliance on Rule 144A and acknowledges that
it has received such information regarding the Company as the undersigned
has requested pursuant to Rule 144A or has determined not to request such
information and that it is aware that the transferor is relying upon its
foregoing representations in order to claim the exemption from registration
provided by Rule 144A;
(ii) a transfer of a Regulation S Note or a beneficial interest
therein to an institutional accredited investor shall be made upon receipt
by the Trustee or its agent of a certificate substantially in the form set
forth in Section 308 hereof from the proposed transferee and, if requested
by the Company or the Trustee, the delivery of an opinion of counsel,
certification and/or other information satisfactory to each of them; and
(iii) a transfer of a Regulation S Note or a beneficial
interest therein to a Non-U.S. Person shall be made upon, if requested by
the Company or the Trustee, receipt by the Trustee or its agent of an
opinion of counsel, certification and/or other information satisfactory to
each of them.
After the expiration of the Restricted Period, interests in the
Regulation S Note may be transferred without requiring certification set forth
in Section 308 or any additional certification.
(c) Private Placement Legend. Upon the transfer, exchange or
------------------------
replacement of Notes not bearing the Private Placement Legend, the Note
Registrar shall deliver Notes that do not bear the Private Placement Legend.
Upon the transfer, exchange or replacement of Notes bearing the Private
Placement Legend, the Note Registrar shall deliver only Notes that bear the
Private Placement Legend unless there is delivered to the Note Registrar an
Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the
effect that neither such legend nor the related restrictions on transfer are
required in order to maintain compliance with the provisions of the Securities
Act.
<PAGE>
57
(d) General. By its acceptance of any Note bearing the Private
-------
Placement Legend, each Holder of such a Note acknowledges the restrictions on
transfer of such Note set forth in this Indenture and in the Private Placement
Legend and agrees that it will transfer such Note only as provided in this
Indenture.
(e) The Company shall deliver to the Trustee an Officer's
Certificate setting forth the dates on which the Restricted Period terminates
(the "Resale Restriction Termination Date").
The Note Registrar shall retain copies of all letters, notices and
other written communications received pursuant to Section 306 or this Section
307. The Company shall have the right to inspect and make copies of all such
letters, notices or other written communications at any reasonable time upon the
giving of reasonable written notice to the Note Registrar.
(f) No Obligation of the Trustee: (i) The Trustee shall have no
----------------------------
responsibility or obligation to any beneficial owner of a Global Note, a member
of, or a participant in the Depository or other Person with respect to any
ownership interest in the Notes, with respect to the accuracy of the records of
the Depository or its nominee or of any participant or member thereof or with
respect to the delivery to any participant, member, beneficial owner or other
Person (other than the Depository) of any notice (including any notice of
redemption) or the payment of any amount, under or with respect to such Notes.
All notices and communications to be given to the Holders and all payments to be
made to Holders under the Notes shall be given or made only to the registered
Holders (which shall be the Depository or its nominee in the case of a Global
Note). The rights of beneficial owners in any Global Note in global form shall
be exercised only through the Depository subject to the applicable rules and
procedures of the Depository. The Trustee may rely and shall be fully protected
and indemnified pursuant to Section 607 in relying upon information furnished by
the Depository with respect to any beneficial owners, its members and
participants.
(ii) The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer imposed
under this Indenture or under applicable law with respect to any transfer of any
interest in any Note (including without limitation any transfers between or
among Depository participants, members or beneficial owners in any Global Note)
other than to require delivery of such certificates and other documentation of
evidence as are expressly required by, and to do so if and when expressly
required by, the terms of this Indenture, and to examine the same to determine
substantial compliance as to form with the express requirements hereof.
SECTION 308. Form of Certificate to Be Delivered in Connection with
------------------------------------------------------
Transfers to Institutional Accredited Investors.
- -----------------------------------------------
[date]
PARAGON HEALTH NETWORK, INC.
c/o IBJ Schroder Bank & Trust Company, as Trustee
1 State Street, 11th Floor
New York, New York 10004
Attention: Corporate Trust Administration
Ladies and Gentlemen:
This certificate is delivered to request a transfer of $______
principal amount of the [9 1/2% Senior Subordinated Notes due 2007] [10 1/2%
Senior Subordinated Discount Notes due 2007] (the "Notes") of Paragon Health
Network, Inc. (the "Company").
<PAGE>
58
Upon transfer, the Notes would be registered in the name of the new
beneficial owner as follows:
Name:
Address:
Taxpayer ID Number:
The undersigned represents and warrants to you that:
(1) We are an institutional "accredited investor" (as defined in
Rules 501(a)(1), (2), (3) and (7) under the Securities Act of 1933, as amended
(the "Securities Act")), purchasing for our own account or for the account of an
institutional "accredited investor" at least $250,000 principal amount of the
Notes, and we are acquiring the Notes not with a view to, or for offer or sale
in connection with, any distribution in violation of the Securities Act. We have
such knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of our investment in the Notes and invest in
or purchase securities similar to the Notes in the normal course of our
business. We and any accounts for which we are acting are each able to bear the
economic risk of our or its investment.
(2) We understand that the Notes have not been registered under the
Securities Act and, unless so registered, may not be sold except as permitted in
the following sentence. We agree on our own behalf and on behalf of any
investor account for which we are purchasing Notes to offer, sell or otherwise
transfer such Notes prior to the date which is two years after the later of the
date of original issue and the last date on which the Company or any affiliate
of the Company was the owner of such Notes (or any predecessor thereto) (the
"Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to
a registration statement which has been declared effective under the Securities
Act, (c) in a transaction complying with the requirements of Rule 144A under the
Securities Act, to a person we reasonably believe is a qualified institutional
buyer under Rule 144A (a "QIB") that purchases for its own account or for the
account of a QIB and to whom notice is given that the transfer is being made in
reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the
United States within the meaning of Regulation S under the Securities Act, (e)
to an institutional "accredited investor" within the meaning of Rule 501(a)(1),
(2), (3) or (7) under the Securities Act that is purchasing for its own account
or for the account of such an institutional "accredited investor", in each case
in a minimum principal amount of Notes of $250,000 or (f) pursuant to any other
available exemption from the registration requirements of the Securities Act,
subject in each of the foregoing cases to any requirement of law that the
disposition of our property or the property of such investor account or accounts
be at all times within our or their control and in compliance with any
applicable state securities laws. The foregoing restrictions on resale will not
apply subsequent to the Resale Restriction Termination Date. If any resale or
other transfer of the Notes is proposed to be made pursuant to clause (e) above
prior to the Resale Restriction Termination Date, the transferor shall deliver a
letter from the transferee substantially in the form of this letter to the
Company and the Trustee, which shall provide, among other things, that the
transferee is an institutional "accredited investor" within the meaning of Rule
501(a)(1), (2), (3) or (7) under the Securities Act and that it is acquiring
such Notes for investment purposes and not for distribution in violation of the
Securities Act. Each purchaser acknowledges that the Company and the Trustee
reserve the right prior to any offer, sale or other transfer prior to the Resale
Termination Date of the Notes pursuant to clauses (d), (e) or (f) above to
require the delivery of an opinion of counsel, certifications and/or other
information satisfactory to the Company and the Trustee.
TRANSFEREE:
BY:
Upon transfer the Notes would be registered in the name of the new beneficial
owner as follows:
<PAGE>
59
TAXPAYER ID
NAME ADDRESS NUMBER:
------ ------- ------
Very truly yours,
[Name of Transferor]
By:______________________________ _________________________________
Name: Signature Medallion Guaranteed
Title:
SECTION 309. Form of Certificate to Be Delivered in Connection with
------------------------------------------------------
Transfers Pursuant to Regulation S.
- ----------------------------------
[date]
IBJ Schroder Bank & Trust Company, as Trustee
1 State Street, 11th Floor
New York, New York 10004
Attention: Corporate Trust Administration
Re: PARAGON HEALTH NETWORK, INC. (the "Company")
[9 1/2% Senior Subordinated Notes due 2007]
[10 1/2% Senior Subordinated Discount Notes] (the "Notes")
-----------------------------------------------------------
Ladies and Gentlemen:
In connection with our proposed sale of $________ aggregate principal
amount of the Notes, we confirm that such sale has been effected pursuant to and
in accordance with Regulation S under the United States Securities Act of 1933,
as amended (the "Securities Act"), and, accordingly, we represent that:
(a) the offer of the Notes was not made to a person in the United
States;
(b) either (i) at the time the buy order was originated, the
transferee was outside the United States or we and any person acting on our
behalf reasonably believed that the transferee was outside the United
States or (ii) the transaction was executed in, on or through the
facilities of a designated off-shore securities market and neither we nor
any person acting on our behalf knows that the transaction has been pre-
arranged with a buyer in the United States;
(c) no directed selling efforts have been made in the United States in
contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S, as applicable; and
(d) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
<PAGE>
60
In addition, if the sale is made during a restricted period and the
provisions of Rule 903(c)(3) or Rule 904(c)(1) of Regulation S are applicable
thereto, we confirm that such sale has been made in accordance with the
applicable provisions of Rule 903(c)(3) or Rule 904(c)(1), as the case may be.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:____________________________ _______________________________
Authorized Signature Signature Medallion Guaranteed
SECTION 310. Mutilated, Destroyed, Lost and Stolen Notes.
-------------------------------------------
If (i) any mutilated Note is surrendered to the Trustee, or (ii) the
Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Note, and there is delivered to the Company,
any Guarantor (if applicable) and the Trustee such security or indemnity, in
each case, as may be required by them to save each of them harmless, then, in
the absence of notice to the Company any Guarantor or the Trustee that such Note
has been acquired by a bona fide purchaser, the Company shall execute and upon
Company Order the Trustee shall authenticate and deliver, in exchange for any
such mutilated Note or in lieu of any such destroyed, lost or stolen Note, a new
Note of like tenor and principal amount, bearing a number not contemporaneously
outstanding.
In case any such mutilated, destroyed, lost or stolen Note has become
or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses (including
the fees and expenses of the Trustee) in connection therewith.
Every new Note issued pursuant to this Section in lieu of any
mutilated, destroyed, lost or stolen Note shall constitute an original
additional contractual obligation of the Company, any Guarantor and any other
obligor upon the Notes, whether or not the mutilated, destroyed, lost or stolen
Note shall be at any time enforceable by anyone, and shall be entitled to all
benefits of this Indenture equally and proportionately with any and all other
Notes duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Notes.
SECTION 311. Payment of Interest; Interest Rights Preserved.
----------------------------------------------
Interest on any Note which is payable, and is punctually paid or duly
provided for, on any interest payment date shall be paid to the Person in whose
name such Note (or one or more Predecessor Notes) is registered at the close of
business on the Regular Record Date for such interest at the office or agency of
the Company maintained for such purpose pursuant to Section 1002; provided,
however, that each installment of interest may at the Company's option be paid
by (i) mailing a check for such interest, payable to or upon the written order
of the Person entitled thereto pursuant to Section 312, to the address
<PAGE>
61
of such Person as it appears in the Note Register or (ii) wire transfer to an
account located in the United States maintained by the payee.
Any interest on any Note which is payable, but is not paid when the
same becomes due and payable and such nonpayment continues for a period of 30
days shall forthwith cease to be payable to the Holder on the Regular Record
Date by virtue of having been such Holder, and such defaulted interest and (to
the extent lawful) interest on such defaulted interest at the rate borne by the
Notes (such defaulted interest and interest thereon herein collectively called
"Defaulted Interest") shall be paid by the Company, at its election in each
case, as provided in clause (a) or (b) below:
(a) The Company may elect to make payment of any Defaulted Interest to
the Persons in whose names the Notes (or their respective Predecessor
Notes) are registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest, which shall be fixed in the
following manner. The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on each Note and the date
(not less than 30 days after such notice) of the proposed payment (the
"Special Interest Payment Date"), and at the same time the Company shall
deposit with the Trustee an amount of money equal to the aggregate amount
proposed to be paid in respect of such Defaulted Interest or shall make
arrangements satisfactory to the Trustee for such deposit prior to the date
of the proposed payment, such money when deposited to be held in trust for
the benefit of the Persons entitled to such Defaulted Interest as in this
clause provided. Thereupon the Trustee shall fix a record date (the
"Special Record Date") for the payment of such Defaulted Interest which
shall be not more than 15 days and not less than 10 days prior to the
Special Interest Payment Date and not less than 10 days after the receipt
by the Trustee of the notice of the proposed payment. The Trustee shall
promptly notify the Company of such Special Record Date, and in the name
and at the expense of the Company, shall cause notice of the proposed
payment of such Defaulted Interest and the Special Record Date and Special
Interest Payment Date therefor to be given in the manner provided for in
Section 106, not less than 10 days prior to such Special Record Date.
Notice of the proposed payment of such Defaulted Interest and the Special
Record Date and Special Interest Payment Date therefor having been so
given, such Defaulted Interest shall be paid on the Special Interest
Payment Date to the Persons in whose names the Notes (or their respective
Predecessor Notes) are registered at the close of business on such Special
Record Date and shall no longer be payable pursuant to the following clause
(b).
(b) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any
securities exchange on which the Notes may be listed, and upon such notice
as may be required by such exchange, if, after notice given by the Company
to the Trustee of the proposed payment pursuant to this clause, such manner
of payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Note.
SECTION 312. Persons Deemed Owners.
---------------------
Prior to the due presentment of a Note for registration of transfer,
the Company, the Trustee and any agent of the Company, any Guarantor or the
Trustee may treat the Person in whose name such Note is registered as the owner
of such Note for the purpose of receiving payment of principal of (and premium,
if any) and (subject to Sections 305 and 311) interest on such Note and for all
other purposes whatsoever, whether or not such Note be overdue, and none of the
Company, any Guarantor, the Trustee nor any agent of the Company, any Guarantor
or the Trustee shall be affected by notice to the contrary.
<PAGE>
62
SECTION 313. Cancellation.
------------
All Notes surrendered for payment, redemption, registration of
transfer or exchange shall, if surrendered to any Person other than the Trustee,
be delivered to the Trustee and shall be promptly cancelled by it. If the
Company shall acquire any of the Notes other than as set forth in the preceding
sentence, the acquisition shall not operate as a redemption or satisfaction of
the Indebtedness represented by such Notes unless and until the same are
surrendered to the Trustee for cancellation pursuant to this Section 313. No
Notes shall be authenticated in lieu of or in exchange for any Notes cancelled
as provided in this Section, except as expressly permitted by this Indenture.
All cancelled Notes held by the Trustee shall be destroyed by the Trustee and
the Trustee shall send a certificate of such destruction to the Company.
SECTION 314. Computation of Interest.
-----------------------
Interest on the Notes shall be computed on the basis of a 360-day year
of twelve 30-day months.
SECTION 315. CUSIP Numbers.
-------------
The Company in issuing Notes may use "CUSIP" numbers (if then
generally in use) in addition to serial numbers; if so, the Trustee shall use
such "CUSIP" numbers in addition to serial numbers in notices of redemption and
repurchase as a convenience to Holders; provided that any such notice may state
that no representation is made as to the correctness of such CUSIP numbers,
either as printed on the Notes or as contained in any notice of a redemption or
repurchase and that reliance may be placed only on the serial or other
identification numbers printed on the Notes, and any such redemption or
repurchase shall not be affected by any defect in or omission of such CUSIP
numbers. The Company will promptly notify the Trustee of any change in the
CUSIP numbers.
ARTICLE FOUR. SATISFACTION AND DISCHARGE
400.
SECTION 401. Satisfaction and Discharge of Indenture.
---------------------------------------
This Indenture shall upon Company Request cease to be of further
effect (except as to surviving rights of registration of transfer or exchange of
Notes expressly provided for herein or pursuant hereto) and the Trustee, at the
expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture when
(i) either
(A) all Notes theretofore authenticated and delivered (other than
(1) Notes which have been lost, stolen or destroyed and which have
been replaced or paid as provided in Section 310 and (2) Notes for
whose payment money has theretofore been deposited in trust with the
Trustee or any Paying Agent or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged from such
trust, as provided in Section 1003) have been delivered to the Trustee
for cancellation; or
(B) all Notes not theretofore delivered to the Trustee for
cancellation
(1) have become due and payable by reason of the making of a
notice of redemption or otherwise; or
<PAGE>
63
(2) will become due and payable at their Stated Maturity
within one year; or
(3) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of
the Company,
and the Company in the case of (1), (2) or (3) above, has irrevocably
deposited or caused to be deposited with the Trustee as trust funds in
trust for such purpose an amount in cash or Government Obligations
sufficient to pay and discharge the entire indebtedness on such Notes
not theretofore delivered to the Trustee for cancellation, for
principal of (and premium, if any) and interest to the date of such
deposit (in the case of Notes which have become due and payable) or to
the Stated Maturity or Redemption Date, as the case may be;
(ii) no Default or Event of Default with respect to this Indenture
or the Notes shall have occurred and be continuing on the date of such
deposit or shall occur as a result of such deposit and such deposit will
not result in a breach or violation of, or constitute a default under, any
other instrument or agreement to which the Company or any Guarantor of the
Notes is a party or by which it is bound;
(iii) the Company or any Guarantor has paid or caused to be paid all
sums payable hereunder by the Company or any Guarantor in connection with
all the Notes including all fees and expenses of the Trustee;
(iv) the Company has delivered irrevocable instructions to the
Trustee to apply the deposited money toward the payment of such Notes at
maturity or the Redemption Date, as the case may be; and
(v) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of
this Indenture and the termination of the Company's obligation hereunder
have been satisfied.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 607 and, if money shall
have been deposited with the Trustee pursuant to subclause (B) of clause (i) of
this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive any such satisfaction and discharge.
SECTION 402. Application of Trust Money.
--------------------------
Subject to the provisions of the last paragraph of Section 1003, all
money deposited with the Trustee pursuant to Section 401 shall be held in trust
and applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and interest for whose payment such money has been deposited with the
Trustee; but such money need not be segregated from other funds except to the
extent required by law.
If the Trustee or Paying Agent is unable to apply any money or
Government Obligations in accordance with Section 401 by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's and any Guarantor's obligations under this Indenture and the Notes
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 401; provided that if the Company has made any payment of principal of,
premium, if any, or interest on any Notes because of the reinstatement
<PAGE>
64
of its obligations, the Company shall be subrogated to the rights of the Holders
of such Notes to receive such payment from the money or Government Obligations
held by the Trustee or Paying Agent.
ARTICLE FIVE. REMEDIES
500.
SECTION 501. Events of Default.
-----------------
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be occasioned by the provisions of Article Thirteen or be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) default in any payment of interest on any Note when the
same becomes due and such default continues for a period of 30 days whether
or not such payment shall be prohibited by Article Thirteen;
(ii) default in the payment of the principal of any Note when
the same becomes due at its Stated Maturity, upon optional redemption, upon
required repurchase, upon declaration or otherwise, whether or not such
payment shall be prohibited by Article Thirteen;
(iii) the Company fails to comply with Section 801;
(iv) the Company fails to comply with Section 1003, 1009, 1010,
1011, 1012, 1013, 1014, 1015, 1016, 1017, 1019 or 1020 (other than a
failure to purchase Notes when required under Section 1016 or 1017) and
such failure continues for 30 days after the notice specified below;
(v) the Company fails to comply with any of its agreements in
the Notes or this Indenture (other than those referred to in (i), (ii),
(iii) or (iv) above) and such failure continues for 60 days after the
notice specified below;
(vi) Indebtedness of the Company or any Significant Subsidiary
is not paid within any applicable grace period after final maturity or the
acceleration by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $20 million;
(vii) the Company or any Significant Subsidiary pursuant to or
within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against
it in an involuntary case;
(C) consents to the appointment of a Custodian of it or
for any substantial part of its property;
(D) makes a general assignment for the benefit of its
creditors; or takes any comparable action under any foreign laws relating
to insolvency; or
(viii) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
<PAGE>
65
(A) is for relief against the Company or any Significant
Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any Significant
Subsidiary or for any substantial part of its property; or
(C) orders the winding up or liquidation of the Company or any
Significant Subsidiary;
or any similar relief is granted under any foreign laws and the order or
decree remains unstayed and in effect for 90 days;
(ix) any judgment or decree for the payment of money in excess of $20
million (net of any insurance or indemnity payments actually received in
respect thereof prior to or within 90 days from the entry thereof, or to be
received in respect thereof in the event any appeal thereof shall be
unsuccessful) is rendered against the Company or any Significant Subsidiary
that is not discharged, or bonded or insured by a third Person and either
(A) an enforcement proceeding has been commenced upon such judgment or
decree or (B) such judgment or decree remains outstanding for a period of
90 days following the entry of such judgment or decree and is not
discharged, waived or stayed; or
(x) the failure of any Notes Guarantee by a Guarantor made pursuant
to Section 1020 to be in full force and effect (except as contemplated by
the terms thereof or of this Indenture) or the denial or disaffirmation in
writing by any such Guarantor of its obligations under this Indenture or
any such Guarantee of the Notes if such Default continues for 10 days.
The foregoing will constitute Events of Default whatever the reason
for any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
A Default under clause (iv) or (v) above shall not constitute an Event
of Default until the Trustee or the Holders of at least 25% in principal amount
of the outstanding Notes notify the Company of the Default and the Company does
not cure such Default within the time specified in clause (iv) or (v), as the
case may be, after receipt of such notice. Such notice must specify the
Default, demand that it be remedied and state that such notice is a "Notice of
Default".
The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officer's Certificate of
any event which with the giving of notice or the lapse of time would become an
Event of Default under clause (iv), (v) or (viii) above, its status and what
action the Company is taking or proposes to take with respect thereto.
If a Default occurs and is continuing and is known to the Trustee, the
Trustee must mail to each Holder notice of the Default within 90 days after it
occurs. Except in the case of a Default in the payment of principal of, premium,
if any, or interest on any Note, the Trustee may withhold such notice if and so
long as a committee of its Trust Officers in good faith determines that
withholding notice is in the interests of the Holders. In addition, the Company
is required to deliver to the Trustee, within 120 days after the end of each
fiscal year, a certificate indicating whether the signers thereof know of any
Default that occurred during the previous year.
<PAGE>
66
SECTION 502. Acceleration of Maturity; Rescission and Annulment.
--------------------------------------------------
If an Event of Default (other than by reason of an Event of Default
specified in Section 501(vii) or 501(viii)) occurs and is continuing, the
Trustee by notice to the Company or the Holders of at least a majority in
principal amount of the applicable Notes Outstanding may declare the principal
(and premium, if any), accrued and unpaid interest and any other monetary
obligations on all such then outstanding Notes to be due and payable
immediately, by a notice in writing to the Company (and to the Trustee if given
by Holders). Upon the effectiveness of such declaration, such principal (and
premium, if any) and interest will be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default specified in
Section 501(vii) or 501(viii) occurs and is continuing, then the principal
amount of all the Notes shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder.
The Holders of a majority in principal amount of the outstanding Notes
by notice to the Trustee may rescind an acceleration and its consequences if the
rescission would not conflict with any judgment or decree and if all existing
Events of Default have been cured or waived except nonpayment of principal or
interest that has become due solely because of acceleration. The Trustee may
rely upon such notice of rescission without nay independent investigation as to
the satisfaction of the conditions in the preceding sentence. No such
rescission shall affect any subsequent Default or impair any right consequent
thereto.
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
-------------------------------------------------------
Trustee.
- -------
If an Event of Default specified in Section 501(i) or 501(ii) occurs
and is continuing, the Trustee, in its own name as trustee of an express trust,
may institute a judicial proceeding for the collection of the sums so due and
unpaid, may prosecute such proceeding to judgment or final decree and may
enforce the same against the Company or any Guarantor (in accordance with the
applicable Guarantee of the Notes) or any other obligor upon the Notes and
collect the moneys adjudged or decreed to be payable in the manner provided by
law out of the property of the Company, any Guarantor or any other obligor upon
the Notes, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders under this Indenture or any Guarantee of the Notes by such appropriate
judicial proceedings as the Trustee shall deem most effectual to protect and
enforce any such rights, including, seeking recourse against any Guarantor
pursuant to the terms of any Guarantee of the Notes, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy
including, without limitation, seeking recourse against any Guarantor pursuant
to the terms of a Guarantee of the Notes, or to enforce any other proper remedy,
subject however to Section 513. No recovery of any such judgment upon any
property of the Company or any Guarantor shall affect or impair any rights,
powers or remedies of the Trustee or the Holders.
SECTION 504. Trustee May File Proofs of Claim.
--------------------------------
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor, including any
Guarantor, upon the Notes or the property of the Company or of such other
obligor or their creditors, the Trustee (irrespective of whether the principal
of the Notes shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Trustee shall have made
any demand on the Company for the payment of overdue principal, premium, if any,
or interest) shall be entitled and empowered, by intervention in such proceeding
or otherwise,
<PAGE>
67
(i) to file and prove a claim for the whole amount of principal (and
premium, if any) and interest owing and unpaid in respect of the Notes, to
take such other actions (including participating as a member, voting or
otherwise, of any official committee of creditors appointed in such matter)
and to file such other papers or documents as may be necessary or advisable
in order to have the claims of the Trustee (including any claim for the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel) and of the Holders allowed in such
judicial proceeding, and
(ii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any Custodian in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay the
Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 607.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding; provided, however, that the
Trustee may, on behalf of such Holders, vote for the election of a trustee in
bankruptcy or other similar official.
SECTION 505. Trustee May Enforce Claims Without Possession of Notes.
------------------------------------------------------
All rights of action and claims under this Indenture, the Notes or the
Guarantees of the Notes may be prosecuted and enforced by the Trustee without
the possession of any of the Notes or the production thereof in any proceeding
relating thereto, and any such proceeding instituted by the Trustee shall be
brought in its own name and as trustee of an express trust, and any recovery of
judgment shall, after provision for the payment of the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, be
for the ratable benefit of the Holders of the Notes in respect of which such
judgment has been recovered.
SECTION 506. Application of Money Collected.
------------------------------
Subject to Article Thirteen, any money collected by the Trustee
pursuant to this Article shall be applied in the following order, at the date or
dates fixed by the Trustee and, in case of the distribution of such money on
account of principal (or premium, if any) or interest, upon presentation of the
Notes and the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section
607;
SECOND: To holders of Senior Indebtedness to the extent required by
Article Thirteen;
THIRD: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on the Notes in respect of
which or for the benefit of which such money has been collected, ratably,
without preference or priority of any kind, according to the amounts due
and payable on such Notes for principal (and premium, if any) and interest,
respectively; and
FOURTH: The balance, if any, to the Person or Persons entitled
thereto, including the Company or any other obligor on the Notes, as their
interests may appear or as a court of competent jurisdiction may direct,
provided that all sums due and owing to the Holders and the Trustee have
been paid in full as required by this Indenture.
<PAGE>
68
SECTION 507. Limitation on Suits.
-------------------
No Holder of any Notes shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(i) the Holder gives to the Trustee written notice stating that
an Event of Default is continuing;
(ii) the Holders of at least 25% in principal amount of the
outstanding Notes make a written request to the Trustee to pursue the
remedy;
(iii) such Holder or Holders offer to the Trustee reasonable
security or indemnity against any loss, liability or expense;
(iv) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer of security or indemnity; and
(v) the Holders of a majority in principal amount of the
outstanding Notes do not give the Trustee a direction inconsistent with the
request during such 60-day period.
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture, any Note or any Guarantee of the Notes to affect, disturb or
prejudice the rights of any other Holders, or to obtain or to seek to obtain
priority or preference over any other Holders or to enforce any right under this
Indenture, any Note or any Guarantee of the Notes, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
SECTION 508. Unconditional Right of Holders to Receive Principal,
----------------------------------------------------
Premium and Interest.
- --------------------
Notwithstanding any other provision in this Indenture (other than
Article XIII), the Holder of any Note shall have the right, which is absolute
and unconditional, to receive payment, as provided herein (including, if
applicable, Article Eleven) and in such Note of the principal of (and premium,
if any) and (subject to Section 311) interest on such Note on the respective
Stated Maturities expressed in such Note (or, in the case of redemption or
repurchase, on the Redemption Date or repurchase) and to institute suit for the
enforcement of any such payment, and such rights shall not be impaired without
the consent of such Holder.
SECTION 509. Restoration of Rights and Remedies.
----------------------------------
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture or any Guarantee of the Notes and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case, subject to any determination in such proceeding, the Company, any
Guarantor, any other obligor on the Notes, the Trustee and the Holders shall be
restored severally and respectively to their former positions hereunder, and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
SECTION 510. Rights and Remedies Cumulative.
------------------------------
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of
Section 310, no right or remedy herein conferred upon or reserved to the Trustee
or to the Holders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other
<PAGE>
69
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 511. Delay or Omission Not Waiver.
----------------------------
No delay or omission of the Trustee or of any Holder to exercise any
right or remedy accruing upon any Event of Default shall impair any such right
or remedy or constitute a waiver of any such Event of Default or an acquiescence
therein. Every right and remedy given by this Article or by law to the
Trustee or to the Holders may be exercised from time to time, and as often as
may be deemed expedient, by the Trustee or by the Holders, as the case may be.
SECTION 512. Control by Holders.
------------------
The Holders of not less than a majority in principal amount of the
Outstanding Notes shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, provided that
(i) such direction shall not be in conflict with any rule of
law or with this Indenture or any Guarantee of the Notes,
(ii) the Trustee need not take any action which might involve
it in personal liability or be unduly prejudicial to the Holders not
consenting, it being understood that (subject to Section 601) the Trustee
shall have no duty to ascertain whether or not such actions or forbearance
are unduly prejudicial to such Holders; and
(iii) subject to the provisions of Section 315 of the Trust
Indenture Act, the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
Prior to taking any action hereunder, the Trustee shall be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
SECTION 513. Waiver of Past Defaults.
-----------------------
Subject to Sections 508 and 902, the Holders of a majority in
aggregate principal amount of the Outstanding Notes (including consents obtained
in connection with a tender offer or exchange offer for the Notes) may on behalf
of the Holders of all the Notes, by written notice to the Trustee, waive any
existing Default or Event of Default and its consequences under this Indenture
or any Guarantee of the Notes except a continuing Default or Event of Default in
the payment of interest on, premium, if any, or the principal of, any such Note
held by a non-consenting Holder, or in respect of a covenant or a provision
which cannot be amended or modified without the consent of all Holders.
In the event that any Event of Default specified in Section 501(vi)
shall have occurred and be continuing, such Event of Default and all
consequences thereof (including without limitation any acceleration or resulting
payment default) shall be annulled, waived and rescinded, automatically and
without any action by the Trustee or the Holders of the Notes, if within 30 days
after such Event of Default arose (i) the Indebtedness that is the basis for
such Event of Default has been discharged, or (ii) the holders thereof have
rescinded or waived the acceleration, notice or action (as the case may be)
giving rise to such Event of Default, or (iii) if the Default that is the basis
for such Event of Default has been cured.
<PAGE>
70
Upon any such waiver, such Default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or Event of Default or impair any right consequent thereon.
SECTION 514. Waiver of Stay or Extension Laws.
--------------------------------
The Company, the Guarantors and any other obligors upon the Notes,
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law wherever enacted, now or at
any time hereafter in force, which would prohibit or forgive the Company, any
Guarantor or any such obligor from paying all or any portion of the principal
of, premium, if any, or interest on the Notes contemplated herein or in the
Notes or which may affect the covenants or the performance of this Indenture;
and each of the Company, any Guarantor and any such obligor (to the extent that
it may lawfully do so) hereby expressly waives all benefit or advantage of any
such law and covenants that it will not hinder, delay or impede the execution of
any power herein granted to the Trustee, but will suffer and permit the
execution of every such power as though no such law had been enacted.
SECTION 515. Undertaking for Costs.
---------------------
All parties to this Indenture agree, and each Holder of any Note by
his acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may in
its discretion assess reasonable costs, including reasonable attorneys' fees and
expenses, against any party litigant in such suit, having due regard to the
merits and good faith of the claims or defenses made by such party litigant; but
the provisions of this Section shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Holders, holding in
the aggregate more than 10% in principal amount of the Outstanding Notes, or to
any suit instituted by any Holder for the enforcement of the payment of the
principal of (or premium, if any) or interest on any Note on or after the
respective Stated Maturities expressed in such Note (or, in the case of
redemption, on or after the Redemption Date).
ARTICLE SIX. THE TRUSTEE 600.
SECTION 601. Certain Duties and Responsibilities.
-----------------------------------
(a) Except during the continuance of a Default or an Event of
Default,
(i) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture, and the Trustee
should not be liable except for the performance of such duties as
specifically set forth in the Indenture and no others; and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
(ii) in the absence of bad faith or willful misconduct on its
part, the Trustee may conclusively rely, as to the truth of the statements
and the correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture; but in the case of any such certificates or opinions, the
Trustee shall be under a duty to examine the same to determine whether or
not they conform to the requirements of this Indenture, but not to verify
the contents thereof.
(b) In case a Default or an Event of Default has occurred and is
continuing of which a Trust Officer of the Trustee has actual knowledge or of
which written notice of such Default or Event of
<PAGE>
71
Default shall have been given to the Trustee by the Company, any other obligor
of the Notes or by any Holder, the Trustee shall exercise such of the rights and
powers vested in it by this Indenture, and use the same degree of care and skill
in their exercise, as a prudent man would exercise or use under the
circumstances in the conduct of his own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that
(i) this paragraph (c) shall not be construed to limit the
effect of paragraph (a) of this Section;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer, unless it shall be proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in accordance with
the direction of the Holders of a majority in aggregate principal amount of
the Outstanding Notes relating to the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising any
trust or power conferred upon the Trustee, under this Indenture.
(d) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section and to the TIA.
SECTION 602. Notice of Defaults.
------------------
Within 90 days after the occurrence of any Default hereunder, the
Trustee shall transmit in the manner and to the extent provided in TIA Section
313(c), notice of such Default hereunder actually known to a Trust Officer of
the Trustee, unless such Default shall have been cured or waived; provided,
however, that, except in the case of a Default in the payment of the principal
of (or premium, if any) or interest on any Note, the Trustee shall be protected
in withholding such notice if and so long as the board of directors, the
executive committee or a trust committee of directors and/or Trust Officers of
the Trustee in good faith determine that the withholding of such notice is in
the interest of the Holders; and provided further that in the case of any
Default of the character specified in Section 501(iii) no such notice to Holders
shall be given until at least 30 days after the occurrence thereof.
Notwithstanding anything to the contrary expressed in this Indenture, the
Trustee shall not be deemed to have knowledge of any Default or Event of Default
hereunder unless and until the Trustee shall have received written notice
thereof from the Company at its principal Corporate Trust Office as specified in
Section 105, except in the case of an Event of Default under Sections 501(i) or
501(ii) (provided that the Trustee is the Paying Agent).
SECTION 603. Certain Rights of Trustee.
-------------------------
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture and use the same degree of care and skill in their exercise as a
prudent person would exercise or use under the circumstances in the conduct of
his own affairs.
(b) Subject to the provisions of TIA Sections 315(a) through 315(d):
(i) the Trustee may conclusively rely and shall be protected in
acting or refraining from acting upon (whether in its original or facsimile
form) any resolution, certificate, statement, instrument, opinion, report,
notice, request, direction, consent, order, bond, debenture, note, other
<PAGE>
72
evidence of indebtedness or other paper or document believed by it to be
genuine and to have been signed or presented by the proper party or parties
and the Trustee need not investigate any fact or matter stated in the
documents;
(ii) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order and
any resolution of the Board of Directors may be sufficiently evidenced by a
Board Resolution;
(iii) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the Trustee
(unless other evidence be herein specifically prescribed) may, in the
absence of bad faith or willful misconduct on its part, request and rely
upon an Officers' Certificate or an Opinion of Counsel and shall not liable
for any action it takes or omits to take in good faith reliance on such
Officer's Certificate or Opinion of Counsel;
(iv) the Trustee may consult with counsel of its selection and
any advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance thereon;
(v) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such
Holders shall have offered to the Trustee reasonable security or indemnity
satisfactory to the Trustee against the costs, expenses, losses and
liabilities which might be incurred by it in compliance with such request
or direction;
(vi) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further inquiry
or investigation into such facts or matters as it may see fit, and, if the
Trustee shall determine to make such further inquiry or investigation, it
shall be entitled to examine the books, records and premises of the
Company, personally or by agent or attorney;
(vii) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys and the Trustee shall not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed
with due care by it hereunder; and
(viii) the Trustee shall not be liable for any action taken,
suffered or omitted by it in good faith and reasonably believed by it to be
authorized or within the discretion or rights or powers conferred upon it
by this Indenture; provided, however, that the Trustee's conduct does not
constitute willful misconduct or negligence.
(c) The Trustee shall not be required to expend or risk its own funds
or otherwise incur any financial liability in the performance of any of its
duties hereunder, or in the exercise of any of its rights or powers if it shall
have reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
<PAGE>
73
SECTION 604. Trustee Not Responsible for Recitals or Issuance of
---------------------------------------------------
Notes.
- -----
The recitals contained herein and in the Notes, except for the
Trustee's certificates of authentication, shall be taken as the statements of
the Company, and the Trustee assumes no responsibility for their correctness and
it shall not be responsible for the Company's use of the proceeds from the
Notes. The Trustee makes no representations as to the validity or sufficiency
of this Indenture or of the Notes, except that the Trustee represents that it is
duly authorized to execute and deliver this Indenture, authenticate the Notes
and perform its obligations hereunder and that the statements made by it in a
Statement of Eligibility on Form T-1 supplied to the Company are true and
accurate, subject to the qualifications set forth therein. The Trustee shall
not be accountable for the use or application by the Company of the proceeds of
the Notes.
SECTION 605. May Hold Notes.
--------------
The Trustee, any Paying Agent, any Note Registrar, any Authenticating
Agent or any other agent of the Company or of the Trustee, in its individual or
any other capacity, may become the owner or pledgee of Notes and, subject to TIA
Sections 310(b) and 311, may otherwise deal with the Company with the same
rights it would have if it were not Trustee, Paying Agent, Note Registrar,
Authenticating Agent or such other agent.
SECTION 606. Money Held in Trust.
-------------------
All moneys received by the Trustee shall, until used or applied as
herein provided, be held in trust hereunder for the purposes for which they were
received, but need not be segregated from other funds except to the extent
required by law. The Trustee shall be under no liability for interest on any
money received by it hereunder except as otherwise agreed in writing with the
Company.
SECTION 607. Compensation and Reimbursement.
------------------------------
The Company agrees:
(i) to pay to the Trustee from time to time such compensation
as shall be agreed to in writing between the Company and the Trustee for
all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(ii) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance
with any provision of this Indenture (including the reasonable compensation
and the expenses and disbursements of its agents, consultants and counsel
and costs and expenses of collection), except any such expense,
disbursement or advance as may be attributable to its negligence or bad
faith; and
(iii) to indemnify each of the Trustee or any predecessor Trustee
(and their respective directors, officers, stockholders, employees and
agents) for, and to hold them harmless against, any and all loss, damage,
claim, liability or expense, including taxes (other than taxes based on the
income of the Trustee) incurred without negligence, willful misconduct or
bad faith on their part, arising out of or in connection with the
acceptance or administration of this trust, including the costs and
expenses of defending themselves against any claim or liability in
connection with the exercise or performance of any of the Trustee's powers
or duties hereunder.
The obligations of the Company under this Section to compensate the
Trustee, to pay or reimburse the Trustee for expenses, disbursements and
advances and to indemnify and hold harmless
<PAGE>
74
the Trustee shall constitute additional indebtedness hereunder and shall survive
the satisfaction and discharge of this Indenture. As security for the
performance of such obligations of the Company, the Trustee shall have a lien
prior to the Holders of the Notes upon all property and funds held or collected
by the Trustee as such, except funds held in trust for the payment of principal
of (and premium, if any) or interest on particular Notes.
When the Trustee incurs expenses or renders services in connection
with an Event of Default specified in Section 501(vii) or (viii), the expenses
(including the reasonable charges and expenses of its counsel) of and the
compensation for such services are intended to constitute expenses of
administration under any applicable federal or state bankruptcy, insolvency or
other similar law.
The provisions of this Section shall survive the termination of this
Indenture.
SECTION 608. Corporate Trustee Required; Eligibility.
---------------------------------------
There shall be at all times a Trustee hereunder which shall be
eligible to act as Trustee under TIA Section 310(a)(1), and which shall have an
office in The City of New York and shall have a combined capital and surplus of
at least $50,000,000. If the Trustee does not have an office in The City of New
York, the Trustee may appoint an agent in The City of New York reasonably
acceptable to the Company to conduct any activities which the Trustee may be
required under this Indenture to conduct in The City of New York. If such
corporation publishes reports of condition at least annually, pursuant to law or
to the requirements of federal, state, territorial or District of Columbia
supervising or examining authority, then for the purposes of this Section 608,
the combined capital and surplus of such corporation shall be deemed to be its
combined capital and surplus as set forth in its most recent report of condition
so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section 608, it shall resign immediately
in the manner and with the effect hereinafter specified in this Article.
SECTION 609. Resignation and Removal; Appointment of Successor.
-------------------------------------------------
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of this Section.
(b) The Trustee may resign at any time by giving written notice
thereof to the Company. Upon receiving such notice of resignation, the Company
shall promptly appoint a successor trustee by written instrument executed by
authority of the Board of Directors, a copy of which shall be delivered to the
resigning Trustee and a copy to the successor trustee. If an instrument of
acceptance required by this Section shall not have been delivered to the Trustee
within 30 days after the giving of such notice of resignation, the resigning
Trustee may petition, at the expense of the Company, any court of competent
jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of
not less than a majority in principal amount of the Outstanding Notes, delivered
to the Trustee and to the Company. The Trustee so removed may, at the expense
of the Company, petition any court of competent jurisdiction for the appointment
of a successor Trustee if no successor Trustee is appointed within 30 days of
such removal.
(d) If at any time:
(i) the Trustee shall fail to comply with the provisions of TIA
Section 310(b) after written request therefor by the Company or by any
Holder who has been a bona fide Holder of a Note for at least six months,
or
<PAGE>
75
(ii) the Trustee shall cease to be eligible under Section 608
and shall fail to resign after written request therefor by the Company or
by any Holder who has been a bona fide Holder of a Note for at least six
months, or
(iii) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a Custodian of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (A) the Company, by a Board Resolution, may remove the
Trustee, or (B) subject to TIA Section 315(e), any Holder who has been a bona
fide Holder of a Note for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor Trustee. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Notes delivered to
the Company and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment, become the successor Trustee
and supersede the successor Trustee appointed by the Company. If no successor
Trustee shall have been so appointed by the Company or the Holders and accepted
appointment in the manner hereinafter provided, any Holder who has been a bona
fide Holder of a Note for at least six months may, at the expense of the Company
on behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee to the
Holders of Notes in the manner provided for in Section 106. Each notice shall
include the name of the successor Trustee and the address of its Corporate Trust
Office.
SECTION 610. Acceptance of Appointment by Successor.
--------------------------------------
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers, trusts
and duties of the retiring Trustee; but, on request of the Company or the
successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder. Notwithstanding the replacement of the Trustee
pursuant to this Section 610, the Company's obligations under Section 607 shall
continue for the benefit of the retiring Trustee with regard to expenses and
liabilities incurred by it and compensation earned by it prior to such
replacement or otherwise under the Indenture. Upon request of any such
successor Trustee, the Company shall execute any and all instruments for more
fully and certainly vesting in and confirming to such successor Trustee all such
rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article.
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76
SECTION 611. Merger, Conversion, Consolidation or Succession to
--------------------------------------------------
Business.
- --------
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Notes shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Notes so authenticated with the same effect
as if such successor Trustee had itself authenticated such Notes. In case at
that time any of the Notes shall not have been authenticated, any successor
Trustee may authenticate such Notes either in the name of any predecessor
hereunder or in the name of the successor Trustee. In all such cases such
certificates shall have the full force and effect which this Indenture provides
for the certificate of authentication of the Trustee shall have; provided,
however, that the right to adopt the certificate of authentication of any
predecessor Trustee or to authenticate Notes in the name of any predecessor
Trustee shall apply only to its successor or successors by merger, conversion or
consolidation.
SECTION 612. Trustee's Application for Instructions from the Company.
-------------------------------------------------------
Any application by the Trustee for written instructions from the
Company may, at the option of the Trustee, set forth in writing any action
proposed to be taken or omitted by the Trustee under this Indenture and the date
on and/or after which such action shall be taken or such omission shall be
effective. Subject to Section 610, the Trustee shall not be liable for any
action taken by, or omission of, the Trustee in accordance with a proposal
included in such application on or after the date specified in such application
(which date shall not be less than three Business Days after the date any
officer of the Company actually receives such application, unless any such
officer shall have consented in writing to any earlier date) unless prior to
taking any such action (or the effective date in the case of an omission), the
Trustee shall have received written instructions in response to such application
specifying the action to be taken or omitted.
ARTICLE SEVEN. HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY 700.
SECTION 701. Company to Furnish Trustee Names and Addresses.
----------------------------------------------
The Company will furnish or cause to be furnished to the Trustee
(a) semiannually, not more than 10 days after each Regular Record
Date, a list, in such form as the Trustee may reasonably require, of the names
and addresses of the Holders as of such Regular Record Date; and
(b) at such other times as the Trustee may reasonably request in
writing, within 30 days after receipt by the Company of any such request, a list
of similar form and content to that in Subsection (a) hereof as of a date not
more than 15 days prior to the time such list is furnished;
provided, however, that if and so long as the Trustee shall be the Note
Registrar, no such list need be furnished.
SECTION 702. Disclosure of Names and Addresses of Holders.
--------------------------------------------
Every Holder of Notes, by receiving and holding the same, agrees with
the Company and the Trustee that none of the Company or the Trustee or any agent
of either of them shall be held accountable by reason of the disclosure of any
such information as to the names and addresses of the
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77
Holders in accordance with TIA Section 312, regardless of the source from which
such information was derived, and that the Trustee shall not be held accountable
by reason of mailing any material pursuant to a request made under TIA Section
312(b).
SECTION 703. Reports by Trustee.
------------------
Within 60 days after May 15 of each year commencing with the first May
15 after the first issuance of Notes, the Trustee shall transmit to the Holders,
in the manner and to the extent provided in TIA Section 313(c), a brief report
dated as of such May 15 if required by TIA Section 313(a).Delivery of such
reports, information and documents to the Trustee is for informational purposes
only and the Trustee's receipt of such shall not constitute constructive notice
of any information contained therein or determinable from information contained
therein, including the Company's compliance with any of its covenants hereunder
(as to which the Trustee is entitled to conclusively rely exclusively on
Officer's Certificates).
The Trustee also shall comply with TIA (S) 313(b). A copy of each
report at the time of its mailing to Holders shall be filed by the Trustee with
the Commission and each stock exchange (if any) on which the Notes are listed.
The Company agrees to notify promptly the Trustee whenever the Notes become
listed on any stock exchange and of any delisting thereof.
ARTICLE EIGHT. MERGER, CONSOLIDATION, OR SALE OF ASSETS 800.
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.
----------------------------------------------------
The Company will not in a single transaction or series of transactions
consolidate with or merge with or into, or convey, transfer or lease all or
substantially all its assets to any Person, unless:
(i) the resulting, surviving or transferee Person (the
"Successor Company") shall be a corporation, partnership, trust or limited
liability company organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia and the
Successor Company (if not the Company) shall expressly assume, by
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Notes and hereunder;
(ii) immediately after giving effect to such transaction (and
treating any Indebtedness that becomes an obligation of the Successor
Company or any Subsidiary of the Successor Company as a result of such
transaction as having been incurred by the Successor Company or such
Restricted Subsidiary at the time of such transaction), no Default or Event
of Default shall have occurred and be continuing;
(iii) immediately before and after giving effect to such
transaction, the Company or the Successor Company if the Company is not the
continuing obligor under this Indenture would at the time of such
transaction or series of transactions, after giving pro forma effect to
such transaction as if such transaction had occurred on the first day of
the four quarter period ending on or immediately prior to the date of such
transaction, be able to Incur at least $1.00 of Indebtedness pursuant to
clause (a) of Section 1010; and
(iv) the Company shall have delivered to the Trustee (A) an
Officers' Certificate, stating that (1) such Officers are not aware of any
Default or Event of Default that shall have happened and be continuing and
(2) such consolidation, merger or transfer and such supplemental indenture
comply with this Indenture; provided that no Officers' Certificate will be
required as to matters described in clause (A)(1) of this clause (iv) for a
consolidation, merger or transfer described in the last paragraph of this
Section 801, and (B) an Opinion of Counsel, stating that such
consolidation, merger or transfer and such supplemental indenture comply
with this Indenture, both in the form
<PAGE>
78
required by this Indenture; provided that (1) in giving such opinion such
counsel may rely on such officer's certificate as to any matters of fact
(including without limitation as to compliance with the foregoing clauses
(ii) and (iii)), and (2) no Opinion of Counsel will be required for a
consolidation, merger or transfer described in the last paragraph of this
Section 801.
Notwithstanding the foregoing clauses (ii) and (iii), (x) any
Restricted Subsidiary may consolidate with, merge into or transfer all or part
of its properties and assets to the Company and (y) the Company may merge with
an Affiliate incorporated solely for the purpose of reincorporating the Company
in another jurisdiction to realize tax or other benefits.
SECTION 802. Successor Substituted.
---------------------
Upon any consolidation of the Company with or merger of the Company
with or into any other corporation or any conveyance, transfer, lease or other
disposition of all or substantially all of the assets of the Company to any
Person in accordance with Section 801, the Successor Company will succeed to,
and be substituted for, and may exercise every right and power of, the Company
hereunder and thereafter the predecessor Company shall be released from all
obligations and covenants hereunder, but, in the case of conveyance, transfer or
lease of all or substantially all its assets, the predecessor Company will not
be released from the obligation to pay the principal of and interest on the
Notes.
ARTICLE NINE. SUPPLEMENTS AND AMENDMENTS TO INDENTURE 900.
SECTION 901. Supplemental Indentures Without Consent of Holders.
--------------------------------------------------
Without the consent of any Holders, the Company, the Guarantors, if
any (with respect to a Guarantee of the Notes to which it is a party), and the
Trustee, at any time and from time to time, may enter into one or more
indentures supplemental hereto, in form satisfactory to the Trustee, for any of
the following purposes:
(i) to cure any ambiguity, defect or inconsistency; or
(ii) to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in
a manner such that the uncertificated Notes are described in Section
163(f)(2)(B) of the Code); or
(iii) to add Guarantees with respect to the Notes; or
(iv) to provide for the assumption by a successor corporation,
partnership, trust or limited liability company of the obligations of the
Company hereunder; or
(v) to secure the Notes; or
(vi) to confirm and evidence the release and discharge of any
Guarantee of the Notes or Lien with respect to or securing the Notes when
such release and discharge is permitted by and provided for hereunder; or
(vii) to provide that any Indebtedness that becomes or will
become an obligation of the Successor Company pursuant to a transaction
governed by Section 801 (and that is not a Subordinated Obligation) is
Senior Subordinated Indebtedness for purposes of this Indenture; or
<PAGE>
79
(viii) to add to the covenants of the Company for the benefit
of the Holders or to surrender any right or power conferred upon the
Company; or
(ix) to make any other change that does not adversely affect
the rights of any Holder; or
(x) to comply with any requirement of the Commission in
connection with the qualification of this Indenture under the Trust
Indenture Act.
However, no amendment may be made to the subordination provisions of
the Indenture that adversely affects the rights of any holder of Senior
Indebtedness then outstanding unless the holders of such Senior Indebtedness (or
any group or representative thereof authorized to give a consent) consent to
such change.
SECTION 902. Supplemental Indentures with Consent of Holders.
-----------------------------------------------
With the consent of the Holders of at least a majority in principal
amount of the Outstanding Notes (including consents obtained in connection with
a tender offer or exchange offer for the Notes), the Company, and the Trustee
may enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders under this Indenture; provided, however, that no such supplemental
indenture shall, without the consent of the Holder of each Outstanding Note
affected thereby (with respect to any Notes held by a nonconsenting Holder of
the Notes):
(i) reduce the amount of Notes whose Holders must consent to
an amendment; or
(ii) reduce the stated rate of or extend the stated time for
payment of interest on any Note or amend the rate of accretion on the
Senior Subordinated Discount Notes or amend the definition of Accreted
Value; or
(iii) reduce the principal of or Accreted Value of or extend
the Stated Maturity of any Note; or
(iv) reduce the premium payable upon the redemption or
repurchase of any Note or change the time at which any Note may be redeemed
as described in Section 1101; or
(v) make any Note payable in money other than that stated in
the Note; or
(vi) impair the right of any Holder to receive payment of
principal of and interest on such Holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such Holder's Notes; or
(vii) make any change in the amendment provisions which
require each Holder's consent or in the waiver provisions; or
(viii) make any change to the subordination provisions of this
Indenture that adversely affects the rights of any Holder.
<PAGE>
80
The consent of the Holders is not necessary under this Indenture to
approve the particular form of any proposed supplemental indenture. It is
sufficient if such consent approves the substance of the proposed supplemental
indenture.
The Senior Subordinated Notes and the Senior Subordinated Discount
Notes will vote together as a single class of securities under the Indenture
with respect to matters on which Holders are required or permitted to vote.
SECTION 903. Execution of Supplemental Indentures.
------------------------------------
The Trustee may, but shall not be obligated to, enter into any such
supplemental indenture which affects the Trustee's own rights, duties or
immunities, as determined by the Trustee in its sole discretion under this
Indenture or otherwise. In signing or refusing to sign any supplemental
indenture permitted by this Article or the modifications thereby of the trusts
created by this Indenture, the Trustee shall be entitled to receive, and shall
be fully protected in relying upon, an Officer's Certificate and an Opinion of
Counsel stating that the execution of such supplemental indenture is authorized
or permitted by this Indenture.
SECTION 904. Effect of Supplemental Indentures.
---------------------------------
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Notes theretofore or thereafter authenticated and delivered hereunder shall
be bound thereby (except as provided in Section 902).
SECTION 905. Conformity with Trust Indenture Act.
-----------------------------------
Every supplemental indenture executed pursuant to the Article shall
conform to the requirements of the Trust Indenture Act as then in effect.
SECTION 906. Reference in Notes to Supplemental Indentures.
---------------------------------------------
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company or the Trustee
shall so determine, new Notes so modified as to conform to any such supplemental
indenture may be prepared and executed by the Company, and the Company shall
issue and the Trustee shall authenticate a new Note that reflects the changed
terms, the cost and expense of which will be borne by the Company in exchange
for Outstanding Notes.
SECTION 907. Notice of Supplemental Indentures.
---------------------------------
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of Section 902, the Company
shall give notice thereof to the Holders of each Outstanding Note affected, in
the manner provided for in Section 106, setting forth in general terms the
substance of such supplemental indenture. The failure to give such notice to
all the Holders, or any defect therein, will not impair or affect the validity
of the supplemental indenture.
<PAGE>
81
SECTION 908. Effect on Senior Indebtedness.
-----------------------------
No supplemental indenture shall adversely affect the rights of any
holders of Senior Indebtedness under Article Thirteen unless the requisite
holders of each issue of Senior Indebtedness affected thereby shall have
consented to such supplemental indenture.
ARTICLE TEN. COVENANTS 1000.
SECTION 1001. Payment of Principal, Premium, if any, and Interest.
---------------------------------------------------
The Company covenants and agrees for the benefit of the Holders that
it will duly and punctually pay the principal of (and premium, if any) and
interest on the Notes in accordance with the terms of the Notes and this
Indenture.
SECTION 1002. Maintenance of Office or Agency.
-------------------------------
The Company will maintain in The City of New York, an office or agency
where the Notes may be presented or surrendered for payment, where, if
applicable, the Notes may be surrendered for registration of transfer or
exchange and where notices and demands to or upon the Company in respect of the
Notes and this Indenture may be served. The Corporate Trust Office of the
Trustee shall be such office or agency of the Company, unless the Company shall
designate and maintain some other office or agency for one or more of such
purposes. The Company will give prompt written notice to the Trustee of any
change in the location of any such office or agency. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee, and the Company hereby appoints the Trustee as its agent to receive all
such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York) where the Notes may
be presented or surrendered for any or all such purposes and may from time to
time rescind any such designation; provided, however, that no such designation
or rescission shall in any manner relieve the Company of its obligation to
maintain an office or agency in The City of New York for such purposes. The
Company will give prompt written notice to the Trustee of any such designation
or rescission and any change in the location of any such other office or agency.
SECTION 1003. Money for Note Payments to Be Held in Trust.
-------------------------------------------
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of (or premium, if any) or interest
on any of the Notes, segregate and hold in trust for the benefit of the Persons
entitled thereto a sum sufficient to pay the principal of (or premium, if any)
or interest so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided and will promptly notify the Trustee of
its action or failure to so act.
Whenever the Company shall have one or more Paying Agents for the
Notes, it will, on or before each due date of the principal of (or premium, if
any) or interest on any Notes, deposit with a Paying Agent a sum in same day
funds (or New York Clearing House funds if such deposit is made prior to the
date on which such deposit is required to be made) that shall be available to
the Trustee by 11:00 a.m. Eastern Standard Time on such due date sufficient to
pay the principal (and premium, if any) or interest so becoming due, such sum to
be held in trust for the benefit of the Persons entitled to such principal,
premium or interest,
<PAGE>
82
and (unless such Paying Agent is the Trustee) the Company will promptly notify
the Trustee of such action or any failure to so act.
The Company will cause each Paying Agent (other than the Trustee) to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will:
(i) hold all sums held by it for the payment of the principal
of (and premium, if any) or interest on Notes in trust for the benefit of
the Persons entitled thereto until such sums shall be paid to such Persons
or otherwise disposed of as herein provided;
(ii) give the Trustee notice of any default by the Company (or
any other obligor upon the Notes) in the making of any payment of principal
(and premium, if any) or interest; and
(iii) at any time during the continuance of any such default,
upon the written request of the Trustee, forthwith pay to the Trustee all
sums so held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such sums.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of (or premium, if
any) or interest on any Note and remaining unclaimed for two years after such
principal, premium or interest has become due and payable shall be paid to the
Company on Company Request, or (if then held by the Company) shall be discharged
from such trust; and the Holder of such Note shall thereafter, as an unsecured
general creditor, look only to the Company for payment thereof, and all
liability of the Trustee or such Paying Agent with respect to such trust money,
and all liability of the Company as trustee thereof, shall thereupon cease;
provided, however, that the Trustee or such Paying Agent, before being required
to make any such repayment to the Company, may at the expense of the Company
cause to be published once, in a leading daily newspaper (if practicable, The
Wall Street Journal (Eastern Edition)) printed in the English language and of
general circulation in New York City, notice that such money remains unclaimed
and that, after a date specified therein, which shall not be less than 30 days
from the date of such publication, any unclaimed balance of such money then
remaining will be repaid to the Company.
SECTION 1004. Corporate Existence.
-------------------
Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect the corporate
existence and that of each Restricted Subsidiary and the corporate rights
(charter and statutory) licenses and franchises of the Company and each
Restricted Subsidiary; provided, however, that the Company shall not be required
to preserve any such existence (except the Company) right, license or franchise
if the Board of Directors of the Company shall determine that the preservation
thereof is no longer desirable in the conduct of the business of the Company and
each of its Restricted Subsidiaries, taken as a whole, and that the loss thereof
is not, and will not be, disadvantageous in any material respect to the Holders.
<PAGE>
83
SECTION 1005. Payment of Taxes and Other Claims.
---------------------------------
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (i) all material taxes, assessments and
governmental charges levied or imposed upon the Company or any Subsidiary or
upon the income, profits or property of the Company or any Subsidiary and (ii)
all lawful claims for labor, materials and supplies, which, if unpaid, might by
law become a material liability or lien upon the property of the Company or any
Restricted Subsidiary; provided, however, that the Company shall not be required
to pay or discharge or cause to be paid or discharged any such tax, assessment,
charge or claim whose amount, applicability or validity is being contested in
good faith by appropriate proceedings and for which appropriate reserves, if
necessary (in the good faith judgment of management of the Company) are being
maintained in accordance with GAAP.
SECTION 1006. Maintenance of Properties.
-------------------------
The Company will cause all material properties owned by the Company or
any Restricted Subsidiary or used or held for use in the conduct of its business
or the business of any Restricted Subsidiary to be maintained and kept in normal
condition, repair and working order and will cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as in
the judgment of the Company may be necessary so that the business carried on in
connection therewith may be properly conducted at all times; provided, however,
that nothing in this Section shall prevent the Company or any of its Restricted
Subsidiaries from discontinuing the maintenance of any of such properties if
such discontinuance is, in the judgment of the Company, desirable in the conduct
of its business or the business of any Restricted Subsidiary and not adverse in
any material respect to the Holders.
SECTION 1007. Insurance.
---------
To the extent available at commercially reasonable rates, the Company
will maintain, and will cause its Restricted Subsidiaries to maintain, insurance
with responsible carriers against such risks and in such amounts, and with such
deductibles, retentions, self-insured amounts and co-insurance provisions, as
are customarily carried by similar businesses, of similar size in their country
of organization, including professional and general liability, property and
casualty loss, workers' compensation and interruption of business insurance. In
the event the Company determines that insurance satisfying the first sentence of
this Section 1007 is not available at commercially available rates, it shall
provide an Officer's Certificate to such effect to the Trustee and the Trustee
may conclusively rely on the determinations set forth therein.
SECTION 1008. Compliance with Laws.
--------------------
The Company shall comply, and shall cause each of its Restricted
Subsidiaries to comply, with all applicable statutes, rules, regulations, orders
and restrictions of the United States of America, all states and municipalities
thereof, and of any governmental regulatory authority, in respect of the conduct
of their respective businesses and the ownership of their respective properties,
except for such noncompliances as would not in the aggregate have a material
adverse effect on the financial condition or results of operations of the
Company and its Restricted Subsidiaries, taken as a whole.
SECTION 1009. Limitation on Restricted Payments.
---------------------------------
(a) The Company shall not, and shall not permit any Restricted
Subsidiary, directly or indirectly, to (i) declare or pay any dividend or make
any distribution on or in respect of its Capital Stock (including any payment to
its stockholders in connection with any merger or consolidation involving the
Company) except (A) dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and (B) dividends or distributions payable
to the Company or any Restricted Subsidiary (and, if such Restricted Subsidiary
is not a Wholly Owned Subsidiary, to its other shareholders on no more than a
pro rata basis, measured by value), (ii) purchase, redeem, retire or otherwise
acquire for value any Capital Stock of
<PAGE>
84
the Company or any Restricted Subsidiary held by Persons other than the Company
or another Restricted Subsidiary), (iii) purchase, repurchase, redeem, defease
or otherwise acquire or retire for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment, any Subordinated Obligations (other
than the purchase, repurchase, redemption or other acquisition of Subordinated
Obligations in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
acquisition) or (iv) make any Investment (other than a Permitted Investment) in
any Person (any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Investment being herein referred to
as a "Restricted Payment") if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment: (A) a Default shall have occurred and
be continuing (or would result therefrom); (B) the Company could not incur at
least an additional $1.00 of Indebtedness under the first paragraph (a) of the
covenant contained in Section 1010; or (C) the aggregate amount of such
Restricted Payment and all other Restricted Payments (the amount so expended, if
other than in cash, to be determined in good faith by the Company's Board of
Directors, whose determination shall be conclusive and evidenced by a resolution
of the Company's Board of Directors) declared or made subsequent to the date of
this Indenture would exceed the sum of: (1) 50% of the Consolidated Net Income
accrued during the period (treated as one accounting period) from the end of the
most recent fiscal quarter ending prior to the Issue Date to the end of the most
recent fiscal quarter ending prior to the date of such Restricted Payment for
which consolidated financial statements of the Company are available (or, in
case such Consolidated Net Income shall be a deficit, minus 100% of such
deficit); (2) the aggregate Net Cash Proceeds received by the Company from the
issuance or sale of its Capital Stock (other than Disqualified Stock) plus the
principal amount of convertible securities which have been converted into or
exchanged for Capital Stock (other than Disqualified Stock), in each case,
subsequent to the Issue Date (other than an issuance or sale to a Restricted
Subsidiary of the Company); provided that in the event such issuance or sale is
to an employee stock ownership plan or other trust established by the Company or
any of its Subsidiaries for the benefit of their employees, to the extent the
purchase by such plan or trust is financed by Indebtedness of such plan or trust
and for which the Company is liable as Guarantor or otherwise, such aggregate
amount of Net Cash Proceeds shall be limited to the aggregate amount of
principal payments made by such plan or trust with respect to such
Indebtedness); and (3) in the case of the disposition or repayment of any
Investment constituting a Restricted Payment (without duplication of any amount
deducted in calculating the amount of Investments at any time outstanding
included in the amount of Restricted Payments), an amount equal to the lesser of
(x) the return of capital or similar repayment with respect to such Investment
and (y) the initial amount of such Investment, in either case, less the cost of
the disposition of such Investment.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(i) any purchase, redemption, repurchase, defeasance, retirement or other
acquisition of Capital Stock of the Company or Subordinated Obligations made by
exchange (including any such exchange pursuant to the exercise of a conversion
right or privilege in connection with which cash is paid in lieu of the issuance
of fractional shares) for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
and other than Capital Stock issued or sold to a Subsidiary or an employee stock
ownership plan or other trust established by the Company or any of its
Subsidiaries); provided, however, that (A) such purchase, redemption,
repurchase, defeasance, retirement or other acquisition shall be excluded in
subsequent calculations of the amount of Restricted Payments and (B) the Net
Cash Proceeds or reduction of Indebtedness from such sale shall be excluded in
calculations under clauses (B) and (C) of the previous paragraph; (ii) any
purchase, redemption, repurchase, defeasance, retirement or other acquisition of
Subordinated Obligations made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Subordinated Obligations of the Company that
is permitted to be Incurred pursuant to the covenant contained in Section 1010;
provided, however, that such purchase, redemption, repurchase, defeasance,
retirement or other acquisition shall be excluded in subsequent calculations of
the amount of Restricted Payments; (iii) any purchase, redemption, repurchase,
defeasance, retirement or other acquisition of Subordinated Obligations from Net
Available Cash to the extent permitted by the covenant contained in Section
1017; provided, however, that such purchase, redemption, repurchase, defeasance,
retirement or other acquisition shall be excluded in subsequent calculations of
the amount of Restricted Payments; (iv)
<PAGE>
85
dividends paid within 60 days after the date of declaration thereof if at such
date of declaration such dividend would have complied with paragraph (a);
provided, however, that such dividend shall be included in subsequent
calculations of the amount of Restricted Payments; (v) any purchase or
redemption of any shares of Capital Stock of the Company from employees of the
Company and its Subsidiaries pursuant to the repurchase provisions under
employee stock option or stock purchase agreements or other agreements to
compensate management employees in an aggregate amount after the date of this
Indenture not in excess of $1.0 million in any fiscal year (excluding
repurchases and redemptions in connection with the Mergers), plus any unused
amounts under this clause (v) from prior fiscal years; provided, however, that
such purchases or redemptions shall be excluded in subsequent calculations of
the amount of Restricted Payments; (vi) Investments in Permitted Business
Ventures that in the aggregate do not exceed at any one time outstanding 10% of
Consolidated Tangible Assets less any amounts invested under clause (iv) of the
definition of "Additional Assets" (exclusive of those Permitted Business
Ventures in existence on the Issue Date); provided, however, that any such
Investments in Permitted Business Ventures shall be included in subsequent
calculations of the amount of Restricted Payments; (vii) any purchase,
redemption or repurchase of any shares of Capital Stock of the Company in
connection with the Mergers and as described in or contemplated by the Offering
Memorandum; provided, however, that any such purchases or redemptions shall be
excluded in subsequent calculations of the amount of Restricted Payments; or
(viii) other Restricted payments not to exceed $10.0 million in the aggregate.
(c) Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this Section 1009 were computed, which calculations may
be based upon the Company's latest available financial statements. The Trustee
shall have no duty to recompute or recalculate or verify the accuracy of the
information set forth in such Officers' Certificate.
(d) The Company will not permit any Unrestricted Subsidiary to become
a Restricted Subsidiary except pursuant to the second to last sentence of the
definition of "Unrestricted Subsidiary."
SECTION 1010. Limitation on Indebtedness.
--------------------------
(a) The Company shall not, and shall not permit any Restricted
Subsidiary to, Incur any Indebtedness; provided, however, that the Company or
any Restricted Subsidiary may Incur Indebtedness if on the date of the
Incurrence of such Indebtedness the Consolidated Coverage Ratio would be greater
than (i) 1.75 to 1.00, if such Indebtedness is Incurred on or prior to the
second anniversary of the Issue Date and (ii) 2.00 to 1.00 if such Indebtedness
is Incurred thereafter.
(b) Notwithstanding the foregoing, the Company and its Restricted
Subsidiaries may Incur the following Indebtedness: (i) Indebtedness Incurred
pursuant to the Senior Credit Facility (or any refinancing thereof) in a maximum
principal amount not to exceed at any time (A) an aggregate principal amount of
$740.0 million under the Term Loan Facility, plus (in the case of any
refinancing thereof) the aggregate amount of fees, underwriting discounts,
premiums and other costs and expenses incurred in connection with such
refinancing, less (1) the aggregate amount of all scheduled repayments of
principal applied to permanently reduce the Indebtedness outstanding under the
Term Loan Facility and (2) the excess of (a) the aggregate amount of all
mandatory prepayments of principal with Net Available Cash from
Asset Dispositions applied to permanently reduce the Indebtedness outstanding
under the Term Loan Facility over (b) $75.0 million and (B) an aggregate
principal amount outstanding at any time under the Revolving Credit Facility (or
any refinancing thereof) not to exceed $175.0 million; (ii) Indebtedness (A) of
the Company to any Restricted Subsidiary and (B) of any Wholly Owned Subsidiary
to the Company or any Restricted Subsidiary; provided, however, that any
subsequent issuance or transfer of any Capital Stock or any other event that
results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any other subsequent transfer of any such Indebtedness (except to
the Company or a Wholly Owned Subsidiary) will be deemed, in each case, an
Incurrence of Indebtedness by the Company or such Restricted Subsidiary, as the
case may be, in the amount that remains outstanding following such issuance or
transfer
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86
of such securities; (iii) Indebtedness represented by the Notes, any
Indebtedness (other than the Indebtedness described in clauses (i) or (ii)
above) outstanding on the date of this Indenture and any Refinancing
Indebtedness Incurred in respect of any Indebtedness described in this clause
(iii) or the previous paragraph; (iv) Indebtedness of the Company or any
Restricted Subsidiary in the form of Capitalized Lease Obligations, Purchase
Money Obligations or Attributable Debt, and any Refinancing Indebtedness with
respect thereto, in an aggregate amount not in excess of 7.5% of Consolidated
Tangible Assets at any one time outstanding; (v) Indebtedness represented by
Guarantees of Indebtedness Incurred pursuant to the covenant contained in this
section; (vi) Indebtedness under Hedging Obligations; provided, however, that
such Hedging Obligations are entered into for bona fide hedging purposes of the
Company or any Restricted Subsidiary and are in the ordinary course of business;
(vii) Indebtedness evidenced by letters of credit issued in the ordinary course
of business of the Company to secure workers' compensation and other insurance
coverages; and (viii) Indebtedness (which may comprise Bank Indebtedness) in an
aggregate principal amount at any one time outstanding not in excess of the
greater of (A) $75.0 million and (B) an amount equal to 5.0% of Consolidated
Tangible Assets.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph that permits Refinancing
Indebtedness in respect of Indebtedness constituting Subordinated Obligations if
the proceeds of such Refinancing Indebtedness are used, directly or indirectly,
to Refinance such Subordinated Obligations, unless such Refinancing Indebtedness
will be subordinated to the Notes at least to the same extent as such
Subordinated Obligations.
(d) For purposes of determining compliance with, and the outstanding
principal amount of any particular Indebtedness Incurred pursuant to and in
compliance with, this covenant, (i) in the event that Indebtedness meets the
criteria of more than one of the types of Indebtedness described in paragraph
(b) of this Section, the Company, in its sole discretion, shall classify such
item of Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses; and (ii) the amount of Indebtedness issued
at a price that is less than the principal amount thereof shall be equal to the
amount of the liability in respect thereof determined in accordance with GAAP.
(e) The Company will not permit any Unrestricted Subsidiary to Incur
any Indebtedness other than Non-Recourse Debt and Guarantees of Indebtedness
Incurred in accordance with paragraphs (a) and (b) of the covenant contained in
this section; provided, however, if any such Indebtedness ceases to be Non-
Recourse Debt, such event shall be deemed to constitute an incurrence of
Indebtedness by the Company or a Restricted Subsidiary.
SECTION 1011. Limitation on Layering.
----------------------
The Company shall not incur any Indebtedness that is expressly
subordinate in right of payment to any Senior Indebtedness unless such
Indebtedness is Senior Subordinated Indebtedness or is contractually
subordinated in right of payment to Senior Subordinated Indebtedness. Unsecured
Indebtedness is not deemed to be subordinate or junior to Secured Indebtedness
merely because it is unsecured, and Indebtedness that is not guaranteed by a
particular person is not deemed to be subordinate or junior to Indebtedness that
is so guaranteed merely because it is not so guaranteed.
SECTION 1012. Limitation on Affiliate Transactions.
------------------------------------
(a) The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, enter into or conduct any transaction or
series of transactions (including the purchase, sale, lease or exchange of any
property or the rendering of any service with any Affiliate of the Company (an
"Affiliate Transaction") on terms (i) that taken as a whole are less favorable
to the Company or such Restricted Subsidiary, as the case may be, than those
that could be obtained at the time of such transaction in arm's-length dealings
with a Person who is not such an Affiliate and (ii) that, in the event such
Affiliate Transaction involves an aggregate amount in excess of $10.0 million,
are not in writing and have not been approved by
<PAGE>
87
a majority of the members of the Board of Directors having no material personal
financial interest in such Affiliate Transaction or, in the event there are no
such members, as to which the Company has not obtained a Fairness Opinion (as
hereinafter defined). In addition, any transaction involving aggregate payments
or other transfers by the Company and its Restricted Subsidiaries in excess of
$20.0 million will also require an opinion (a "Fairness Opinion") from an
independent investment banking firm or appraiser, as appropriate, of national
prominence, to the effect that the terms of such transaction are no less
favorable to the Company or such Restricted Subsidiary, as the case may be, than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not an Affiliate.
(b) The provisions of the foregoing paragraph (a) shall not prohibit
(i) any Restricted Payment permitted by Section 1009, any Permitted Investment,
or any other transaction specifically excluded from the definition of
"Restricted Payment", (ii) the performance of the Company's or Restricted
Subsidiary's obligations under any employment contract, collective bargaining
agreement, agreement for the provision of services, employee benefit plan,
related trust agreement or any other similar arrangement heretofore or hereafter
entered into in the ordinary course of business, (iii) payment of compensation,
performance of indemnification or contribution obligations, or any issuance,
grant or award of stock, options or other securities, to employees, officers or
directors in the ordinary course of business, (iv) any transaction between the
Company and a Restricted Subsidiary or between Restricted Subsidiaries, (v) the
Transactions and the incurrence and payment of all fees and expenses payable in
connection therewith as described in or contemplated by the Offering Memorandum,
(vi) any other transaction arising out of agreements in existence on the Issue
Date, including, without limitation, the Stockholders Agreement and the
Registration Rights Agreement (each as described in the Offering Memorandum
under "Certain Related Transactions and Agreements"), and (vii) transactions
with suppliers or other purchasers or sellers of goods or services, in each case
in the ordinary course of business and on terms no less favorable to the Company
or the Restricted Subsidiary, as the case may be, than those that could be
obtained at such time in arm's-length dealings with a Person which is not an
Affiliate.
SECTION 1013. Limitation on Restrictions on Distributions from
------------------------------------------------
Restricted Subsidiaries.
- -----------------------
The Company will not, and will not permit any Restricted Subsidiary
to, create or otherwise cause or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligations owed to the Company, (ii)
make any loans or advances to the Company or (iii) transfer any of its property
or assets to the Company, except (A) any encumbrance or restriction pursuant to
an agreement in effect at or entered into on the date of the Indenture
(including, without limitation, the Senior Credit Facility); (B) any encumbrance
or restriction with respect to a Restricted Subsidiary (1) pursuant to an
agreement relating to any Indebtedness Incurred by a Restricted Subsidiary prior
to the date on which such Restricted Subsidiary was acquired by the Company, or
of another Person that is assumed by the Company or a Restricted Subsidiary in
connection with the acquisition of assets from, or merger or consolidation with,
such Person (other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was acquired by the Company, or
such acquisition of assets, merger or consolidation) and outstanding on the date
of such acquisition, merger or consolidation or (2) pursuant to any agreement
(not relating to any Indebtedness) in existence when a Person becomes a
Subsidiary of the Company or when such agreement is acquired by the Company or
any Subsidiary thereof, that is not created in contemplation of such Person
becoming such a Subsidiary or such acquisition (for purposes of this clause (B),
if another Person is the Successor Company, any Subsidiary or agreement thereof
shall be deemed acquired or assumed, as the case may be, by the Company when
such Person becomes the Successor Company); (C) any encumbrance or restriction
with respect to a Restricted Subsidiary pursuant to an agreement (a "Refinancing
Agreement") effecting a refinancing of Indebtedness Incurred pursuant to, or
that otherwise extends, renews, refinances or replaces, an agreement referred to
in clause (A) or (B) of this covenant or this clause (C) or contained in any
amendment to an agreement referred to in clause (A) or (B) of this covenant or
this clause (C) (an "Initial
<PAGE>
88
Agreement") or contained in any amendment to an Initial Agreement; provided,
however, that the encumbrances and restrictions contained in any such
Refinancing Agreement or amendment are no less favorable to the Holders of the
Notes taken as a whole than encumbrances and restrictions contained in the
Initial Agreement or Agreements to which such Refinancing Agreement or amendment
relates; (D) any encumbrance or restriction (1) that restricts in a customary
manner the subletting, assignment or transfer of any property or asset that is
subject to a lease, license or similar contract, or the assignment or transfer
of any lease, license or other contract, (2) by virtue of any transfer of,
agreement to transfer, option or right with respect to, or Lien on, any property
or assets of the Company or any Restricted Subsidiary not otherwise prohibited
by the Indenture, (3) contained in mortgages, pledges or other security
agreements securing Indebtedness of a Restricted Subsidiary to the extent such
encumbrance or restrictions restrict the transfer of the property subject to
such mortgages, pledges or other security agreements or (4) pursuant to
customary provisions restricting dispositions of real property interests set
forth in any reciprocal easement agreements of the Company or any Restricted
Subsidiary; (E) any restriction with respect to a Restricted Subsidiary (or any
of its property or assets) imposed pursuant to an agreement entered into for the
direct or indirect sale or disposition of all or substantially all the Capital
Stock or assets of such Restricted Subsidiary (or the property or assets that
are subject to such restriction) pending the closing of such sale or
disposition; and (F) any encumbrance or restriction on the transfer of property
or assets required by any regulatory authority having jurisdiction over the
Company or any Restricted Subsidiary or any of their businesses.
SECTION 1014. Limitation on Sale or Issuance of Preferred Stock of
----------------------------------------------------
Restricted Subsidiaries.
- -----------------------
The Company shall not sell any shares of Preferred Stock of a
Restricted Subsidiary, and shall not permit any Restricted Subsidiary, directly
or indirectly, to issue or sell any shares of its Preferred Stock to any Person
(other than to the Company or a Restricted Subsidiary).
SECTION 1015. Limitation on Liens.
-------------------
The Company shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, create or permit to exist any Lien (other than
Permitted Liens) on any of its property or assets (including Capital Stock),
whether owned on the date of this Indenture or thereafter acquired, securing any
Indebtedness that is not Senior Indebtedness (the "Initial Lien"), unless
contemporaneously therewith effective provision is made to secure the
obligations due under this Indenture and the Notes or, in respect of Liens on
any Restricted Subsidiary's property or assets, equally and ratably with such
obligation for so long as such obligation is secured by such Initial Lien. Any
such Lien thereby created in favor of the Notes will be automatically and
unconditionally released and discharged upon (i) the release and discharge of
the Initial Lien to which it relates, or (ii) any sale, exchange or transfer to
any Person not an Affiliate of the Company of the property or assets secured by
such Initial Lien, or of all of the Capital Stock held by the Company or any
Restricted Subsidiary in, or all or substantially all the assets of, any
Restricted Subsidiary creating such Lien.
SECTION 1016. Change of Control.
-----------------
(a) Upon the occurrence of a Change of Control, each Holder will have
the right to require the Company to repurchase all or any part of such Holder's
Notes at a purchase price in cash equal to 101% of the principal amount (or
Accreted Value, as the case may be) thereof, plus accrued and unpaid interest,
if any, to the date of repurchase (subject to the right of Holders of record on
the relevant record date to receive interest due on the relevant interest
payment date) (the "Change of Control Offer"); provided, however, that
notwithstanding the occurrence of a Change of Control, the Company shall not be
obligated to purchase the Notes pursuant to this covenant in the event that it
has exercised its right to redeem all of the Notes pursuant to Section 1101.
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89
(b) Within 30 days following any Change of Control, unless the Company
has mailed a redemption notice in connection with such Change of Control as
described in Section 1105, the Company shall mail a notice to each holder with a
copy to the Trustee stating:
(i) that a Change of Control has occurred or will occur and
that such Holder has (or upon such occurrence will have) the right to
require the Company to purchase such Holder's Notes at a purchase price in
cash equal to (i) 101% of the principal amount thereof, in the case of
Senior Subordinated Notes, plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of Holders of record on a record
date to receive interest on the relevant interest payment date) and (ii)
prior to November 1, 2002, 101% of the Accreted Value on the purchase date,
in the case of the Senior Subordinated Discount Notes, and thereafter, 101%
of the principal amount, plus accrued and unpaid interest, if any, thereon,
to the purchase date;
(ii) the circumstances and relevant facts and financial
information regarding such Change of Control;
(iii) the date of purchase (which shall be no earlier than 30
days nor later than 90 days from the date such notice is mailed);
(iv) the instructions determined by the Company, consistent
with this covenant, that a Holder must follow in order to have its Notes
purchased; and
(v) that, if such offer is made prior to such Change of
Control, payment is conditioned on the occurrence of such Change of
Control.
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Indenture, the Company will comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations described in this Indenture by virtue thereof.
SECTION 1017. Limitation on Sales of Assets.
-----------------------------
(a) The Company will not, and will not permit any Restricted
Subsidiary to, make any Asset Disposition unless (i) at least 75% of the
consideration therefor (excluding, in the case of an Asset Disposition of
assets, any consideration by way of relief from, or by any other person assuming
responsibility for, any liabilities, contingent or otherwise, which are not
Indebtedness) received by the Company or such Restricted Subsidiary is in the
form of cash and (ii) an amount equal to 100% of the Net Available Cash from
such Asset Disposition is applied by the Company (or such Restricted Subsidiary,
as the case may be) (A) first, to the extent the Company elects (or is required
by the terms of any Senior Indebtedness or Indebtedness (other than Preferred
Stock) of a Restricted Subsidiary), to prepay, repay or purchase Senior
Indebtedness or such Indebtedness of a Restricted Subsidiary (in each case other
than Indebtedness owed to the Company or a Restricted Subsidiary of the Company)
within 365 days after the date of such Asset Disposition; (B) second, to the
------
extent of the balance of Net Available Cash after application in accordance with
clause (A), to the extent the Company or such Restricted Subsidiary elects, to
reinvest in Additional Assets (including by means of an Investment in Additional
Assets by a Restricted Subsidiary with Net Available Cash received by the
Company or another Restricted Subsidiary) within 365 days from the date of such
Asset Disposition or, if such reinvestment in Additional Assets is a project
authorized by the Board of Directors that will take longer than 365 days to
complete, the period of time necessary to complete such project; (C) third, to
-----
the extent of the balance of such Net Available Cash after application in
accordance with clauses (A) and (B) (such balance, the "Excess Proceeds"), to
make an offer to purchase Notes at a price in cash equal to (i) in the case of
the Senior Subordinated Notes, 100% of the principal amount thereof, plus
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90
accrued and unpaid interest, if any, to the purchase date and (ii) in the case
of the Senior Subordinated Discount Notes, prior to November 1, 2002, 100% of
the Accreted Value thereof on the purchase date and thereafter, 100% of the
Accreted Value thereof, plus accrued and unpaid interest, if any, thereon to the
purchase date, and (to the extent required by the terms thereof) any other
Senior Subordinated Indebtedness pursuant and subject to the conditions of the
agreements governing such other Indebtedness at a purchase price of 100% of the
principal amount thereof plus accrued and unpaid interest to the purchase date
and (D) fourth, to the extent of the balance of such Excess Proceeds after
application in accordance with clauses (A), (B) and (C) above, to fund (to the
extent consistent with any other applicable provision of this Indenture) any
general corporate purpose (including the repayment of Subordinated Obligations);
provided, however, that in connection with any prepayment, repayment or purchase
of Indebtedness pursuant to clause (A) or (C) above, the Company or such
Restricted Subsidiary will retire such Indebtedness and will cause the related
loan commitment (if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing
provisions of this covenant, the Company and the Restricted Subsidiaries shall
not be required to apply any Net Available Cash in accordance with this covenant
except to the extent that the aggregate Net Available Cash from all Asset
Dispositions that is not applied in accordance with this covenant exceeds $10.0
million.
To the extent that the aggregate principal amount (or Accreted Value,
as the case may be) of the Notes and other Senior Subordinated Indebtedness
tendered pursuant to an offer to purchase made in accordance with clause (C)
above exceeds the amount of Excess Proceeds, the Trustee shall select the Notes
and Senior Subordinated Indebtedness to be purchased on a pro rata basis, based
on the aggregate principal amount (or Accreted Value, as applicable) thereof
surrendered in such offer to purchase. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset to zero.
For the purposes of this covenant, the following are deemed to be
cash: (v) Cash Equivalents, (w) the assumption of Indebtedness of the Company
(other than Disqualified Stock of the Company) or any Restricted Subsidiary and
the release of the Company or such Restricted Subsidiary from all liability on
such Indebtedness in connection with such Asset Disposition, (x) Indebtedness of
any Restricted Subsidiary that is no longer a Restricted Subsidiary as a result
of such Asset Disposition, to the extent that the Company and each other
Restricted Subsidiary is released from any Guarantee (or is the beneficiary of
any indemnity with respect thereto which is secured by any letter of credit or
cash equivalents) of such Indebtedness in connection with such Asset
Disposition, (y) securities received by the Company or any Restricted Subsidiary
from the transferee that are promptly converted by the Company or such
Restricted Subsidiary into cash, and (z) consideration consisting of
Indebtedness of the Company or any Restricted Subsidiary.
(b) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
(c) In the event of an Asset Disposition that requires the purchase of
Notes pursuant to clause (a)(iii)(C), the Company will be required to purchase
Notes tendered pursuant to an offer by the Company for the Notes at a purchase
price of 100% of their principal amount plus accrued and unpaid interest, if
any, to the purchase date in accordance with the procedures (including prorating
in the event of oversubscription) set forth in this Indenture.
SECTION 1018. Statement by Officers as to Default.
-----------------------------------
(a) The Company will deliver to the Trustee, within 120 days after the
end of each fiscal year, an Officers' Certificate stating that a review of the
activities of the Company and its Restricted Subsidiaries during the preceding
fiscal year has been made under the supervision of the signing officers
<PAGE>
91
with a view to determining whether it has kept, observed, performed and
fulfilled, and has caused each of its Restricted Subsidiaries to keep, observe,
perform and fulfill its obligations under this Indenture and further stating, as
to each such officer signing such certificate, that, to the best of his or her
knowledge, the Company during such preceding fiscal year has kept, observed,
performed and fulfilled, and has caused each of its Restricted Subsidiaries to
keep, observe, perform and fulfill each and every such covenant contained in
this Indenture and no Default or Event of Default occurred during such year and
at the date of such certificate there is no Default or Event of Default which
has occurred and is continuing or, if such signers do know of such Default or
Event of Default, the certificate shall describe its status, with particularity
and that, to the best of his or her knowledge, no event has occurred and remains
by reason of which payments on the account of the principal of or interest, if
any, on the Notes is prohibited or if such event has occurred, a description of
the event and what action each is taking or proposes to take with respect
thereto. The Officers' Certificate shall also notify the Trustee should the
Company elect to change the manner in which it fixes its fiscal year end. For
purposes of this Section 1018(a), such compliance shall be determined without
regard to any period of grace or requirement of notice under this Indenture.
(b) When any Default has occurred and is continuing under this
Indenture, or if the trustee for or the holder of any other evidence of
Indebtedness of the Company or any Significant Subsidiary gives any notice or
takes any other action with respect to a claimed default (other than with
respect to Indebtedness in the principal amount of less than $20 million), the
Company shall deliver to the Trustee by registered or certified mail or
facsimile transmission an Officers' Certificate specifying such event, notice or
other action within five Business Days of its occurrence.
SECTION 1019. Reporting Requirements.
----------------------
As long as any of the Notes is outstanding, the Company will file with
the Commission the annual reports, quarterly reports and other documents
required to be filed with the Commission pursuant to Sections 13 and 15 of the
Exchange Act, whether or not the Company is then obligated to file reports
pursuant to such sections. The Company will be required to file with the Trustee
and provide to each holder of Notes within 15 days after filing with the
Commission (or if any such filing is not required under the Exchange Act, 15
days after the Company would have been required to make such filing) copies of
such reports and documents.
SECTION 1020. Limitations on Issuances of Guarantees of Indebtedness
------------------------------------------------------
by Restricted Subsidiaries.
- --------------------------
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee the payment of any Senior Subordinated Indebtedness (or
other Indebtedness ranking junior thereto) of the Company or any of its
Restricted Subsidiaries unless such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture to this Indenture providing for
the Guarantee of the payment of the Notes by such Restricted Subsidiary, which
Guarantee shall be senior to or pari passu with such Restricted Subsidiary's
Guarantee of such Indebtedness. Notwithstanding the foregoing, any such
Guarantee by a Restricted Subsidiary of the Notes shall provide by its terms
that it shall be automatically and unconditionally released and discharged upon
a sale or other disposition, by way of merger or otherwise, to any Person not an
Affiliate of the Company, of the Company's stock in, or the assets of, such
Restricted Subsidiary, which sale or other disposition results in such
Restricted Subsidiary ceasing to be a Restricted Subsidiary and such sale or
other disposition is made in compliance with, and the net proceeds therefrom are
applied in accordance with, the applicable provisions of this Indenture. The
foregoing provisions will not be applicable to (i) Guarantees by Restricted
Subsidiaries of the Company's Indebtedness under the Senior Credit Agreement and
with respect to Hedging Obligations related to the Senior Credit Agreement and
(ii) Guarantees of Indebtedness of a Person by its subsidiaries in effect prior
to the time such Person is merged with or into or become a Restricted
Subsidiary, provided that such Guarantees do not extend to any other
Indebtedness of such Person or any other Person.
<PAGE>
92
SECTION 1021. Designation of Unrestricted Subsidiaries.
----------------------------------------
The Board of Directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and would otherwise be permitted under
Section 1009 (including pursuant to clause (vi) thereof relating to Permitted
Business Ventures). All such outstanding Investments will be deemed to
constitute Investments in an amount equal to the greater of the fair market
value or the book value of such Investments at the time of such designation.
Such designation will only be permitted if such Restricted Payment would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary. Unrestricted Subsidiaries will not be
subject to any of the restrictive covenants set forth in this Indenture.
1100. ARTICLE ELEVEN. REDEMPTION OF NOTES
SECTION 1101. Optional Redemption.
-------------------
The Notes may or shall, as the case may be, be redeemed, as a whole or
from time to time in part, subject to the conditions and at the Redemption
Prices specified in the form of Note, together with accrued interest to the
redemption date. The aggregate principal amount of the Senior Subordinated
Notes and the Senior Subordinated Discount Notes to be redeemed shall be
allocated by the Company between the Senior Subordinated Notes and the Senior
Subordinated Discount Notes in the Company's sole discretion.
SECTION 1102. Applicability of Article.
------------------------
Redemption of Notes at the election of the Company or otherwise, as
permitted or required by any provision of this Indenture, shall be made in
accordance with such provision and this Article.
SECTION 1103. Election to Redeem; Notice to Trustee.
-------------------------------------
The election of the Company to redeem any Notes pursuant to Section
1101 shall be evidenced by a Board Resolution. In case of any redemption at the
election of the Company, the Company shall, at least 90 days prior to the
Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee), notify the Trustee of such Redemption Date and of
the principal amount of Notes to be redeemed and shall deliver to the Trustee
such documentation and records as shall enable the Trustee to select the Notes
to be redeemed pursuant to Section 1104.
SECTION 1104. Selection by Trustee of Notes to Be Redeemed.
--------------------------------------------
If less than all the Notes are to be redeemed at any time pursuant to
an optional redemption, the particular Notes to be redeemed shall be selected
not more than 90 days prior to the Redemption Date by the Trustee, from the
Outstanding Notes not previously called for redemption, in compliance with the
requirements of the principal securities exchange, if any, on which such Notes
are listed, or, if such Notes are not so listed, on a pro rata basis, by lot or
by such other method as the Trustee shall deem fair and appropriate (and in such
manner as complies with applicable legal requirements) and which may provide for
the selection for redemption of portions of the principal of the Notes;
provided, however, that no such partial redemption shall reduce the portion of
the principal amount of a Note not redeemed to less than $1,000.
<PAGE>
93
The Trustee shall promptly notify the Company in writing of the Notes
selected for redemption and, in the case of any Notes selected for partial
redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to redemption of Notes shall relate, in the
case of any Note redeemed or to be redeemed only in part, to the portion of the
principal amount of such Note which has been or is to be redeemed.
SECTION 1105. Notice of Redemption.
--------------------
Notice of redemption shall be given in the manner provided for in
Section 106 not less than 30 nor more than 90 days prior to the Redemption Date,
to each Holder of Notes to be redeemed. The Trustee shall give notice of
redemption in the Company's name and at the Company's expense; provided,
however, that the Company shall deliver to the Trustee, at least 45 days prior
to the Redemption Date, an Officers' Certificate requesting that the Trustee
give such notice and setting forth the information to be stated in such notice
as provided in the following items.
All notices of redemption shall state:
(i) the Redemption Date,
(ii) the Redemption Price and the amount of accrued interest to
the Redemption Date payable as provided in Section 1107, if any,
(iii) if less than all Outstanding Notes are to be redeemed,
the identification of the particular Notes (or portion thereof) to be
redeemed, as well as the aggregate principal amount of Notes to be redeemed
and the aggregate principal amount of Notes to be Outstanding after such
partial redemption,
(iv) in case any Note is to be redeemed in part only, the
notice which relates to such Note shall state that on and after the
Redemption Date, upon surrender of such Note, the holder will receive,
without charge, a new Note or Notes of authorized denominations for the
principal amount thereof remaining unredeemed,
(v) that on the Redemption Date the Redemption Price (and
accrued interest, if any, to the Redemption Date payable as provided in
Section 1107) will become due and payable upon each such Note, or the
portion thereof, to be redeemed, and, unless the Company defaults in making
the redemption payment, that interest on Notes called for redemption (or
the portion thereof) will cease to accrue on and after said date,
(vi) the place or places where such Notes are to be surrendered
for payment of the Redemption Price and accrued interest, if any,
(vii) the name and address of the Paying Agent,
(viii) that Notes called for redemption must be surrendered to
the Paying Agent to collect the Redemption Price,
(ix) the CUSIP number, and that no representation is made as to
the accuracy or correctness of the CUSIP number, if any, listed in such
notice or printed on the Notes, and
(x) the paragraph of the Notes or Section of the Indenture
pursuant to which the Notes are to be redeemed.
<PAGE>
94
SECTION 1106. Deposit of Redemption Price.
---------------------------
Prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 1003) an amount of
money sufficient to pay the Redemption Price of, and accrued interest on, all
the Notes which are to be redeemed on that date.
SECTION 1107. Notes Payable on Redemption Date.
--------------------------------
Notice of redemption having been given as aforesaid, the Notes so to
be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified (together with accrued interest, if any, to
the Redemption Date), and from and after such date (unless the Company shall
default in the payment of the Redemption Price and accrued interest) such Notes
shall cease to bear interest. Upon surrender of any such Note for redemption in
accordance with said notice, such Note shall be paid by the Company at the
Redemption Price, together with accrued interest, if any, to the Redemption
Date; provided, however, that installments of interest whose Stated Maturity is
on or prior to the Redemption Date shall be payable to the Holders of such
Notes, or one or more Predecessor Notes, registered as such at the close of
business on the relevant Regular Record Date or Special Record Date, as the case
may be, according to their terms and the provisions of Section 311.
If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the principal (and premium, if any) shall, until paid,
bear interest from the Redemption Date at the rate borne by the Notes.
SECTION 1108. Notes Redeemed in Part.
----------------------
Any Note which is to be redeemed only in part (pursuant to the
provisions of this Article) shall be surrendered at the office or agency of the
Company maintained for such purpose pursuant to Section 1002 (with, if the
Company or the Trustee so requires, due endorsement by, or a written instrument
of transfer in form satisfactory to the Company and the Trustee duly executed
by, the Holder thereof or such Holder's attorney duly authorized in writing),
and the Company shall execute, and the Trustee shall authenticate and deliver to
the Holder of such Note at the expense of the Company, a new Note or Notes, of
any authorized denomination as requested by such Holder, in an aggregate
principal amount equal to and in exchange for the unredeemed portion of the
principal of the Note so surrendered, provided, that each such new Note will be
in a principal amount of $1,000 or integral multiple thereof.
1200. ARTICLE TWELVE. LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1201. Company's Option to Effect Legal Defeasance or Covenant
-------------------------------------------------------
Defeasance.
- ----------
The Company and the Guarantors may, at their option, at any time, with
respect to the Notes, elect to have either Section 1202 or Section 1203 be
applied to all Outstanding Notes upon compliance with the conditions set forth
in this Article Twelve. The Company in its sole discretion can defease either
or both of the Senior Subordinated Notes and the Senior Subordinated Discount
Notes.
SECTION 1202. Legal Defeasance and Discharge.
------------------------------
Upon the Company's exercise under Section 1201 of the option
applicable to this Section 1202, the Company and any Guarantor shall be deemed
to have been discharged from its obligations with respect to all Outstanding
Notes on the date the conditions set forth in Section 1204 are satisfied
(hereinafter, "Legal Defeasance"). For this purpose, such Legal Defeasance
means that the Company and any such Guarantor shall be deemed to have paid and
discharged the entire Indebtedness
<PAGE>
95
represented by the Outstanding Notes, which shall thereafter be deemed to be
"Outstanding" only for the purposes of Section 1205 and the other Sections of
this Indenture referred to in (i) and (ii) below, and to have satisfied all its
other obligations under such Notes and this Indenture insofar as such Notes are
concerned (and the Trustee, at the expense of the Company, shall execute proper
instruments acknowledging the same), except for the following which shall
survive until otherwise terminated or discharged hereunder: (i) the rights of
Holders of Outstanding Notes to receive, solely from the trust fund described in
Section 1204 and as more fully set forth in such Section, payments in respect of
the principal of (and premium, if any, on) and interest on such Notes when such
payments are due, (ii) the Company's obligations with respect to such Notes
under Sections 304, 305, 310, 1002 and 1003, (iii) the rights, powers, trusts,
duties and immunities of the Trustee hereunder, and the Company's obligations in
connection therewith and (iv) this Article Twelve.
If the Company exercises its Legal Defeasance Option, payment of the
Notes may not be accelerated because of an Event of Default.
Subject to compliance with this Article Twelve, the Company may
exercise its option under this Section 1202 notwithstanding the prior exercise
of its option under Section 1203 with respect to the Notes.
SECTION 1203. Covenant Defeasance.
-------------------
Upon the Company's exercise under Section 1201 of the option
applicable to this Section 1203, the Company may terminate (i) its obligations
under any covenant contained in Sections 1004 through 1021, (ii) the operation
of Section 501(vi), Section 501(vii) (with respect only to Significant
Subsidiaries), Section 501(viii) (with respect only to Significant Subsidiaries)
and Section 501(ix) and (iii) the limitations contained in Sections 801(a)(iii)
and (iv) with respect to the Outstanding Notes on and after the date the
conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"),
and the Notes shall thereafter be deemed not to be "Outstanding" for the
purposes of any direction, waiver, consent or declaration or Act of Holders (and
the consequences of any thereof) in connection with such covenants, but shall
continue to be deemed "Outstanding" for all other purposes hereunder (it being
understood that such Notes will not be outstanding for accounting purposes). If
the Company exercises its covenant defeasance option, payment of the Notes may
not be accelerated because of an Event of Default specified under Section
501(iv), (vi), (vii) (with respect only to Significant Subsidiaries), (viii)
(with respect only to Significant Subsidiaries) and (ix) or because of the
failure of the Company to comply with Sections 801(a)(iii) and (iv). For this
purpose, such Covenant Defeasance means that, with respect to the Outstanding
Notes, the Company may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such covenant,
whether directly or indirectly, by reason of any reference elsewhere herein to
any such covenant or by reason of any reference in any such covenant to any
other provision herein or in any other document and such omission to comply
shall not constitute a Default or an Event of Default under Section 501(iv),
but, except as specified above, the remainder of this Indenture and such Notes
shall be unaffected thereby.
SECTION 1204. Conditions to Legal Defeasance or Covenant Defeasance.
-----------------------------------------------------
The following shall be the conditions to application of either Section
1202 or Section 1203 to the Outstanding Notes:
(i) The Company shall irrevocably have deposited or caused to
be deposited with the Trustee (or another trustee satisfying the
requirements of this Indenture who shall agree to comply with the
provisions of this Article Twelve applicable to it) as trust funds in trust
money or Government Obligations, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public
accountants selected by the Company, to pay the principal of, premium, if
any,
<PAGE>
96
and interest due on the Outstanding Notes on the Stated Maturity or on the
applicable Redemption Date as the case may be, of such principal, premium,
if any, or interest on the Outstanding Notes;
(ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee (which opinion may be subject to
customary assumptions and exclusions) confirming that (A) the Company has
received from, or there has been published by, the United States Internal
Revenue Service a ruling or (B) since the Issue Date, there has been a
change in the applicable U.S. federal income tax law, in either case to the
effect that, and based thereon such Opinion of Counsel in the United States
(which opinion may be subject to customary assumptions and exclusions)
shall confirm that the Holders of the Outstanding Notes will not recognize
income, gain or loss for U.S. federal income tax purposes as a result of
such Legal Defeasance and will be subject to U.S. federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall
have delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee confirming that, subject to customary
assumptions and exclusions, the Holders of the Outstanding Notes will not
recognize income, gain or loss for U.S. federal income tax purposes as a
result of such Covenant Defeasance and will be subject to such tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 123rd day after the date of deposit;
(v) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, any
material agreement or instrument (other than this Indenture) to which the
Company or any Guarantor is a party or by which the Company or any
Guarantor is bound;
(vi) the Company shall have delivered to the Trustee an Opinion
of Counsel to the effect that, as of the date of such opinion and subject
to customary assumptions and exclusions following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally under any applicable U.S. federal or state law, and that the
Trustee has a perfected security interest in such trust funds for the
ratable benefit of the Holders;
(vii) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company
with the intent of defeating, hindering, delaying or defrauding any
creditors of the Company or any Guarantor or others;
(viii) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel in the United States (which
Opinion of Counsel may be subject to customary assumptions and exclusions)
each stating that all conditions precedent provided for or relating to the
Legal Defeasance or the Covenant Defeasance, as the case may be, have been
complied with; and
(ix) the Company shall have delivered to the Trustee the
opinion of a nationally recognized firm of independent public accountants
stating the matters set forth in paragraph (i) above.
<PAGE>
97
SECTION 1205. Deposited Money and Government Obligations to Be Held
-----------------------------------------------------
in Trust; Other Miscellaneous Provisions.
- ----------------------------------------
Subject to the provisions of the last paragraph of Section 1003, all
money and Government Obligations (including the proceeds thereof) deposited with
the Trustee (or other qualifying trustee, collectively for purposes of this
Section 1205, the "Trustee") pursuant to Section 1204 in respect of the
Outstanding Notes shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Notes and this Indenture, to the payment,
either directly or through any Paying Agent (including the Company acting as its
own Paying Agent) as the Trustee may determine, to the Holders of such Notes of
all sums due and to become due thereon in respect of principal (and premium, if
any) and interest, but such money need not be segregated from other funds except
to the extent required by law. Money and Government Obligations so held in
trust are not subject to Article Thirteen.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the Government Obligations
deposited pursuant to Section 1204 or the principal and interest received in
respect thereof.
Anything in this Article Twelve to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or Government Obligations held by it as provided in Section
1204 which, in the opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to the
Trustee, are in excess of the amount thereof which would then be required to be
deposited to effect an equivalent legal defeasance or covenant defeasance, as
applicable, in accordance with this Article.
SECTION 1206. Reinstatement.
-------------
If the Trustee or any Paying Agent is unable to apply any money or
Government Obligations in accordance with Section 1205 by reason of any legal
proceeding or by any reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Company's obligations under this Indenture and the Notes
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 1202 or 1203, as the case may be, until such time as the Trustee or
Paying Agent is permitted to apply all such money in accordance with Section
1205; provided, however, that if the Company makes any payment of principal of
(or premium, if any) or interest on any Note following the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Notes to receive such payment from the money and Government Obligations
held by the Trustee or Paying Agent.
1300. ARTICLE THIRTEEN. SUBORDINATION OF NOTES
SECTION 1301. Notes Subordinate to Senior Indebtedness.
----------------------------------------
The Company covenants and agrees, and each Holder of a Note, by his
acceptance thereof, likewise covenants and agrees, for the benefit of the
holders, from time to time, of Senior Indebtedness that, to the extent and in
the manner hereinafter set forth in this Article, the Indebtedness represented
by the Notes and the payment of the principal of (and premium, if any) and
interest on each and all of the Notes and all other Subordinated Obligations are
hereby expressly made subordinate and subject in right of payment as provided in
this Article to the prior payment in full in cash or Cash Equivalents of all
Senior Indebtedness, whether outstanding on the Issue Date or thereafter
incurred, created, assumed or, except as set forth in Section 1014, guaranteed.
The Senior Subordinated Notes and the Senior Subordinated Discount Notes will in
all respects rank pari passu with each other and with all other Senior
Subordinated Indebtedness of the Company.
<PAGE>
98
SECTION 1302. Payment over of Proceeds upon Dissolution, Etc.
----------------------------------------------
Upon any payment or distribution of the assets of the Company upon a
total or partial liquidation or dissolution or reorganization or bankruptcy of
or similar proceeding relating to the Company or its property:
(i) the holders of Senior Indebtedness will be entitled to
receive payment in full in cash or Cash Equivalents of the Senior
Indebtedness (including interest after, or which would accrue but for, the
commencement of any proceeding at the rate specified in the applicable
Senior Indebtedness, whether or not a claim for such interest would be
allowed in a proceeding) before the holders of the Notes are entitled to
receive any payment, and
(ii) until the Senior Indebtedness is paid in full in cash or
Cash Equivalents, any payment or distribution to which holders of the Notes
would be entitled but for the subordination provisions of this Indenture
will be made to holders of the Senior Indebtedness as their interests may
appear (except that holders of Notes may receive securities that are
subordinated at least to the same extent as the Notes to the Senior
Indebtedness and any securities issued in exchange for any Senior
Indebtedness).
SECTION 1303. Suspension of Payment When Senior Indebtedness in
-------------------------------------------------
Default.
- -------
(a) The Company may not pay principal of, premium, if any, or interest
on, the Notes or make any deposit pursuant to the provisions described under
"Defeasance" and may not otherwise purchase or retire any Notes (collectively,
"pay the Notes") if:
(i) any Senior Indebtedness is not paid when due in cash or
Cash Equivalents; or
(ii) any other default on Senior Indebtedness occurs and the
maturity of such Senior Indebtedness is accelerated in accordance with its
terms unless, in either case, the default has been cured or waived and any
such acceleration has been rescinded or such Senior Indebtedness has been
paid in full in cash or Cash Equivalents;
provided, however, the Company may pay the Notes without regard to the foregoing
if the Company and the Trustee receive written notice approving such payment
from the Representative of the Senior Indebtedness with respect to which either
of the events set forth in clause (i) or (ii) above has occurred and is
continuing.
(b) During the continuance of any default (other than a default
described in clause (a) (i) or (a) (ii) above) with respect to any Designated
Senior Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Company may not pay the Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by the Trustee (with a copy to the Company) of
written notice (a "Blockage Notice") of such default from the Representative of
the holders of such Designated Senior Indebtedness specifying an election to
effect a Payment Blockage Period and ending 179 days thereafter (or earlier if
such Payment Blockage Period is terminated (i) by written notice to the Trustee
and the Company from the Person or Persons who gave such Blockage Notice, (ii)
because the default giving rise to such Blockage Notice is no longer continuing
or (iii) because such Designated Senior Indebtedness has been repaid in full (or
such payment has been duly provided for in a manner acceptable to the holders of
such Designated Senior Indebtedness). Notwithstanding the provisions described
in the immediately preceding sentence (but subject to Section 1303(a)), unless
the holders of such Designated Senior Indebtedness or the Representative of such
holders have accelerated the maturity of such Designated Senior Indebtedness,
the Company may resume payments on the Notes after the end of such Payment
Blockage Period. Not more than one Blockage Notice may be given in any
consecutive 360-
<PAGE>
99
day period, irrespective of the number of defaults with respect to Designated
Senior Indebtedness during such period. However, if any Blockage Notice within
such 360-day period is given by or on behalf of any holders of Designated Senior
Indebtedness other than Bank Indebtedness, a Representative of Bank Indebtedness
may give one additional Blockage Notice within such period. In no event,
however, may the total number of days during which any Payment Blockage Period
or Periods is in effect exceed 179 days in the aggregate during any 360
consecutive day period.
SECTION 1304. Acceleration of Notes.
---------------------
If payment of the Notes is accelerated because of an Event of Default,
the Company or the Trustee shall promptly notify the holders of the Designated
Senior Indebtedness or the Representative of such holders of the acceleration.
The Company may not pay the Notes until five Business Days after such holders or
the Representative of the Designated Senior Indebtedness receive notice of such
acceleration and, thereafter, may pay the Notes only if the subordination
provisions of this Indenture otherwise permit payment at that time.
SECTION 1305. When Distribution Must Be Paid Over.
-----------------------------------
If a distribution is made to Holders of the Notes that, due to the
provisions of this Article Thirteen, should not have been made to them, such
Holders are required to hold it in trust for the Holders of Senior Indebtedness
and pay it over to them as their interests may appear.
With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article Thirteen, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to owe
any fiduciary duty to the holders of Senior Indebtedness, and shall not be
liable to any such holders if the Trustee shall pay over or distribute to or on
behalf of Holders or the Company or any other Person money or assets to which
any holders of Senior Indebtedness shall be entitled by virtue of this Article
Thirteen, except if such payment is made as a result of the willful misconduct
or gross negligence of the Trustee.
SECTION 1306. Notice by Company.
-----------------
The Company shall promptly notify the Trustee and the Paying Agent of
any facts known to the Company that would cause a payment of any Obligations
with respect to the Notes that violate this Article, but failure to give such
notice shall not affect the subordination of the Notes to the Senior
Indebtedness as provided in this Article Thirteen.
SECTION 1307. Payment Permitted If No Default.
-------------------------------
Nothing contained in this Article or elsewhere in this Indenture or in
any of the Notes shall prevent the Company, at any time except during the
pendency of any case, proceeding, dissolution, liquidation or other winding up,
assignment for the benefit of creditors or other marshalling of assets and
liabilities of the Company referred to in Section 1302 or under the conditions
described in Section 1303, from making payments at any time of principal of (and
premium, if any, on) or interest on the Notes.
SECTION 1308. Subrogation to Rights of Holders of Senior
------------------------------------------
Indebtedness.
Subject to the payment in full of all Senior Indebtedness in cash or
Cash Equivalents, the Holders shall be subrogated (equally and ratably with the
holders of all Pari Passu Indebtedness of the Company) to the rights of the
holders of such Senior Indebtedness to receive payments and distributions of
cash, property and securities applicable to the Senior Indebtedness until the
Subordinated Obligations shall be paid in full. For purposes of such
subrogation, no payments or distributions to the holders of Senior
<PAGE>
100
Indebtedness of any cash, property or securities to which the Holders of the
Notes or the Trustee would be entitled except for the provisions of this
Article, and no payments over pursuant to the provisions of this Article to the
holders of Senior Indebtedness by Holders of the Notes or on their behalf or by
the Trustee, shall, as among the Company, its creditors other than holders of
Senior Indebtedness, and the Holders of the Notes, be deemed to be a payment or
distribution by the Company to or on account of the Senior Indebtedness; it
being understood that the provisions of this Article are intended solely for the
purpose of determining the relative rights of the Holders of the Notes, on the
one hand, and the holders of Senior Indebtedness, on the other hand.
SECTION 1309. Provisions Solely to Define Relative Rights.
-------------------------------------------
The provisions of this Article are and are intended solely for the
purpose of defining the relative rights of the Holders on the one hand and the
holders of Senior Indebtedness on the other hand. Nothing contained in this
Article or elsewhere in this Indenture or in the Notes is intended to or shall
(a) impair, as between the Company and the Holders, the obligation of the
Company, which is absolute and unconditional, to pay to the Holders the
principal of (and premium, if any) and interest on the Notes as and when the
same shall become due and payable in accordance with their terms; or (b) affect
the relative rights against the Company of the Holders and creditors of the
Company other than their rights in relation to holders of Senior Indebtedness;
or (c) prevent the Trustee or any Holder from exercising all remedies otherwise
permitted by applicable law upon default under this Indenture, subject to the
rights, if any, under this Article of the holders of Senior Indebtedness. If
the Company fails because of this Article to pay principal (or premium, if any)
or interest on a Note on the due date, the failure is still a Default or Event
of Default.
SECTION 1310. Trustee to Effectuate Subordination.
-----------------------------------
Each Holder of a Note by his acceptance thereof authorizes and directs
the Trustee on such Holder's behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article and
appoints the Trustee his attorney-in-fact for any and all such purposes. If the
Trustee does not file a proper proof of claim or proof of debt in the form
required in any proceeding referred to in Section 504 hereof at least 30 days
before the expiration of the time to file such claim, the agent bank under the
Senior Credit Facility (if the such facility is still outstanding) is hereby
authorized to file an appropriate claim for and on behalf of the Holders of the
Notes.
SECTION 1311. Subordination May Not Be Impaired by Company.
--------------------------------------------
No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
non-compliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof any such holder may have or be
otherwise charged with.
SECTION 1312. Distribution or Notice to Representative.
----------------------------------------
Whenever a distribution is to be made or a notice given to holders of
Senior Indebtedness, the distribution may be made and the notice given to their
Representative.
Upon any payment or distribution of assets of the Company referred to
in this Article Thirteen, the Trustee and the Holders shall be entitled to rely
upon any order or decree made by any court of competent jurisdiction or upon any
certificate of such Representative or of the liquidating trustee or agent or
other Person making any distribution to the Trustee or to the Holders for the
purpose of ascertaining the Persons entitled to participate in such
distribution, the holders of the Senior Indebtedness and other
<PAGE>
101
Indebtedness of the Company, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon and all other acts pertinent thereto or
to this Article Thirteen.
SECTION 1313. Notice to Trustee.
-----------------
(a) The Company shall give prompt written notice to the Trustee of any
fact known to the Company which would prohibit the making of any payment to or
by the Trustee in respect of the Notes. Notwithstanding the provisions of this
Article or any other provision of this Indenture, the Trustee shall not be
charged with knowledge of the existence of any facts which would prohibit the
making of any payment to or by the Trustee in respect of the Notes, unless and
until the Trustee shall have received written notice thereof from the Company,
agent bank under the Senior Credit Facility or a holder of Senior Indebtedness
or from any trustee, fiduciary or agent therefor; and, prior to the receipt of
any such written notice, the Trustee, subject to TIA Sections 315(a) through
315(d), shall be entitled in all respects to assume that no such facts exist;
provided, however, that, if the Trustee shall not have received the notice
provided for in this Section at least three Business Days prior to the date upon
which by the terms hereof any money may become payable for any purpose
(including, without limitation, the payment of the principal of (and premium, if
any) or interest on any Note), then, anything herein contained to the contrary
notwithstanding, the Trustee shall have full power and authority to receive such
money and to apply the same to the purpose for which such money was received and
shall not be affected by any notice to the contrary which may be received by it
within three Business Days prior to such date.
(b) Subject to TIA Sections 315(a) through 315(d), the Trustee shall
be entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder of Senior Indebtedness (or a trustee,
fiduciary or agent therefor) to establish that such notice has been given by a
holder of Senior Indebtedness (or a trustee, fiduciary or agent therefor). In
the event that the Trustee determines in good faith that further evidence is
required with respect to the right of any Person as a holder of Senior
Indebtedness to participate in any payment or distribution pursuant to this
Article, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness
held by such Person, the extent to which such Person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
such Person under this Article and, if such evidence is not furnished, the
Trustee may defer any payment to such Person pending judicial determination as
to the right of such Person to receive such payment.
SECTION 1314. Reliance on Judicial Order or Certificate of
--------------------------------------------
Liquidating Agent.
- -----------------
Upon any payment or distribution of assets of the Company referred to
in this Article, the Trustee, subject to TIA Sections 315(a) through 315(d), and
the Holders of the Notes shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such insolvency,
bankruptcy, receivership, liquidation, reorganization, dissolution, winding up
or similar case or proceeding is pending, or a certificate of the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit
of creditors, agent or other Person making such payment or distribution,
delivered to the Trustee or to the Holders of Notes, for the purpose of
ascertaining the Persons entitled to participate in such payment or
distribution, the holders of Senior Indebtedness and other indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article;
provided that such court, trustee, receiver, custodian, assignee, agent or other
Person has been apprised of, or the order, decree or certificate makes reference
to, the provisions of this Article.
<PAGE>
102
SECTION 1315. Rights of Trustee as a Holder of Senior Indebtedness;
-----------------------------------------------------
Preservation of Trustee's Rights.
- --------------------------------
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article with respect to any Senior Indebtedness which
may at any time be held by it, to the same extent as any other holder of Senior
Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of
its rights as such holder. Nothing in this Article shall apply to claims of, or
payments to, the Trustee under or pursuant to Section 607.
SECTION 1316. Article Applicable to Paying Agents.
-----------------------------------
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article shall in such case (unless the context otherwise
requires) be construed as extending to and including such Paying Agent within
its meaning as fully for all intents and purposes as if such Paying Agent were
named in this Article in addition to or in place of the Trustee; provided,
however, that Section 1315 shall not apply to the Company or any Affiliate of
the Company if it or such Affiliate acts as Paying Agent.
SECTION 1317. No Suspension of Remedies.
-------------------------
Nothing contained in this Article shall limit the right of the Trustee
or the Holders of Notes to take any action to accelerate the maturity of the
Notes pursuant to Article Five or to pursue any rights or remedies hereunder or
under applicable law, except as provided in Article Five.
SECTION 1318. Modification of Terms of Senior Indebtedness.
--------------------------------------------
Any renewal or extension of the time of payment of any Senior
Indebtedness or the exercise by the holders of Senior Indebtedness of any of
their rights under any instrument creating or evidencing Senior Indebtedness,
including, without limitation, the waiver of default thereunder, may be made or
done all without notice to or assent from the Holders or the Trustee.
No compromise, alteration, amendment, modification, extension, renewal
or other change of, or waiver, consent or other action in respect of, any
liability or obligation under or in respect of, or of any of the terms,
covenants or conditions of any indenture or other instrument under which any
Senior Indebtedness is outstanding or of such Senior Indebtedness, whether or
not such release is in accordance with the provisions of any applicable
document, shall in any way alter or affect any of the provisions of this Article
Thirteen or of the Notes relating to the subordination thereof.
SECTION 1319. [Intentionally Omitted].
-----------------------
SECTION 1320. Trust Moneys Not Subordinated.
-----------------------------
Notwithstanding anything contained herein to the contrary, payments
from cash or the proceeds of Government Obligations held in trust under Article
Twelve hereof by the Trustee (or other qualifying trustee) and which were
deposited in accordance with the terms of Article Twelve hereof and not in
violation of Section 1303 hereof for the payment of principal of (and premium,
if any) and interest on the Notes shall not be subordinated to the prior payment
of any Senior Indebtedness or subject to the restrictions set forth in this
Article Thirteen, and none of the Holders shall be obligated to pay over any
such amount to the Company or any holder of Senior Indebtedness or any other
creditor of the Company.
<PAGE>
103
This Indenture may be signed in any number of counterparts each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same Indenture.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed as of the day and year first above written.
PARAGON HEALTH NETWORK, INC.
By /s/ Charles B. Carden
---------------------------
Name: Charles B. Carden
Title: Chief Financial Officer
IBJ SCHRODER BANK & TRUST COMPANY,
as Trustee
By /s/ Terrence Rawlins
---------------------------
Name: Terrence Rawlins
Title: Assistant Vice President
<PAGE>
EXHIBIT 4.6
PARAGON HEALTH NETWORK, INC.
$275,000,000
9 1/2% Senior Subordinated Notes due 2007
$294,000,000
10 1/2% Senior Subordinated Discount Notes due 2007
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
------------------------------------------
November 4, 1997
CHASE SECURITIES INC.
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
c/o Chase Securities Inc.
270 Park Avenue, 4th floor
New York, New York 10017
Ladies and Gentlemen:
PARAGON HEALTH NETWORK, INC., a Delaware corporation (after giving
effect to the Mergers, the "Company"), proposes to issue and sell to Chase
-------
Securities Inc. ("CSI"), Smith Barney Inc. ("Smith Barney") and Credit Suisse
--- ------------
First Boston Corporation ("CFSB," and together with CSI and Smith Barney, the
----
"Initial Purchasers"), upon the terms and subject to the conditions set forth in
------------------
a purchase agreement dated October 28, 1997 (the "Purchase Agreement"),
------------------
$275,000,000 aggregate principal amount of its 9 1/2% Senior Subordinated Notes
due 2007 (the "Senior Subordinated Notes") and $294,000,000 aggregate principal
-------------------------
amount of its 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Senior
------
Subordinated Discount Notes," and together with the Senior Subordinated Notes,
- ---------------------------
the "Securities." Capitalized terms used but not defined herein shall have the
----------
meanings given to such terms in the Purchase Agreement.
As an inducement to the Initial Purchasers to enter into the Purchase
Agreement and in satisfaction of a condition to the obligations of the Initial
Purchasers thereunder, the Company agrees with the Initial Purchasers, for the
benefit of the holders (including the Initial Purchasers) of the Securities, the
Exchange Securities (as defined herein) and the Private Exchange Securities (as
defined herein) (collectively, the "Holders"), as follows:
-------
1. Registered Exchange Offer. The Company shall (i) use its
-------------------------
commercially reasonable efforts to prepare and, not later than 60 days following
the date of original issuance of the Securities (the "Issue Date"), to file with
----------
the Commission a registration statement (the "Exchange Offer Registration
---------------------------
Statement") on an appropriate form under the Securities Act with respect to a
- ---------
proposed offer to the Holders of the Securities (the "Registered Exchange
-------------------
Offer") to issue and deliver to such Holders, in exchange for the Securities, a
- -----
like aggregate principal amount of debt securities of the Company (the "Exchange
--------
Securities") that are identical in all material respects to the Securities
- ----------
(except that the Exchange Securities will not contain terms with respect to
transfer restrictions or additional interest upon certain failures to comply
with this Agreement), (ii) use its commercially reasonable efforts to cause the
<PAGE>
2
Exchange Offer Registration Statement to become effective under the Securities
Act no later than 180 days after the Issue Date and the Registered Exchange
Offer to be consummated no later than 180 days after the Issue Date and (iii)
keep the Exchange Offer Registration Statement effective for not less than 30
days (or longer, if required by applicable law) after the date on which notice
of the Registered Exchange Offer is mailed to the Holders (such period being
called the "Exchange Offer Registration Period"). The Exchange Securities will
----------------------------------
be issued under the Indenture or an indenture (the "Exchange Securities
-------------------
Indenture") between the Company and the Trustee or such other bank or trust
- ---------
company that is reasonably satisfactory to the Initial Purchasers, as trustee
(the "Exchange Securities Trustee"), such indenture to be identical in all
---------------------------
material respects to the Indenture, except for the transfer restrictions
relating to the Securities (as described above).
Upon the effectiveness of the Exchange Offer Registration Statement,
the Company shall promptly commence the Registered Exchange Offer, it being the
objective of such Registered Exchange Offer to enable each Holder electing to
exchange Securities for Exchange Securities (assuming that such Holder (a) is
not an affiliate of the Company or an Exchanging Dealer (as defined herein) not
complying with the requirements of the next sentence, (b) is not an Initial
Purchaser holding Securities that have, or that are reasonably likely to have,
the status of an unsold allotment in an initial distribution, (c) acquires the
Exchange Securities in the ordinary course of such Holder's business and (d) has
no arrangements or understandings with any person to participate in the
distribution of the Exchange Securities) and to trade such Exchange Securities
from and after their receipt without any limitations or restrictions under the
Securities Act and without material restrictions under the securities laws of
the several states of the United States. The Company, the Initial Purchasers
and each Exchanging Dealer acknowledge that, pursuant to current interpretations
by the Commission's staff of Section 5 of the Securities Act, each Holder that
is a broker-dealer electing to exchange Securities, acquired for its own account
as a result of market-making activities or other trading activities, for
Exchange Securities (an "Exchanging Dealer"), is required to deliver a
-----------------
prospectus containing substantially the information set forth in Annex A hereto
on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and
the "Purpose of the Exchange Offer" section and in Annex C hereto in the "Plan
of Distribution" section of such prospectus in connection with a sale of any
such Exchange Securities received by such Exchanging Dealer pursuant to the
Registered Exchange Offer.
If, prior to the consummation of the Registered Exchange Offer, any
Holder holds any Securities acquired by it that have, or that are reasonably
likely to be determined to have, the status of an unsold allotment in an initial
distribution, or any Holder is not entitled to participate in the Registered
Exchange Offer, the Company shall, upon the request of any such Holder,
simultaneously with the delivery of the Exchange Securities in the Registered
Exchange Offer, issue and deliver to any such Holder, in exchange for the
Securities held by such Holder (the "Private Exchange"), a like aggregate
----------------
principal amount of debt securities of the Company (the "Private Exchange
----------------
Securities") that are identical in all material respects to the Exchange
- ----------
Securities, except for the transfer restrictions relating to such Private
Exchange Securities. The Private Exchange Securities will be issued under the
same indenture as the Exchange Securities, and the Company shall use its
commercially reasonable efforts to cause the Private Exchange Securities to bear
the same CUSIP numbers as the Exchange Securities.
In connection with the Registered Exchange Offer, the Company shall:
(a) mail to each Holder a copy of the prospectus forming part of the
Exchange Offer Registration Statement, together with an appropriate letter
of transmittal and related documents;
(b) keep the Registered Exchange Offer open for not less than 30 days
(or longer, if required by applicable law) after the date on which notice
of the Registered Exchange Offer is first mailed to the Holders;
<PAGE>
3
(c) utilize the services of a depositary for the Registered Exchange
Offer with an address in the Borough of Manhattan, The City of New York;
(d) permit Holders to withdraw tendered Securities at any time prior
to 5:00 p.m., New York City time, on the last business day on which the
Registered Exchange Offer shall remain open; and
(e) otherwise comply in all respects with all laws that are
applicable to the Registered Exchange Offer.
As soon as practicable after the close of the Registered Exchange
Offer and any Private Exchange, as the case may be, the Company shall:
(a) accept for exchange all Securities tendered and not validly
withdrawn pursuant to the Registered Exchange Offer and the Private
Exchange;
(b) deliver to the Trustee for cancellation all Securities so
accepted for exchange; and
(c) cause the Trustee or the Exchange Securities Trustee, as the case
may be, promptly to authenticate and deliver to each Holder, Exchange
Securities or Private Exchange Securities, as the case may be, equal in
principal amount to the Securities of such Holder so accepted for exchange.
The Company shall use its commercially reasonable efforts to keep the
Exchange Offer Registration Statement effective and to amend and supplement the
prospectus contained therein in order to permit such prospectus to be used by
all persons subject to the prospectus delivery requirements of the Securities
Act for such period of time as such persons must comply with such requirements
in order to resell the Exchange Securities; provided that (i) in the case where
--------
such prospectus and any amendment or supplement thereto must be delivered by an
Exchanging Dealer, such period shall be the lesser of 180 days after the
commencement of the Exchange Offer and the date on which all Exchanging Dealers
have sold all Exchange Securities held by them and (ii) the Company shall make
such prospectus and any amendment or supplement thereto available to any broker-
dealer for use in connection with any resale of any Exchange Securities for a
period of 90 days after the consummation of the Registered Exchange Offer.
The Indenture or the Exchange Securities Indenture, as the case may
be, shall provide that the Securities, the Exchange Securities and the Private
Exchange Securities shall vote and consent together on all matters as one class
and that none of the Securities, the Exchange Securities or the Private Exchange
Securities will have the right to vote or consent as a separate class on any
matter.
Interest on each Exchange Security and Private Exchange Security
issued pursuant to the Registered Exchange Offer and in the Private Exchange
will accrue from the last interest payment date on which interest was paid on
the Securities surrendered in exchange therefor or, if no interest has been paid
on the Securities, from the Issue Date.
Each Holder participating in the Registered Exchange Offer shall be
required to represent to the Company that at the time of the consummation of the
Registered Exchange Offer (i) any Exchange Securities received by such Holder
will be acquired in the ordinary course of business, (ii) such Holder will have
no arrangements or understandings with any person to participate in the
distribution of the Securities or the Exchange Securities within the meaning of
the Securities Act and (iii) such Holder is not an affiliate of the Company or,
if it is such an affiliate, such Holder will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent applicable.
<PAGE>
4
Notwithstanding any other provisions hereof, the Company will ensure
that (i) any Exchange Offer Registration Statement and any amendment thereto and
any prospectus forming part thereof and any supplement thereto complies as to
form in all material respects with the Securities Act and the rules and
regulations of the Commission thereunder, (ii) any Exchange Offer Registration
Statement and any amendment thereto does not, when it becomes effective, contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading and (iii) any
prospectus forming part of any Exchange Offer Registration Statement, and any
supplement to such prospectus, does not, as of the consummation of the
Registered Exchange Offer, include an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
2. Shelf Registration. If (i) because of any change in law or
------------------
applicable interpretations thereof by the Commission's staff the Company is not
permitted to effect the Registered Exchange Offer as contemplated by Section 1
hereof, or (ii) any Securities validly tendered pursuant to the Registered
Exchange Offer are not exchanged for Exchange Securities within 180 days after
the Issue Date, or (iii) any Initial Purchaser so requests with respect to
Securities or Private Exchange Securities not eligible to be exchanged for
Exchange Securities in the Registered Exchange Offer and held by it following
the consummation of the Registered Exchange Offer, or (iv) any applicable law or
interpretations do not permit any Holder to participate in the Registered
Exchange Offer, or (v) any Holder that participates in the Registered Exchange
Offer does not receive freely transferable Exchange Securities in exchange for
tendered Securities, or (vi) the Company so elects, then the following
provisions shall apply:
(a) The Company shall use its commercially reasonable efforts to file
as promptly as practicable (but in no event more than 60 days after so required
or requested pursuant to this Section 2) with the Commission, and thereafter
shall use its commercially reasonable efforts to cause to be declared effective,
a shelf registration statement on an appropriate form under the Securities Act
relating to the offer and sale of the Transfer Restricted Securities (as defined
below) by the Holders thereof from time to time in accordance with the methods
of distribution set forth in such registration statement (hereafter, a "Shelf
-----
Registration Statement" and, together with any Exchange Offer Registration
- ----------------------
Statement, a "Registration Statement").
----------------------
(b) The Company shall use its commercially reasonable efforts to keep
the Shelf Registration Statement continuously effective in order to permit the
prospectus forming part thereof to be used by Holders of Transfer Restricted
Securities for a period ending on the earlier of (i) two years from the Issue
Date or such shorter period that will terminate when all the Transfer Restricted
Securities covered by the Shelf Registration Statement have been sold pursuant
thereto and (ii) the date on which the Securities become eligible for resale
without volume restrictions pursuant to Rule 144(k) under the Securities Act (in
any such case, such period being called the "Shelf Registration Period"). The
-------------------------
Company shall be deemed not to have used its commercially reasonable efforts to
keep the Shelf Registration Statement effective during the requisite period if
it voluntarily takes any action that would result in Holders of Transfer
Restricted Securities covered thereby not being able to offer and sell such
Transfer Restricted Securities during that period, unless such action is
required by applicable law.
(c) Notwithstanding any other provisions hereof, the Company will
ensure that (i) any Shelf Registration Statement and any amendment thereto and
any prospectus forming part thereof and any supplement thereto complies as to
form in all material respects with the Securities Act and the rules and
regulations of the Commission thereunder, (ii) any Shelf Registration Statement
and any amendment thereto (in either case, other than with respect to
information included therein in reliance upon or in conformity with written
information furnished to the Company by or on behalf of any Holder specifically
for use therein (the "Holders' Information")) does not contain an untrue
--------------------
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading and
<PAGE>
5
(iii) any prospectus forming part of any Shelf Registration Statement, and any
supplement to such prospectus (in either case, other than with respect to
Holders' Information), does not include an untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
3. Liquidated Damages. (a) The parties hereto agree that the
------------------
Holders of Transfer Restricted Securities will suffer damages if the Company
fails to fulfill its obligations under Section 1 or Section 2, as applicable,
and that it would not be feasible to ascertain the extent of such damages.
Accordingly, if (i) the applicable Registration Statement is not filed with the
Commission on or prior to 60 days after the Issue Date, (ii) the Exchange Offer
Registration Statement or the Shelf Registration Statement, as the case may be,
is not declared effective within 150 days after the Issue Date (or in the case
of a Shelf Registration Statement required to be filed in response to a change
in law or the applicable interpretations of Commission's staff, if later, within
45 days after publication of the change in law or interpretation), (iii) the
Registered Exchange Offer is not consummated on or prior to 180 days after the
Issue Date, or (iv) the Shelf Registration Statement is filed and declared
effective within 150 days after the Issue Date (or in the case of a Shelf
Registration Statement required to be filed in response to a change in law or
the applicable interpretations of Commission's staff, if later, within 45 days
after publication of the change in law or interpretation) but shall thereafter
cease to be effective (at any time that the Company is obligated to maintain the
effectiveness thereof) without being succeeded within 45 days by an additional
Registration Statement filed and declared effective (each such event referred to
in clauses (i) through (iv), a "Registration Default"), the Company will be
--------------------
obligated to pay liquidated damages to each Holder of Transfer Restricted
Securities, during the period of one or more such Registration Defaults, in an
amount equal to $ 0.192 per week per $1,000 principal amount (or Accreted Value,
as the case may be) of Transfer Restricted Securities held by such Holder until
(i) the applicable Registration Statement is filed, (ii) the Exchange Offer
Registration Statement is declared effective and the Registered Exchange Offer
is consummated, (iii) the Shelf Registration Statement is declared effective or
(iv) the Shelf Registration Statement again becomes effective, as the case may
be. Following the cure of all Registration Defaults, the accrual of liquidated
damages will cease. As used herein, the term "Transfer Restricted Securities"
------------------------------
means (i) each Security until the date on which such Security has been exchanged
for a freely transferable Exchange Security in the Registered Exchange Offer,
(ii) each Security or Private Exchange Security until the date on which it has
been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iii) each Security or
Private Exchange Security until the date on which it is distributed to the
public pursuant to Rule 144 under the Securities Act or is saleable pursuant to
Rule 144(k) under the Securities Act. Notwithstanding anything to the contrary
in this Section 3(a), the Company shall not be required to pay liquidated
damages to a Holder of Transfer Restricted Securities if such Holder failed to
comply with its obligations to make the representations set forth in the second
to last paragraph of Section 1 or failed to provide the information required to
be provided by it, if any, pursuant to Section 4(n).
(b) The Company shall notify the Trustee and the Paying Agent (as
defined in the Indenture) immediately upon the happening of each and every
Registration Default. The Company shall pay the liquidated damages due on the
Transfer Restricted Securities by depositing with the Paying Agent (which may
not be the Company for these purposes), in trust, for the benefit of the Holders
thereof, prior to 10:00 a.m., New York City time, on the next interest payment
dates specified by the Indenture and the Securities, sums sufficient to pay the
liquidated damages then due. The liquidated damages due shall be payable semi-
annually on dates which correspond to interest payment dates specified by the
Indenture and the Securities to the record holder entitled to receive the
interest payment to be made on such date. Each obligation to pay liquidated
damages shall be deemed to accrue from and including the date of the applicable
Registration Default.
(c) The parties hereto agree that the liquidated damages provided for
in this Section 3 constitute a reasonable estimate of and are intended to
constitute the sole damages that will be suffered by Holders of Transfer
Restricted Securities by reason of the failure of (i) the Shelf Registration
<PAGE>
6
Statement or the Exchange Offer Registration Statement to be filed, (ii) the
Shelf Registration Statement to remain effective or (iii) the Exchange Offer
Registration Statement to be declared effective and the Registered Exchange
Offer to be consummated, in each case to the extent required by this Agreement.
4. Registration Procedures. In connection with any Registration
-----------------------
Statement, the following provisions shall apply:
(a) The Company shall (i) furnish to each Initial Purchaser, prior to
the filing thereof with the Commission, a copy of the Registration Statement and
each amendment thereof and each supplement, if any, to the prospectus included
therein and shall use its commercially reasonable efforts to reflect in each
such document, when so filed with the Commission, such comments as any Initial
Purchaser may reasonably propose; (ii) include the information set forth in
Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer
Procedures" section and the "Purpose of the Exchange Offer" section and in Annex
C hereto in the "Plan of Distribution" section of the prospectus forming a part
of the Exchange Offer Registration Statement, and include the information set
forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the
Registered Exchange Offer; and (iii) if requested by any Initial Purchaser,
include the information required by Items 507 or 508 of Regulation S-K, as
applicable, in the prospectus forming a part of the Exchange Offer Registration
Statement.
(b) The Company shall advise each Initial Purchaser, each Exchanging
Dealer and each of the Holders (if applicable) and, if requested by any such
person, confirm such advice in writing (which advice pursuant to clauses (ii)-
(v) hereof shall be accompanied by an instruction to suspend the use of the
prospectus until the requisite changes have been made):
(i) when any Registration Statement and any amendment thereto
has been filed with the Commission and when such Registration Statement or
any post-effective amendment thereto has become effective;
(ii) of any request by the Commission for amendments or
supplements to any Registration Statement or the prospectus included
therein or for additional information;
(iii) of the issuance by the Commission of any stop order
suspending the effectiveness of any Registration Statement or the
initiation of any proceedings for that purpose;
(iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Securities, the
Exchange Securities or the Private Exchange Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose; and
(v) of the happening of any event that requires the making of
any changes in any Registration Statement or the prospectus included
therein in order that the statements therein are not misleading and do not
omit to state a material fact required to be stated therein or necessary to
make the statements therein in the light of the circumstances under which
they were made, not misleading.
(c) The Company will use its commercially reasonable efforts to
obtain the withdrawal at the earliest possible time of any order suspending the
effectiveness of any Registration Statement.
(d) The Company will furnish to each Holder of Transfer Restricted
Securities included within the coverage of any Shelf Registration Statement,
without charge, at least one conformed copy of such Shelf Registration Statement
and any post-effective amendment thereto, including financial statements and
schedules and, if any such Holder so requests in writing, all exhibits thereto
(including those, if any, incorporated by reference).
<PAGE>
7
(e) The Company will, during the Shelf Registration Period, promptly
deliver to each Holder of Transfer Restricted Securities included within the
coverage of any Shelf Registration Statement, without charge, as many copies of
the prospectus (including each preliminary prospectus) included in such Shelf
Registration Statement and any amendment or supplement thereto as such Holder
may reasonably request; and the Company consents to the use of such prospectus
or any amendment or supplement thereto by each of the selling Holders of
Transfer Restricted Securities in connection with the offer and sale of the
Transfer Restricted Securities covered by such prospectus or any amendment or
supplement thereto.
(f) The Company will furnish to each Initial Purchaser and each
Exchanging Dealer, and to any other Holder who so requests, without charge, at
least one conformed copy of the Exchange Offer Registration Statement and any
post-effective amendment thereto, including financial statements and schedules
and, if any Initial Purchaser or Exchanging Dealer or any such Holder so
requests in writing, all exhibits thereto (including those, if any, incorporated
by reference).
(g) The Company will, during the Exchange Offer Registration Period
or the Shelf Registration Period, as applicable, promptly deliver to each
Initial Purchaser, each Exchanging Dealer and such other persons that are
required to deliver a prospectus following the Registered Exchange Offer,
without charge, as many copies of the final prospectus included in the Exchange
Offer Registration Statement or the Shelf Registration Statement and any
amendment or supplement thereto as such Initial Purchaser, Exchanging Dealer or
other persons may reasonably request; and the Company consents to the use of
such prospectus or any amendment or supplement thereto by any such Initial
Purchaser, Exchanging Dealer or other persons, as applicable, as aforesaid.
(h) Prior to the effective date of any Registration Statement, the
Company will use its commercially reasonable efforts to register or qualify, or
cooperate with the Holders of Securities, Exchange Securities or Private
Exchange Securities included therein and their respective counsel in connection
with the registration or qualification of, such Securities, Exchange Securities
or Private Exchange Securities for offer and sale under the securities or blue
sky laws of such jurisdictions as any such Holder reasonably requests in writing
and do any and all other acts or things necessary or advisable to enable the
offer and sale in such jurisdictions of the Securities, Exchange Securities or
Private Exchange Securities covered by such Registration Statement; provided
--------
that the Company will not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action which would
subject it to general service of process or to taxation in any such jurisdiction
where it is not then so subject.
(i) The Company will cooperate with the Holders of Securities,
Exchange Securities or Private Exchange Securities to facilitate the timely
preparation and delivery of certificates representing Securities, Exchange
Securities or Private Exchange Securities to be sold pursuant to any
Registration Statement free of any restrictive legends and in such denominations
and registered in such names as the Holders thereof may request in writing prior
to sales of Securities, Exchange Securities or Private Exchange Securities
pursuant to such Registration Statement.
(j) If any event contemplated by Section 4(b)(ii) through (v) occurs
during the period for which the Company is required to maintain an effective
Registration Statement, the Company will use its commercially reasonable efforts
to promptly prepare and file with the Commission a post-effective amendment to
the Registration Statement or a supplement to the related prospectus or file any
other required document so that, as thereafter delivered to purchasers of the
Securities, Exchange Securities or Private Exchange Securities from a Holder,
the prospectus will not include an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
<PAGE>
8
(k) Not later than the effective date of the applicable Registration
Statement, the Company will provide CUSIP numbers for the Securities, the
Exchange Securities and the Private Exchange Securities, as the case may be, and
provide the applicable trustee with printed certificates for the Securities, the
Exchange Securities or the Private Exchange Securities, as the case may be, in a
form eligible for deposit with The Depository Trust Company.
(l) The Company will comply with all applicable rules and regulations
of the Commission and will make generally available to its security holders as
soon as practicable after the effective date of the applicable Registration
Statement an earning statement satisfying the provisions of Section 11(a) of the
Securities Act; provided that in no event shall such earning statement be
--------
delivered later than 45 days after the end of a 12-month period (or 90 days, if
such period is a fiscal year) beginning with the first month of the Company's
first fiscal quarter commencing after the effective date of the applicable
Registration Statement, which statement shall cover such 12-month period.
(m) The Company will cause the Indenture or the Exchange Securities
Indenture, as the case may be, to be qualified under the Trust Indenture Act as
required by applicable law in a timely manner.
(n) The Company may require each Holder of Transfer Restricted
Securities to be registered pursuant to any Shelf Registration Statement to
furnish to the Company such information concerning the Holder and the
distribution of such Transfer Restricted Securities as the Company may from time
to time reasonably require for inclusion in such Shelf Registration Statement,
and the Company may exclude from such registration the Transfer Restricted
Securities of any Holder that fails to furnish such information within a
reasonable time after receiving such request.
(o) In the case of a Shelf Registration Statement, each Holder of
Transfer Restricted Securities to be registered pursuant thereto agrees by
acquisition of such Transfer Restricted Securities that, upon receipt of any
notice from the Company pursuant to Section 4(b)(ii) through (v), such Holder
will discontinue disposition of such Transfer Restricted Securities until such
Holder's receipt of copies of the supplemental or amended prospectus
contemplated by Section 4(j) or until advised in writing (the "Advice") by the
------
Company that the use of the applicable prospectus may be resumed. If the
Company shall give any notice under Section 4(b)(ii) through (v) during the
period that the Company is required to maintain an effective Registration
Statement (the "Effectiveness Period"), such Effectiveness Period shall be
--------------------
extended by the number of days during such period from and including the date of
the giving of such notice to and including the date when each seller of Transfer
Restricted Securities covered by such Registration Statement shall have received
(x) the copies of the supplemental or amended prospectus contemplated by Section
4(j) (if an amended or supplemental prospectus is required) or (y) the Advice
(if no amended or supplemental prospectus is required).
(p) In the case of a Shelf Registration Statement, the Company shall
enter into such customary agreements (including, if requested, an underwriting
agreement in customary form) and take all such other action, if any, as Holders
of a majority in aggregate principal amount of the Securities, Exchange
Securities and Private Exchange Securities being sold or the managing
underwriters (if any) shall reasonably request in order to facilitate any
disposition of Securities, Exchange Securities or Private Exchange Securities
pursuant to such Shelf Registration Statement.
(q) In the case of a Shelf Registration Statement, the Company shall
(i) make reasonably available for inspection by a representative of, and Special
Counsel (as defined below) acting for, Holders of a majority in aggregate
principal amount of the Securities, Exchange Securities and Private Exchange
Securities being sold and any underwriter participating in any disposition of
Securities, Exchange Securities or Private Exchange Securities pursuant to such
Shelf Registration Statement, all relevant financial and other records,
pertinent corporate documents and properties of the Company and its subsidiaries
and (ii) use its commercially reasonable efforts to have its officers,
<PAGE>
9
directors, employees, accountants and counsel supply all relevant information
reasonably requested by such representative, Special Counsel or any such
underwriter (an "Inspector") in connection with such Shelf Registration
---------
Statement.
(r) In the case of a Shelf Registration Statement, the Company shall,
if requested by Holders of a majority in aggregate principal amount of the
Securities, Exchange Securities and Private Exchange Securities being sold,
their Special Counsel or the managing underwriters (if any) in connection with
such Shelf Registration Statement, use its commercially reasonable efforts to
cause (i) its counsel to deliver an opinion relating to the Shelf Registration
Statement and the Securities, Exchange Securities or Private Exchange
Securities, as applicable, in customary form, (ii) its officers to execute and
deliver all customary documents and certificates requested by Holders of a
majority in aggregate principal amount of the Securities, Exchange Securities
and Private Exchange Securities being sold, their Special Counsel or the
managing underwriters (if any) and (iii) its independent public accountants to
provide a comfort letter or letters in customary form, subject to receipt of
appropriate documentation as contemplated, and only if permitted, by Statement
of Auditing Standards No. 72.
5. Registration Expenses. Except as provided in Section 9 hereof,
---------------------
the Company will bear all expenses incurred in connection with the performance
of its obligations under Sections 1, 2, 3 and 4, and the Company will reimburse
the Initial Purchasers and the Holders for the reasonable fees and disbursements
of one firm of attorneys (in addition to any local counsel) chosen by the
Holders of a majority in aggregate principal amount of the Securities, the
Exchange Securities and the Private Exchange Securities to be sold pursuant to
each Registration Statement (the "Special Counsel") acting for the Initial
---------------
Purchasers or Holders in connection therewith.
6. Indemnification. (a) In the event of a Shelf Registration
---------------
Statement or in connection with any prospectus delivery pursuant to an Exchange
Offer Registration Statement by an Initial Purchaser or Exchanging Dealer, as
applicable, the Company shall indemnify and hold harmless each Holder
(including, without limitation, any such Initial Purchaser or Exchanging
Dealer), its affiliates, their respective officers, directors, employees,
representatives and agents, and each person, if any, who controls such Holder
within the meaning of the Securities Act or the Exchange Act (collectively
referred to for purposes of this Section 6 and Section 7 as a Holder) from and
against any loss, claim, damage or liability, joint or several, or any action in
respect thereof (including, without limitation, any loss, claim, damage,
liability or action relating to purchases and sales of Securities, Exchange
Securities or Private Exchange Securities), to which that Holder may become
subject, whether commenced or threatened, under the Securities Act, the Exchange
Act, any other federal or state statutory law or regulation, at common law or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained in any such Registration Statement or any prospectus
forming part thereof or in any amendment or supplement thereto or (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, and shall
reimburse each Holder promptly upon demand for any reasonable legal or other
expenses reasonably incurred by that Holder in connection with investigating or
defending or preparing to defend against or appearing as a third party witness
in connection with any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company shall not be liable
-------- -------
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, an untrue statement or alleged untrue
statement in or omission or alleged omission from any of such documents in
reliance upon and in conformity with any Holders' Information; and provided,
--------
further, that with respect to any such untrue statement in or omission from any
- -------
related preliminary prospectus, the indemnity agreement contained in this
Section 6(a) shall not inure to the benefit of any Holder from whom the person
asserting any such loss, claim, damage, liability or action received Securities,
Exchange Securities or Private Exchange Securities to the extent that such loss,
claim, damage, liability or action of or with respect to such Holder results
from the fact that both (A) a copy of the final prospectus was not sent or given
to such person at or prior to the written confirmation
<PAGE>
10
of the sale of such Securities, Exchange Securities or Private Exchange
Securities to such person and (B) the untrue statement in or omission from the
related preliminary prospectus was corrected in the final prospectus unless such
failure to deliver the final prospectus was a result of non-compliance by the
Company with Section 4(d), 4(e), 4(f) or 4(g).
(b) In the event of a Shelf Registration Statement, each Holder shall
indemnify and hold harmless the Company, its affiliates, their respective
officers, directors, employees, representatives and agents, and each person, if
any, who controls the Company within the meaning of the Securities Act or the
Exchange Act (collectively referred to for purposes of this Section 6(b) and
Section 7 as the Company), from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which the
Company may become subject, whether commenced or threatened, under the
Securities Act, the Exchange Act, any other federal or state statutory law or
regulation, at common law or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue statement or
alleged untrue statement of a material fact contained in any such Registration
Statement or any prospectus forming part thereof or in any amendment or
supplement thereto or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, but in each case only to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with any Holders' Information furnished to
the Company by such Holder, and shall reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending or preparing to defend against or appearing as a
third-party witness in connection with any such loss, claim, damage, liability
or action as such expenses are incurred; provided, however, that no such Holder
-------- -------
shall be liable for any indemnity claims hereunder in excess of the amount of
net proceeds received by such Holder from the sale of Securities, Exchange
Securities or Private Exchange Securities pursuant to such Shelf Registration
Statement.
(c) Promptly after receipt by an indemnified party under this Section
6 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party pursuant to Section 6(a) or 6(b), notify the indemnifying
party in writing of the claim or the commencement of that action; provided,
--------
however, that the failure to notify the indemnifying party shall not relieve the
- -------
indemnifying party from any liability which it may have under this Section 6
except to the extent that it has been materially prejudiced (through the
forfeiture of substantive rights or defenses) by such failure; and provided,
--------
further, that the failure to notify the indemnifying party shall not relieve it
- -------
from any liability which it may have to an indemnified party otherwise than
under this Section 6. If any such claim or action shall be brought against an
indemnified party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it wishes, jointly with any other similarly notified indemnifying party, to
assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense of such claim or action, the
indemnifying party shall not be liable to the indemnified party under this
Section 6 for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof other than the
reasonable costs of investigation; provided, however, that an indemnified party
-------- -------
shall have the right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel for the indemnified party will be at
the expense of such indemnified party unless (1) the employment of counsel by
the indemnified party has been authorized in writing by the indemnifying party,
(2) the indemnified party has reasonably concluded (based upon written advice of
counsel to the indemnified party, a copy of which has been provided to the
indemnifying party) that there may be legal defenses available to it or other
indemnified parties that are different from or in addition to those available to
the indemnifying party, (3) a conflict or potential conflict exists (based upon
written advice of counsel to the indemnified party, a copy of which has been
provided to the indemnifying party) between the indemnified party and the
indemnifying party (in which case the indemnifying party will not have the right
to direct the defense of such action on behalf of the indemnified party) or (4)
the
<PAGE>
11
indemnifying party has not in fact employed counsel reasonably satisfactory to
the indemnified party to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be at
the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm of attorneys (in
addition to any local counsel) at any one time for all such indemnified party or
parties. Each indemnified party, as a condition of the indemnity agreements
contained in Sections 6(a) and 6(b), shall use all reasonable efforts to
cooperate with the indemnifying party in the defense of any such action or
claim. No indemnifying party shall be liable for any settlement of any such
action effected without its written consent (which consent shall not be
unreasonably withheld), but if settled with its written consent or if there be a
final judgment for the plaintiff in any such action, the indemnifying party
agrees to indemnify and hold harmless any indemnified party from and against any
loss or liability by reason of such settlement or judgment. No indemnifying
party shall, without the prior written consent of the indemnified party (which
consent shall not be unreasonably withheld), effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
7. Contribution. If the indemnification provided for in Section 6 is
------------
unavailable or insufficient to hold harmless an indemnified party under Section
6(a) or 6(b), then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability, or action in respect
thereof, (i) in such proportion as shall be appropriate to reflect the relative
benefits received by the Company from the offering and sale of the Securities,
on the one hand, and a Holder with respect to the sale by such Holder of
Securities, Exchange Securities or Private Exchange Securities, on the other, or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and such Holder on the other with respect to the
statements or omissions that resulted in such loss, claim, damage or liability,
or action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and a Holder on the other with respect to such offering and such sale shall be
deemed to be in the same proportion as the total net proceeds from the offering
of the Securities (before deducting expenses) received by or on behalf of the
Company as set forth in the table on the cover of the Offering Memorandum, on
the one hand, bear to the total proceeds received by such Holder with respect to
its sale of Securities, Exchange Securities or Private Exchange Securities, on
the other. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to the Company or
information supplied by the Company on the one hand or to any Holders'
Information supplied by such Holder on the other, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The parties hereto agree that it
would not be just and equitable if contributions pursuant to this Section 7 were
to be determined by pro rata allocation or by any other method of allocation
that does not take into account the equitable considerations referred to herein.
The amount paid or payable by an indemnified party as a result of the loss,
claim, damage or liability, or action in respect thereof, referred to above in
this Section 7 shall be deemed to include, for purposes of this Section 7, any
reasonable legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending or preparing to defend any such
action or claim. Notwithstanding the provisions of this Section 7, an
indemnifying party that is a Holder of Securities, Exchange Securities or
Private Exchange Securities shall not be required to contribute any amount in
excess of the amount by which the total price at which the Securities, Exchange
Securities or Private Exchange Securities sold by such indemnifying party to any
purchaser exceeds the amount of any damages which such indemnifying party has
otherwise paid or become liable
<PAGE>
12
to pay by reason of any untrue or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
8. Rules 144 and 144A. The Company shall use its commercially
------------------
reasonable efforts to file the reports required to be filed by it under the
Securities Act and the Exchange Act in a timely manner and, if at any time the
Company is not required to file such reports, it will, upon the written request
of any Holder of Transfer Restricted Securities, make publicly available other
information so long as necessary to permit sales of such Holder's securities
pursuant to Rules 144 and 144A. The Company covenants that it will take such
further action as any Holder of Transfer Restricted Securities may reasonably
request, all to the extent required from time to time to enable such Holder to
sell Transfer Restricted Securities without registration under the Securities
Act within the limitation of the exemptions provided by Rules 144 and 144A
(including, without limitation, the requirements of Rule 144A(d)(4)). Upon the
written request of any Holder of Transfer Restricted Securities, the Company
shall deliver to such Holder a written statement as to whether it has complied
with such requirements. Notwithstanding the foregoing, nothing in this Section 8
shall be deemed to require the Company to register any of its securities
pursuant to the Exchange Act.
9. Underwritten Registrations. If any of the Transfer Restricted
--------------------------
Securities covered by any Shelf Registration Statement are to be sold in an
underwritten offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by the Holders of
a majority in aggregate principal amount of such Transfer Restricted Securities
included in such offering, subject to the consent of the Company (which shall
not be unreasonably withheld or delayed), and such Holders shall be responsible
for all underwriting commissions and discounts in connection therewith.
No person may participate in any underwritten registration hereunder
unless such person (i) agrees to sell such person's Transfer Restricted
Securities on the basis reasonably provided in any underwriting arrangements
approved by the persons entitled hereunder to approve such arrangements and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
10. Miscellaneous. (a) Amendments and Waivers. The provisions of
------------- ----------------------
this Agreement may not be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may not be given, unless the
Company has obtained the written consent of Holders of a majority in aggregate
principal amount of the Securities, the Exchange Securities and the Private
Exchange Securities, taken as a single class. Notwithstanding the foregoing, a
waiver or consent to depart from the provisions hereof with respect to a matter
that relates exclusively to the rights of Holders whose Securities, Exchange
Securities or Private Exchange Securities are being sold pursuant to a
Registration Statement and that does not directly or indirectly affect the
rights of other Holders may be given by Holders of a majority in aggregate
principal amount of the Securities, the Exchange Securities and the Private
Exchange Securities being sold by such Holders pursuant to such Registration
Statement.
(b) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand delivery, first-class mail,
telecopier or air courier guaranteeing next-day delivery:
(1) if to a Holder, at the most current address given by such Holder
to the Company in accordance with the provisions of this Section 10(b),
which address initially is, with respect to each Holder, the address of
such Holder maintained by the Registrar under the Indenture, with a copy in
like manner to the Initial Purchasers;
<PAGE>
13
(2) if to an Initial Purchaser, initially at its address set forth in
the Purchase Agreement; and
(3) if to the Company, initially at the address of the Company set
forth in the Purchase Agreement.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; one business day after
being delivered to a next-day air courier; five business days after being
deposited in the mail; and when receipt is acknowledged by the recipient's
telecopier machine, if sent by telecopier.
(c) Successors And Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns.
(d) Counterparts. This Agreement may be executed in any number of
------------
counterparts (which may be delivered in original form or by telecopier) and by
the 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.
(e) Definition of Terms. For purposes of this Agreement, (a) the term
-------------------
"business day" means any day on which the New York Stock Exchange, Inc. is open
for trading, (b) the term "subsidiary" has the meaning set forth in Rule 405
under the Securities Act and (c) except where otherwise expressly provided, the
term "affiliate" has the meaning set forth in Rule 405 under the Securities Act.
(f) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(g) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York.
(h) Remedies. In the event of a breach by the Company or by any
--------
Holder of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law, including recovery of damages (other than the recovery of
damages for a breach by the Company of its obligations under Sections 1 or 2
hereof for which liquidated damages have been paid pursuant to Section 3 hereof,
the sole and exclusive remedy for any such breach), will be entitled to specific
performance of its rights under this Agreement. The Company and each Holder
agree that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of any of the provisions of this Agreement
(other than a breach by the Company of its obligations under Sections 1 or 2
hereof for which liquidated damages shall have been paid pursuant to Section 3
hereof) and hereby further agree that, in the event of any action for specific
performance in respect of such breach, it shall waive the defense that a remedy
at law would be adequate.
(i) No Inconsistent Agreements. The Company represents, warrants and
--------------------------
agrees that (i) it has not entered into and shall not, on or after the date of
this Agreement, enter into any agreement that is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof, (ii) it has not previously entered into any agreement which
remains in effect granting any registration rights with respect to any of its
debt securities to any person and (iii) without limiting the generality of the
foregoing, without the written consent of the Holders of a majority in aggregate
principal amount of the then outstanding Transfer Restricted Securities, it
shall not grant to any person the right to request the Company to register any
debt securities of the Company under the
<PAGE>
14
Securities Act unless the rights so granted are not in conflict or inconsistent
with the provisions of this Agreement.
(j) No Piggyback on Registrations. Neither the Company nor any of its
-----------------------------
security holders (other than the Holders of Transfer Restricted Securities in
such capacity) shall have the right to include any securities of the Company in
any Shelf Registration or Registered Exchange Offer other than Transfer
Restricted Securities.
(k) Severability. The remedies provided herein are cumulative and not
------------
exclusive of any remedies provided by law. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their commercially reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the Initial Purchasers.
Very truly yours,
PARAGON HEALTH NETWORK, INC.
By /s/ Charles B. Carden
---------------------------
Name: Charles B. Carden
Title: Executive Vice President
and Chief Financial Officer
Accepted:
CHASE SECURITIES INC.
By /s/ David Fass
-----------------------
Authorized Signatory
SMITH BARNEY INC.
By /s/ John K. Hudson
------------------------
Authorized Signatory
CREDIT SUISSE FIRST BOSTON CORPORATION
By /s/ Joseph D. Fashano
-------------------------
Authorized Signatory
Joseph D. Fashano
Director
<PAGE>
ANNEX C
[Form of Initial Comfort Letter]
The Company and GranCare shall have furnished to the Initial
Purchasers a letter of Ernst & Young LLP, addressed to the Initial Purchasers
and dated the date of the Purchase Agreement, in form and substance satisfactory
to the Initial Purchasers, substantially to the effect set forth below:
(i) they are independent certified public accountants with respect
to the Company and GranCare within the meaning of Rule 101 of the Code of
Professional Conduct of the AICPA and its interpretations and rulings;
(ii) in their opinion, the audited financial statements and pro forma
financial information included in the Offering Memorandum and reported on
by them comply in form in all material respects with the accounting
requirements of the Exchange Act and the related published rules and
regulations of the Commission thereunder that would apply to the Offering
Memorandum if the Offering Memorandum were a prospectus included in a
registration statement on Form S-1 under the Securities Act (except that
certain supporting schedules are omitted);
(iii) based upon a reading of the latest unaudited financial
statements made available by the Company and GranCare, the procedures of
the AICPA for a review of interim financial information as described in
Statement of Auditing Standards No. 71, reading of minutes and inquiries of
certain officials of the Company and GranCare who have responsibility for
financial and accounting matters and certain other limited procedures
requested by the Initial Purchasers and described in detail in such letter,
nothing has come to their attention that causes them to believe that (A)
any unaudited financial statements included in the Offering Memorandum do
not comply as to form in all material respects with applicable accounting
requirements, (B) any material modifications should be made to the
unaudited financial statements included in the Offering Memorandum for them
to be in conformity with generally accepted accounting principles applied
on a basis substantially consistent with that of the audited financial
statements included in the Offering Memorandum or (C) the information
included under the headings "Summary--Summary Unaudited Pro Forma Financial
and Other Data", "Summary--Summary Historical Consolidated Financial and
Other Data--Living Centers of America, Inc.", "Summary Historical
Consolidated Financial and Other Data--GranCare, Inc.", "Capitalization",
"Unaudited Pro Forma Condensed Consolidated Financial Statements",
"Selected Historical Consolidated Financial and Other Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is not in conformity with the disclosure requirements of
Regulation S-K that would apply to the Offering Memorandum if the Offering
Memorandum were a prospectus included in a registration statement on Form
S-1 under the Securities Act;
(iv) based upon the procedures detailed in such letter with respect
to the period subsequent to the date of the last available balance sheet,
including reading of minutes and inquiries of certain officials of the
Company and GranCare who have responsibility for financial and accounting
matters, nothing has come to their attention that causes them to believe
that (A) at a specified date not more than three business days prior to the
date of such letter, there was any change in capital stock, increase in
long-term debt or decrease in net current assets as compared with the
amounts shown in the June 30, 1997 unaudited balance sheet included in the
Offering Memorandum or (B) for the period from July 1, 1997 to a specified
date not more than three business days prior to the date of such letter,
there were any decreases, as compared with the corresponding period in the
preceding year, in net sales, income from operations, EBITDA or net income,
except in all instances for changes, increases or decreases that the
Offering Memorandum discloses have occurred or which are set forth in such
letter, in which case the letter shall be accompanied by an explanation by
the Company or GranCare as to the significance thereof unless said
explanation is not deemed necessary by the Initial Purchasers;
<PAGE>
2
(v) they have performed certain other specified procedures as a
result of which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting, financial
or statistical information derived from the general accounting records of
the Company) set forth in the Offering Memorandum agrees with the
accounting records of the Company and GranCare, excluding any questions of
legal interpretation; and
(vi) on the basis of a reading of the unaudited pro forma financial
information included in the Offering Memorandum, carrying out certain
specified procedures, reading of minutes and inquiries of certain officials
of the Company and GranCare who have responsibility for financial and
accounting matters and proving the arithmetic accuracy of the application
of the pro forma adjustments to the historical amounts in the pro forma
financial information, nothing came to their attention which caused them to
believe that the pro forma financial information does not comply in form in
all material respects with the applicable accounting requirements of Rule
11-02 of Regulation S-X or that the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of such
information.
<PAGE>
EXHIBIT 4.7
TEMPORARY CERTIFICATE--EXCHANGEABLE FOR ENGRAVED CERTIFICATE
WHEN READY FOR DELIVERY
COMMON STOCK COMMON STOCK
Number Shares
PHN
------- ------------
Paragon Health Network, Inc.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
PAR VALUE SEE REVERSE FOR
$.01 PER SHARE CERTAIN DEFINITIONS
CUSIP 698940 10 3
This is to Certify that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
- -------------------------Paragon Health Network, Inc.---------------------------
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
In Witness Whereof the Corporation has caused this certificate to be
signed in facsimile by its duly authorized officers and sealed with a facsimile
of its corporate seal.
Dated
PARAGON HEALTH NETWORK, INC.
CORPORATE
/s/ Susan Thomas Whittle /s/ Keith B. Pitts
Executive Vice President, 1997 Chairman of the Board,
Secretary and DELAWARE Chief Executive Officer
General Counsel and President
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(New York, N.Y.) Transfer Agent and Registrar
By:
Authorized Signature
<PAGE>
Paragon Health Network, Inc. will furnish without charge to each
stockholder who so requests the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock or
series thereof of the Corporation, and the qualifications, limitations or
restrictions of such preferences and/or rights. Such request may be made to the
Corporation or the transfer agent.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and
not as tenants in common
UNIF GIFT MIN ACT -- ____________ Custodian ________________
(Cust) (Minor)
under Uniform Gifts to Minors Act ___________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, __________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------------
| |
- ------------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ________________
X _____________________________________
X _____________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION ON ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By _________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION, (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
______________________________________________
| AMERICAN BANKNOTE COMPANY |
| 680 BLAIR MILL ROAD |
| HONSHAM, PA 19044 |
| 215-657-3480 |
| SALESPERSON--J. NAPOLITANO--212-557-9100A. |
| HOBBS: 404-525-1455. |
______________________________________________
| /Net/Banknote/Home46/ParagonHealth53224/bk |
______________________________________________
________________________________________________________
| PRODUCTION COORDINATOR - BELINDA BECK - 215-830-2198 |
| PROOF OF OCTOBER 16, 1997 |
| PARAGON HEALTH NETWORK, INC. |
| H 53224bk |
________________________________________________________
| Opr. Koshy NEW |
________________________________________________________
| /net/banknote/home46/p |
________________________________________________________
<PAGE>
EXHIBIT 4.8
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH
REGISTRATION.
THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR
OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION
TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY
WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE), ONLY (A) TO THE
COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE
FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A
THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE
UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E)
TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN
ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN
EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF
SUCH NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE
IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F)
PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO
ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO
REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER
INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING
CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF
THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE
TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE
RESALE RESTRICTION TERMINATION DATE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN
THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT
NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
SECTIONS 306 AND 307 OF THE INDENTURE.
<PAGE>
THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR PURPOSES OF
SECTIONS 1271-1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE ISSUE
PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE AND YIELD TO MATURITY OF
THE NOTES MAY BE OBTAINED BY CONTACTING THE ISSUER'S INVESTORS RELATIONS
DEPARTMENT, TELEPHONE NO. (770) 393-0199.
[Remainder of Page Intentionally Left Blank]
<PAGE>
No. 1 Principal Amount $292,700,000
CUSIP NO. 698940 AB 9
ISIN: US 698940 AB 92
10 1/2% Senior Subordinated Discount Note due 2007
Paragon Health Network, Inc., a Delaware corporation promises to pay
to Cede & Co., or registered assigns, the principal sum of Two Hundred Ninety
Two Million Seven Hundred Thousand Dollars on November 1, 2007.
Interest Payment Dates: May 1 and November 1.
Record Dates: April 15 and October 15.
This Note shall not bear interest prior to November 1, 2002. From
November 4, 1997 through November 1, 2002, the Accreted Value of this Note will
increase as specified on the reverse side hereof.
Additional provisions of this Note are set forth on the other side of
this Note.
Dated: November 4, 1997 PARAGON HEALTH NETWORK, INC.
By: /s/ Keith B. Pitts
---------------------------------
Keith B. Pitts
Chairman, President and
Chief Executive Officer
By: /s/ Charles B. Carden
---------------------------------
Charles B. Carden
Executive Vice President and
Chief Financial Officer
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
IBJ SCHRODER BANK & TRUST COMPANY
as Trustee, certifies that this
is one of the Notes referred to
in the Indenture.
By /s/ Terrence Rawlins
-----------------------------
Authorized Signatory November 4, 1997
<PAGE>
2
10 1/2% Senior Subordinated Discount Note due 2007
1. Interest
--------
Paragon Health Network, Inc., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company")) promises to pay interest on the
principal amount of this Note as described below.
The 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Notes")
will accrete in value until November 1, 2002 at a rate of 10.57% per annum,
compounded semi-annually, to an aggregate principal amount of $294,000,000.
Cash interest will not accrue on the Notes prior to November 1, 2002.
Thereafter, interest will accrue at the rate of 10 1/2% per annum and will be
payable semi-annually in cash and in arrears to the Holders of record on each
April 15 or October 15 immediately preceding the interest payment date on May 1
and November 1 of each year, commencing May 1, 2003. Cash interest on the Notes
will accrue from the most recent interest payment date to which interest has
been paid or, if no interest has been paid, from November 1, 2002. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
2. Method of Payment
-----------------
By at least 10:00 a.m. (New York City time) on the date on which any
principal of or interest on the Notes is due and payable, the Company shall
irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay
such principal, premium, if any, and/or interest. The Company will pay interest
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the April 15 or October 15 next preceding the
interest payment date even if the Notes are cancelled, repurchased or redeemed
after the record date and on or before the interest payment date. Holders must
surrender Notes to a Paying Agent to collect principal payments. The Company
will pay principal and interest in money of the United States that at the time
of payment is legal tender for payment of public and private debts. However,
the Company may pay interest by check payable in such money. It may mail an
interest check to a Holder's registered address.
3. Trustee, Paying Agent and Registrar
-----------------------------------
Initially, IBJ Schroder Bank & Trust Company, a New York banking
corporation ("Trustee"), will act as Trustee, Paying Agent and Registrar. IBJ
Schroder Bank & Trust Company will also act as the Trustee for $275,000,000
aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the
"Senior Subordinated Notes"). The Company may appoint and change any Paying
Agent, Registrar or co-registrar without notice to any Noteholder. The Company
or any of its domestically incorporated Wholly Owned Subsidiaries may act as
Paying Agent, Registrar or co-registrar.
4. Indenture
---------
The Company issued the Notes under an Indenture dated as of November
4, 1997 (as it may be amended or supplemented from time to time in accordance
with the terms thereof, the "Indenture"), among the Company and the Trustee.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
------
(S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Capitalized terms used herein and not defined herein have the meanings ascribed
thereto in the Indenture. The Notes are subject to all such terms, and
Noteholders are referred to the Indenture and the Act for a statement of those
terms.
The Notes are general unsecured senior subordinated obligations of the
Company limited to $294 million aggregate principal amount (subject to Section
310 of the Indenture). This Note is one of
<PAGE>
3
the Initial Notes referred to in the Indenture. The Notes include the Initial
Notes and any Exchange Notes issued in exchange for the Initial Notes pursuant
to the Indenture and the Registration Rights Agreement. The Initial Notes and
the Exchange Notes are treated as a single class of securities under the
Indenture. The Indenture imposes certain limitations on the Incurrence of
Indebtedness by the Company and its Restricted Subsidiaries, the payment of
dividends on, and the purchase or redemption of, Capital Stock of the Company
and its Restricted Subsidiaries, certain purchases or redemptions of
Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of
Restricted Subsidiaries, investments of the Company and its Restricted
Subsidiaries and transactions with Affiliates. In addition, the Indenture limits
the ability of the Company and its Subsidiaries to restrict distributions and
dividends from Restricted Subsidiaries.
5. Optional Redemption
-------------------
The Notes will be redeemable, at the Company's option, in whole or in
part, at any time and from time to time on and after November 1, 2002 and prior
to maturity, upon not less than 30 nor more than 90 days' prior notice mailed by
first class mail to each Holder's registered address, at the following
redemption prices (expressed as a percentage of the Accreted Value thereof),
plus accrued and unpaid interest, if any, to the redemption date (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date), if redeemed during the 12 month period
beginning on November 1 of the years indicated below:
Year Redemption Price
---- ----------------
2002 ............................... 105.250%
2003................................ 103.500%
2004................................ 101.750%
2005 and thereafter................. 100.000%
In addition, at any time and from time to time prior to November 1,
2000, the Company may redeem up to 33-1/3% of the originally issued principal
amount at maturity of Notes at a redemption price equal to 110.5% of the
Accreted Value at the redemption date of the Notes so redeemed with the net
proceeds of one or more Equity Offerings by the Company; provided, however, that
at least 50% of the originally issued principal amount at maturity of Notes must
remain outstanding immediately after each such redemption and that any such
redemption occurs within 90 days following the closing of any such Equity
Offering.
The aggregate principal amount of the Notes and the Senior
Subordinated Notes to be redeemed shall be allocated by the Company between the
Notes and the Senior Subordinated Notes in the Company's sole discretion.
6. Notice of Redemption
--------------------
Notice of redemption will be mailed at least 30 days but not more than
90 days before the redemption date to each Holder of Notes to be redeemed at his
registered address. Notes in denominations of principal amount larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of and accrued and unpaid interest on all
Notes (or portions thereof) to be redeemed on the redemption date is deposited
with the Paying Agent on or before the redemption date and certain other
conditions are satisfied, on and after such date interest ceases to accrue on
such Notes (or such portions thereof) called for redemption.
7. Put Provisions
--------------
Upon a Change of Control, any Holder of Notes will have the right to
cause the Company to repurchase all or any part of the Notes of such Holder at a
repurchase price equal to 101% of the principal
<PAGE>
4
amount thereof plus accrued and unpaid interest to the date of repurchase as
provided in, and subject to the terms of, the Indenture.
8. Subordination and Ranking
-------------------------
The Notes are subordinated to Senior Indebtedness, as defined in the
Indenture. To the extent provided in the Indenture, Senior Indebtedness must be
paid before the Notes may be paid. The Company agrees, and each Noteholder by
accepting a Note agrees, to the subordination provisions contained in the
Indenture and authorizes the Trustee to give them effect and appoints the
Trustee as attorney-in-fact for such purpose. The Notes and the Senior
Subordinated Notes will in all respects rank pari passu with each other and with
all other Senior Subordinated Indebtedness of the Company.
9. Denominations; Transfer; Exchange
---------------------------------
The Notes are in registered form without coupons in denominations of
principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer
or exchange Notes in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements or transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not register the transfer of or exchange of (i)
any Note selected for redemption (except, in the case of a Note to be redeemed
in part, the portion of the Note not to be redeemed) for a period beginning 15
days before a selection of Notes to be redeemed and ending on the date of such
selection or (ii) any Notes for a period beginning 15 days before an interest
payment date and ending on such interest payment date.
10. Persons Deemed Owners
---------------------
The registered holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Defeasance
----------
Subject to certain conditions set forth in the Indenture, the Company
at any time may terminate some or all of its obligations under the Notes and the
Indenture if the Company deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Notes to redemption
or maturity, as the case may be. The Company in its sole discretion can defease
either or both of the Notes and the Senior Subordinated Notes.
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders of
at least a majority in principal amount of the outstanding Notes and (ii) any
default or noncompliance with any provision may be waived with the written
consent of the Holders of a majority in principal amount of the outstanding
Notes. Subject to certain exceptions set forth in the Indenture, without the
consent of any Noteholder, the Company and the Trustee may amend the Indenture
or the Notes to cure any ambiguity, omission, defect or inconsistency, or to
comply with Article 5 of the Indenture, or to provide for uncertificated Notes
in addition to or in place of certificated Notes, or to add guarantees with
respect to the Notes or to secure the Notes, or to add additional covenants or
surrender rights and powers conferred on the Company, or to comply with any
request of the SEC in
<PAGE>
5
connection with qualifying the Indenture under the Act, or to make any change
that does not adversely affect the rights of any Noteholder, or to provide for
the issuance of Exchange Notes.
The Notes and the Senior Subordinated Notes will vote together as a
single class of securities under the Indenture with respect to matters on which
Holders are required or permitted to vote.
14. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) a default in any
payment of interest on any Note when due (whether or not such payment is
prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated Maturity,
upon optional redemption, upon required repurchase, upon declaration or
otherwise, whether or not such payment is prohibited by Article 13 of the
Indenture, (iii) the failure by the Company to comply with its obligations under
Section 801 of the Indenture, (iv) the failure by the Company to comply for 30
days after written notice with any of its obligations under Section 1016 of the
Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019
or 1020 of the Indenture (in each case, other than a failure to purchase Notes
when required under Sections 1016 or 1017 of the Indenture), (v) the failure by
the Company to comply for 60 days after notice with its other agreements
contained in the Notes or the Indentures, (vi) the failure by the Company or any
Significant Subsidiary to pay any Indebtedness within any applicable grace
period after final maturity or the acceleration of any such Indebtedness by the
holders thereof because of a default if the total amount of such Indebtedness
unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary, (viii)
the rendering of any judgment or decree for the payment of money in an amount
(net of any insurance or indemnity payments actually received in respect thereof
prior to or within 90 days from the entry thereof, or to be received in respect
thereof in the event any appeal thereof shall be unsuccessful) in excess of
$20.0 million against the Company or a Significant Subsidiary that is not
discharged, bonded or insured by a third Person if (A) an enforcement proceeding
thereon is commenced or (B) such judgment or decree remains outstanding for a
period of 90 days following such judgment or decree and is not discharged,
waived or stayed or (ix) the failure of any Guarantee of the Notes by a
Guarantor made pursuant to Section 1020 of the Indenture to be in full force and
effect (except as contemplated by the terms thereof or of the Indenture) or the
denial or disaffirmation in writing by any such Guarantor of its obligations
under the Indenture or any such Guarantee if such Default continues for 10 days.
If an Event of Default occurs and is continuing, the Trustee or the Holders of
at least a majority in principal amount of the outstanding applicable Notes may
declare all such Notes to be due and payable immediately. Certain events of
bankruptcy or insolvency are Events of Default which will result in the Notes
being due and payable immediately upon the occurrence of such Events of Default.
Noteholders may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Noteholders notice of any continuing Default or Event of Default
(except a Default or Event of Default in payment of principal or interest) if it
determines that withholding notice is in their interest.
15. Trustee Dealings with the Company
---------------------------------
Subject to certain limitations set forth in the Indenture, the Trustee
under the Indenture, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with and collect obligations
owed to it by the Company or its affiliates and may otherwise deal with the
Company or its affiliates with the same rights it would have if it were not
Trustee.
<PAGE>
6
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Noteholder waives and
releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
--------------
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent acting on its behalf) manually signs the
certificate of authentication on the other side of this Note.
18. Registration Rights
-------------------
The Holder of this Note is entitled to the benefits of the
Registration Rights Agreement, dated as of November 4, 1997 (the "Registration
Rights Agreement"), between the Company and the Initial Purchasers named
therein. In the event that either (i) an Exchange Offer Registration Statement
is not filed with the SEC on or prior to 60 days after the Issue Date, (A) an
Exchange Offer Registration Statement or a Shelf Registration Statement is not
declared effective within 150 days after the Issue Date, or (B) the Exchange
Offer is not consummated on or prior to 180 days after the Issue Date in respect
of tendered Notes and a Shelf Registration Statement has not been declared
effective or a Shelf Registration Statement is filed and declared effective
within 150 days after the Issue Date but shall thereafter cease to be effective
(at any time that the Company is obligated to maintain the effectiveness
thereof) without being succeeded within 45 days by an additional Registration
Statement filed and declared effective (each such event referred to in clauses
(A) and (B), a "Registration Default"), the Company will pay liquidated damages
to each holder of Transfer Restricted Securities (as defined in the Registration
Rights Agreement), during the period of one or more such Registration Defaults,
in an amount equal to $.192 per week per $1,000 Accreted Value of the Notes
constituting Transfer Restricted Securities held by such holder until the
applicable Registration Statement is filed or declared effective, the Exchange
Offer is consummated or the Shelf Registration Statement again becomes
effective, as the case may be, provided that, except in certain limited
circumstances, the Company's obligation to pay liquidated damages will terminate
upon consummation of the Exchange Offer. All accrued liquidated damages shall
be paid to holders in the same manner as interest payments on the Notes on semi-
annual payment dates which correspond to interest payment dates for the Notes.
Following the cure of all Registration Defaults, the accrual of liquidated
damages will cease.
19. Abbreviations
-------------
Customary abbreviations may be used in the name of a Noteholder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants
in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act).
20. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Noteholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
<PAGE>
7
21. Governing Law
-------------
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY
LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF NEW YORK.
The Company will furnish to any Noteholder upon written request and
without charge to the Noteholder a copy of the Indenture. Requests may be made
to:
Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, GA 30346
Attention of General Counsel
[Remainder of Page Intentionally Left Blank]
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Note on the books of the
Company. The agent may substitute another to act for him.
________________________________________________________________________________
Date:____________________ Your Signature:___________________
Signature Guarantee:______________________________
(Signature must be guaranteed)
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Note.
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
In connection with any transfer or exchange of any of the Notes evidenced by
this certificate occurring prior to the date that is two years after the later
of the date of original issuance of such Notes and the last date, if any, on
which such Notes were owned by the Company or any Affiliate of the Company, the
undersigned confirms that such Notes are being:
CHECK ONE BOX BELOW:
1[_] acquired for the undersigned's own account, without transfer; or
2[_] transferred to the Company; or
3[_] transferred pursuant to and in compliance with Rule 144A under
the Securities Act of 1933; or
4[_] transferred pursuant to an effective registration statement under
the Securities Act of 1933; or
5[_] transferred pursuant to and in compliance with Regulation S under
the Securities Act of 1933; or
6[_] transferred to an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of
1933), that has furnished to the Trustee a signed letter
containing certain representations and agreements (the form of
which letter appears in Section 308 of the Indenture); or
<PAGE>
2
7[_] transferred pursuant to another available exemption from the
registration requirements of the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee may refuse to register any of
the Notes evidenced by this certificate in the name of any person other than the
registered holder thereof; provided, however, that if box (5), (6) or (7) is
checked, the Trustee or the Company may require, prior to registering any such
transfer of the Notes, in their sole discretion, such legal opinions,
certifications and other information as the Trustee or the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933, such as the exemption provided by
Rule 144 under such Act.
______________________________
Signature
Signature Guarantee:
______________________________ ______________________________
(Signature must be guaranteed) Signature
____________________________________________________________
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, as amended, and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Date: ___________________ _______________________________________
NOTICE: To be executed by an executive officer.
<PAGE>
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE
The following increases or decreases in this Global Note have been
made:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Date of Amount of decrease in Principal Amount of increase in Principal Principal Amount of this Global Signature of
Exchange Amount of this Global Note Amount of this Global Note Note following such decrease or authorized signatory
increase of Trustee or Notes
Custodian
</TABLE>
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.6 or 4.8 of the Indenture, check the box:
[_]
If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 4.6 or 4.8 of the Indenture, state the amount in
principal amount (must be integral multiple of $1,000): $
Date: __________ Your Signature ___________________________________________
(Sign exactly as your name appears on the
other side of the Note)
Signature Guarantee: _______________________________________
(Signature must be guaranteed)
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
EXHIBIT 4.9
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH
REGISTRATION.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS
EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN
AN OFFSHORE TRANSACTION, (2) BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR
OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION
TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY
WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE), ONLY (A) TO THE
COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE
FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A
THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE
UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E)
TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN
ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN
EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF
SUCH NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE
IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F)
PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO
ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO
REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER
INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING
CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF
THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE
TRUSTEE. THIS LEGEND WILL BE REMOVED AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND
INCLUDING THE LATER OF (A) THE DAY ON WHICH THE NOTES ARE OFFERED TO PERSONS
OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE
CLOSING OF THE ORIGINAL OFFERING. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM
BY REGULATION S UNDER THE SECURITIES ACT.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN
THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
<PAGE>
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT
NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
SECTIONS 306 AND 307 OF THE INDENTURE.
THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR PURPOSES OF
SECTIONS 1271-1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE ISSUE
PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE AND YIELD TO MATURITY OF
THE NOTES MAY BE OBTAINED BY CONTACTING THE ISSUER'S INVESTORS RELATIONS
DEPARTMENT, TELEPHONE NO. (770) 393-0199.
[Remainder of Page Intentionally Left Blank]
<PAGE>
No. 1 Principal Amount $1,300,000
CUSIP NO. U69879 AB 7
ISIN: USU 69879 AB 78
10 1/2% Senior Subordinated Discount Note due 2007
Paragon Health Network, Inc., a Delaware corporation promises to pay
to Cede & Co., or registered assigns, the principal sum of One Million Three
Hundred Thousand Dollars on November 1, 2007.
Interest Payment Dates: May 1 and November 1.
Record Dates: April 15 and October 15.
This Note shall not bear interest prior to November 1, 2002. From
November 4, 1997 through November 1, 2002, the Accreted Value of this Note will
increase as specified on the reverse side hereof.
Additional provisions of this Note are set forth on the other side of
this Note.
Dated: November 4, 1997 PARAGON HEALTH NETWORK, INC.
By: /s/ Keith B. Pitts
--------------------------------------
Keith B. Pitts
Executive Vice President and
Chief Financial Officer
By: /s/ Charles B. Carden
--------------------------------------
Charles B. Carden
Executive Vice President and
Chief Financial Officer
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
IBJ SCHRODER BANK & TRUST COMPANY
as Trustee, certifies that this
is one of the Notes referred to
in the Indenture.
By /s/ Terrence Rawlins
------------------------------
Authorized Signatory November 4, 1997
<PAGE>
2
10 1/2% Senior Subordinated Discount Note due 2007
1. Interest
--------
Paragon Health Network, Inc., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company")) promises to pay interest on the
principal amount of this Note as described below.
The 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Notes")
will accrete in value until November 1, 2002 at a rate of 10.57% per annum,
compounded semi-annually, to an aggregate principal amount of $294,000,000.
Cash interest will not accrue on the Notes prior to November 1, 2002.
Thereafter, interest will accrue at the rate of 10 1/2% per annum and will be
payable semi-annually in cash and in arrears to the Holders of record on each
April 15 or October 15 immediately preceding the interest payment date on May 1
and November 1 of each year, commencing May 1, 2003. Cash interest on the Notes
will accrue from the most recent interest payment date to which interest has
been paid or, if no interest has been paid, from November 1, 2002. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
2. Method of Payment
-----------------
By at least 10:00 a.m. (New York City time) on the date on which any
principal of or interest on the Notes is due and payable, the Company shall
irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay
such principal, premium, if any, and/or interest. The Company will pay interest
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the April 15 or October 15 next preceding the
interest payment date even if the Notes are cancelled, repurchased or redeemed
after the record date and on or before the interest payment date. Holders must
surrender Notes to a Paying Agent to collect principal payments. The Company
will pay principal and interest in money of the United States that at the time
of payment is legal tender for payment of public and private debts. However,
the Company may pay interest by check payable in such money. It may mail an
interest check to a Holder's registered address.
3. Trustee, Paying Agent and Registrar
-----------------------------------
Initially, IBJ Schroder Bank & Trust Company, a New York banking
corporation ("Trustee"), will act as Trustee, Paying Agent and Registrar. IBJ
Schroder Bank & Trust Company will also act as the Trustee for $275,000,000
aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the
"Senior Subordinated Notes"). The Company may appoint and change any Paying
Agent, Registrar or co-registrar without notice to any Noteholder. The Company
or any of its domestically incorporated Wholly Owned Subsidiaries may act as
Paying Agent, Registrar or co-registrar.
4. Indenture
---------
The Company issued the Notes under an Indenture dated as of November
4, 1997 (as it may be amended or supplemented from time to time in accordance
with the terms thereof, the "Indenture"), among the Company and the Trustee.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
------
(S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Capitalized terms used herein and not defined herein have the meanings ascribed
thereto in the Indenture. The Notes are subject to all such terms, and
Noteholders are referred to the Indenture and the Act for a statement of those
terms.
The Notes are general unsecured senior subordinated obligations of the
Company limited to $294 million aggregate principal amount (subject to Section
310 of the Indenture). This Note is one of
<PAGE>
3
the Initial Notes referred to in the Indenture. The Notes include the Initial
Notes and any Exchange Notes issued in exchange for the Initial Notes pursuant
to the Indenture and the Registration Rights Agreement. The Initial Notes and
the Exchange Notes are treated as a single class of securities under the
Indenture. The Indenture imposes certain limitations on the Incurrence of
Indebtedness by the Company and its Restricted Subsidiaries, the payment of
dividends on, and the purchase or redemption of, Capital Stock of the Company
and its Restricted Subsidiaries, certain purchases or redemptions of
Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of
Restricted Subsidiaries, investments of the Company and its Restricted
Subsidiaries and transactions with Affiliates. In addition, the Indenture limits
the ability of the Company and its Subsidiaries to restrict distributions and
dividends from Restricted Subsidiaries.
5. Optional Redemption
-------------------
The Notes will be redeemable, at the Company's option, in whole or in
part, at any time and from time to time on and after November 1, 2002 and prior
to maturity, upon not less than 30 nor more than 90 days' prior notice mailed by
first class mail to each Holder's registered address, at the following
redemption prices (expressed as a percentage of the Accreted Value thereof),
plus accrued and unpaid interest, if any, to the redemption date (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date), if redeemed during the 12 month period
beginning on November 1 of the years indicated below:
Year Redemption Price
---- ----------------
2002............................... 105.250%
2003............................... 103.500%
2004............................... 101.750%
2005 and thereafter................ 100.000%
In addition, at any time and from time to time prior to November 1,
2000, the Company may redeem up to 33-1/3% of the originally issued principal
amount at maturity of Notes at a redemption price equal to 110.5% of the
Accreted Value at the redemption date of the Notes so redeemed with the net
proceeds of one or more Equity Offerings by the Company; provided, however, that
at least 50% of the originally issued principal amount at maturity of Notes must
remain outstanding immediately after each such redemption and that any such
redemption occurs within 90 days following the closing of any such Equity
Offering.
The aggregate principal amount of the Notes and the Senior
Subordinated Notes to be redeemed shall be allocated by the Company between the
Notes and the Senior Subordinated Notes in the Company's sole discretion.
6. Notice of Redemption
--------------------
Notice of redemption will be mailed at least 30 days but not more than
90 days before the redemption date to each Holder of Notes to be redeemed at his
registered address. Notes in denominations of principal amount larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of and accrued and unpaid interest on all
Notes (or portions thereof) to be redeemed on the redemption date is deposited
with the Paying Agent on or before the redemption date and certain other
conditions are satisfied, on and after such date interest ceases to accrue on
such Notes (or such portions thereof) called for redemption.
7. Put Provisions
--------------
Upon a Change of Control, any Holder of Notes will have the right to
cause the Company to repurchase all or any part of the Notes of such Holder at a
repurchase price equal to 101% of the principal
<PAGE>
4
amount thereof plus accrued and unpaid interest to the date of repurchase as
provided in, and subject to the terms of, the Indenture.
8. Subordination and Ranking
-------------------------
The Notes are subordinated to Senior Indebtedness, as defined in the
Indenture. To the extent provided in the Indenture, Senior Indebtedness must be
paid before the Notes may be paid. The Company agrees, and each Noteholder by
accepting a Note agrees, to the subordination provisions contained in the
Indenture and authorizes the Trustee to give them effect and appoints the
Trustee as attorney-in-fact for such purpose. The Notes and the Senior
Subordinated Notes will in all respects rank pari passu with each other and with
all other Senior Subordinated Indebtedness of the Company.
9. Denominations; Transfer; Exchange
---------------------------------
The Notes are in registered form without coupons in denominations of
principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer
or exchange Notes in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements or transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not register the transfer of or exchange of (i)
any Note selected for redemption (except, in the case of a Note to be redeemed
in part, the portion of the Note not to be redeemed) for a period beginning 15
days before a selection of Notes to be redeemed and ending on the date of such
selection or (ii) any Notes for a period beginning 15 days before an interest
payment date and ending on such interest payment date.
10. Persons Deemed Owners
---------------------
The registered holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Defeasance
----------
Subject to certain conditions set forth in the Indenture, the Company
at any time may terminate some or all of its obligations under the Notes and the
Indenture if the Company deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Notes to redemption
or maturity, as the case may be. The Company in its sole discretion can defease
either or both of the Notes and the Senior Subordinated Notes.
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders of
at least a majority in principal amount of the outstanding Notes and (ii) any
default or noncompliance with any provision may be waived with the written
consent of the Holders of a majority in principal amount of the outstanding
Notes. Subject to certain exceptions set forth in the Indenture, without the
consent of any Noteholder, the Company and the Trustee may amend the Indenture
or the Notes to cure any ambiguity, omission, defect or inconsistency, or to
comply with Article 5 of the Indenture, or to provide for uncertificated Notes
in addition to or in place of certificated Notes, or to add guarantees with
respect to the Notes or to secure the Notes, or to add additional covenants or
surrender rights and powers conferred on the Company, or to comply with any
request of the SEC in
<PAGE>
5
connection with qualifying the Indenture under the Act, or to make any change
that does not adversely affect the rights of any Noteholder, or to provide for
the issuance of Exchange Notes.
The Notes and the Senior Subordinated Notes will vote together as a
single class of securities under the Indenture with respect to matters on which
Holders are required or permitted to vote.
14. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) a default in any
payment of interest on any Note when due (whether or not such payment is
prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated Maturity,
upon optional redemption, upon required repurchase, upon declaration or
otherwise, whether or not such payment is prohibited by Article 13 of the
Indenture, (iii) the failure by the Company to comply with its obligations under
Section 801 of the Indenture, (iv) the failure by the Company to comply for 30
days after written notice with any of its obligations under Section 1016 of the
Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019
or 1020 of the Indenture (in each case, other than a failure to purchase Notes
when required under Sections 1016 or 1017 of the Indenture), (v) the failure by
the Company to comply for 60 days after notice with its other agreements
contained in the Notes or the Indentures, (vi) the failure by the Company or any
Significant Subsidiary to pay any Indebtedness within any applicable grace
period after final maturity or the acceleration of any such Indebtedness by the
holders thereof because of a default if the total amount of such Indebtedness
unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary, (viii)
the rendering of any judgment or decree for the payment of money in an amount
(net of any insurance or indemnity payments actually received in respect thereof
prior to or within 90 days from the entry thereof, or to be received in respect
thereof in the event any appeal thereof shall be unsuccessful) in excess of
$20.0 million against the Company or a Significant Subsidiary that is not
discharged, bonded or insured by a third Person if (A) an enforcement proceeding
thereon is commenced or (B) such judgment or decree remains outstanding for a
period of 90 days following such judgment or decree and is not discharged,
waived or stayed or (ix) the failure of any Guarantee of the Notes by a
Guarantor made pursuant to Section 1020 of the Indenture to be in full force and
effect (except as contemplated by the terms thereof or of the Indenture) or the
denial or disaffirmation in writing by any such Guarantor of its obligations
under the Indenture or any such Guarantee if such Default continues for 10 days.
If an Event of Default occurs and is continuing, the Trustee or the Holders of
at least a majority in principal amount of the outstanding applicable Notes may
declare all such Notes to be due and payable immediately. Certain events of
bankruptcy or insolvency are Events of Default which will result in the Notes
being due and payable immediately upon the occurrence of such Events of Default.
Noteholders may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Noteholders notice of any continuing Default or Event of Default
(except a Default or Event of Default in payment of principal or interest) if it
determines that withholding notice is in their interest.
15. Trustee Dealings with the Company
---------------------------------
Subject to certain limitations set forth in the Indenture, the Trustee
under the Indenture, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with and collect obligations
owed to it by the Company or its affiliates and may otherwise deal with the
Company or its affiliates with the same rights it would have if it were not
Trustee.
<PAGE>
6
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Noteholder waives and
releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
--------------
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent acting on its behalf) manually signs the
certificate of authentication on the other side of this Note.
18. Registration Rights
-------------------
The Holder of this Note is entitled to the benefits of the
Registration Rights Agreement, dated as of November 4, 1997 (the "Registration
Rights Agreement"), between the Company and the Initial Purchasers named
therein. In the event that either (i) an Exchange Offer Registration Statement
is not filed with the SEC on or prior to 60 days after the Issue Date, (A) an
Exchange Offer Registration Statement or a Shelf Registration Statement is not
declared effective within 150 days after the Issue Date, or (B) the Exchange
Offer is not consummated on or prior to 180 days after the Issue Date in respect
of tendered Notes and a Shelf Registration Statement has not been declared
effective or a Shelf Registration Statement is filed and declared effective
within 150 days after the Issue Date but shall thereafter cease to be effective
(at any time that the Company is obligated to maintain the effectiveness
thereof) without being succeeded within 45 days by an additional Registration
Statement filed and declared effective (each such event referred to in clauses
(A) and (B), a "Registration Default"), the Company will pay liquidated damages
to each holder of Transfer Restricted Securities (as defined in the Registration
Rights Agreement), during the period of one or more such Registration Defaults,
in an amount equal to $.192 per week per $1,000 Accreted Value of the Notes
constituting Transfer Restricted Securities held by such holder until the
applicable Registration Statement is filed or declared effective, the Exchange
Offer is consummated or the Shelf Registration Statement again becomes
effective, as the case may be, provided that, except in certain limited
circumstances, the Company's obligation to pay liquidated damages will terminate
upon consummation of the Exchange Offer. All accrued liquidated damages shall
be paid to holders in the same manner as interest payments on the Notes on semi-
annual payment dates which correspond to interest payment dates for the Notes.
Following the cure of all Registration Defaults, the accrual of liquidated
damages will cease.
19. Abbreviations
-------------
Customary abbreviations may be used in the name of a Noteholder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants
in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act).
20. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Noteholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
<PAGE>
7
21. Governing Law
-------------
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY
LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF NEW YORK.
The Company will furnish to any Noteholder upon written request and
without charge to the Noteholder a copy of the Indenture. Requests may be made
to:
Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, GA 30346
Attention of General Counsel
[Remainder of Page Intentionally Left Blank]
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Note on the books of the
Company. The agent may substitute another to act for him.
________________________________________________________________________________
Date:____________________ Your Signature:____________________________________
Signature Guarantee:____________________________________________________________
(Signature must be guaranteed)
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Note.
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
In connection with any transfer or exchange of any of the Notes evidenced by
this certificate occurring prior to the date that is two years after the later
of the date of original issuance of such Notes and the last date, if any, on
which such Notes were owned by the Company or any Affiliate of the Company, the
undersigned confirms that such Notes are being:
CHECK ONE BOX BELOW:
1 [_] acquired for the undersigned's own account, without transfer; or
2 [_] transferred to the Company; or
3 [_] transferred pursuant to and in compliance with Rule 144A under
the Securities Act of 1933; or
4 [_] transferred pursuant to an effective registration statement under
the Securities Act of 1933; or
5 [_] transferred pursuant to and in compliance with Regulation S under
the Securities Act of 1933; or
6 [_] transferred to an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of
1933), that has furnished to the Trustee a signed letter
containing certain representations and agreements (the form of
which letter appears in Section 308 of the Indenture); or
<PAGE>
2
7 [_] transferred pursuant to another available exemption from the
registration requirements of the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee may refuse to register any of
the Notes evidenced by this certificate in the name of any person other than the
registered holder thereof; provided, however, that if box (5), (6) or (7) is
checked, the Trustee or the Company may require, prior to registering any such
transfer of the Notes, in their sole discretion, such legal opinions,
certifications and other information as the Trustee or the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933, such as the exemption provided by
Rule 144 under such Act.
__________________________
Signature
Signature Guarantee:
___________________________________ __________________________
(Signature must be guaranteed) Signature
____________________________________________________________
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE
The following increases or decreases in this Global Note have been made:
<TABLE>
<CAPTION>
Date of Exchange Amount of decrease in Amount of increase in Principal Amount of Signature of authorized
Principal Amount of Principal Amount of this Global Note signatory of Trustee or
this Global Note this Global Note following such decrease or increase Notes Custodian
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.6 or 4.8 of the Indenture, check the box:
[_]
If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 4.6 or 4.8 of the Indenture, state the amount in
principal amount (must be integral multiple of $1,000): $
Date: __________ Your Signature ______________________________________________
(Sign exactly as your name appears on the other side
of the Note)
Signature Guarantee: _______________________________________
(Signature must be guaranteed)
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
Form of Certificate To Be Delivered in Connection with Transfers under
Regulation S
[date]
IBJ Schroder Bank & Trust Company, as Trustee
1 State Street, 11th Floor
New York, New York 10004
Attention: Corporate Trust Administration
Re: PARAGON HEALTH NETWORK, INC. (the "Company")
10 1/2% Senior Subordinated Discount Notes (the "Notes")
Ladies and Gentlemen:
In connection with our proposed sale of $________ aggregate principal
amount of the Notes, we confirm that such sale has been effected pursuant to and
in accordance with Regulation S under the United States Securities Act of 1933,
as amended (the "Securities Act"), and, accordingly, we represent that:
A. the offer of the Notes was not made to a person in the United
States;
B. either (i) at the time the buy order was originated, the
transferee was outside the United States or we and any person acting on our
behalf reasonably believed that the transferee was outside the United
States or (ii) the transaction was executed in, on or through the
facilities of a designated off-shore securities market and neither we nor
any person acting on our behalf knows that the transaction has been
pre-arranged with a buyer in the United States;
C. no directed selling efforts have been made in the United States
in contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S, as applicable; and
D. the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
In addition, if the sale is made during a restricted period and the
provisions of Rule 903(c)(3) or Rule 904(c)(1) of Regulation S are applicable
thereto, we confirm that such sale has been made in accordance with the
applicable provisions of Rule 903(c)(3) or Rule 904(c)(1), as the case may be.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:____________________________ __________________________________
Authorized Signature Signature Medallion Guaranteed
<PAGE>
EXHIBIT 4.10
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH
REGISTRATION.
THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR
OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION
TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY
WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE), ONLY (A) TO THE
COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE
FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A
THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE
UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E)
TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN
ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN
EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF
SUCH NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE
IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F)
PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO
ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO
REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER
INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING
CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF
THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE
TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE
RESALE RESTRICTION TERMINATION DATE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN
THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT
NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
SECTIONS 306 AND 307 OF THE INDENTURE.
<PAGE>
THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR PURPOSES OF
SECTIONS 1271-1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE ISSUE
PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE AND YIELD TO MATURITY OF
THE NOTES MAY BE OBTAINED BY CONTACTING THE ISSUER'S INVESTORS RELATIONS
DEPARTMENT, TELEPHONE NO. (770) 393-0199.
[Remainder of Page Intentionally Left Blank]
<PAGE>
Principal Amount $0
No. 1
CUSIP NO. 698940 AD 5
10 1/2% Senior Subordinated Discount Note due 2007
Paragon Health Network, Inc., a Delaware corporation promises to pay
to Cede & Co., or registered assigns, the principal sum of Zero Dollars on
November 1, 2007.
Interest Payment Dates: May 1 and November 1.
Record Dates: April 15 and October 15.
This Note shall not bear interest prior to November 1, 2002. From
November 4, 1997 through November 1, 2002, the Accreted Value of this Note will
increase as specified on the reverse side hereof.
Additional provisions of this Note are set forth on the other side of
this Note.
Dated: November 4, 1997 PARAGON HEALTH NETWORK, INC.
By: /s/ Keith B. Pitts
----------------------------------
Keith B. Pitts
Chairman, President and
Chief Executive Officer
By: /s/ Charles B. Carden
-----------------------------------
Charles B. Carden
Executive Vice President and
Chief Financial Officer
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
IBJ SCHRODER BANK & TRUST COMPANY
as Trustee, certifies that this
is one of the Notes referred to
in the Indenture.
By /s/ Terrence Rawlins
- ----------------------------------
Authorized Signatory November 4, 1997
<PAGE>
2
10 1/2% Senior Subordinated Discount Note due 2007
1. Interest
--------
Paragon Health Network, Inc., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company")) promises to pay interest on the
principal amount of this Note as described below.
The 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Notes")
will accrete in value until November 1, 2002 at a rate of 10.57% per annum,
compounded semi-annually, to an aggregate principal amount of $294,000,000.
Cash interest will not accrue on the Notes prior to November 1, 2002.
Thereafter, interest will accrue at the rate of 10 1/2% per annum and will be
payable semi-annually in cash and in arrears to the Holders of record on each
April 15 or October 15 immediately preceding the interest payment date on May 1
and November 1 of each year, commencing May 1, 2003. Cash interest on the Notes
will accrue from the most recent interest payment date to which interest has
been paid or, if no interest has been paid, from November 1, 2002. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
2. Method of Payment
-----------------
By at least 10:00 a.m. (New York City time) on the date on which any
principal of or interest on the Notes is due and payable, the Company shall
irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay
such principal, premium, if any, and/or interest. The Company will pay interest
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the April 15 or October 15 next preceding the
interest payment date even if the Notes are cancelled, repurchased or redeemed
after the record date and on or before the interest payment date. Holders must
surrender Notes to a Paying Agent to collect principal payments. The Company
will pay principal and interest in money of the United States that at the time
of payment is legal tender for payment of public and private debts. However,
the Company may pay interest by check payable in such money. It may mail an
interest check to a Holder's registered address.
3. Trustee, Paying Agent and Registrar
-----------------------------------
Initially, IBJ Schroder Bank & Trust Company, a New York banking
corporation ("Trustee"), will act as Trustee, Paying Agent and Registrar. IBJ
Schroder Bank & Trust Company will also act as the Trustee for $275,000,000
aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the
"Senior Subordinated Notes"). The Company may appoint and change any Paying
Agent, Registrar or co-registrar without notice to any Noteholder. The Company
or any of its domestically incorporated Wholly Owned Subsidiaries may act as
Paying Agent, Registrar or co-registrar.
4. Indenture
---------
The Company issued the Notes under an Indenture dated as of November
4, 1997 (as it may be amended or supplemented from time to time in accordance
with the terms thereof, the "Indenture"), among the Company and the Trustee.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
------
(S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Capitalized terms used herein and not defined herein have the meanings ascribed
thereto in the Indenture. The Notes are subject to all such terms, and
Noteholders are referred to the Indenture and the Act for a statement of those
terms.
The Notes are general unsecured senior subordinated obligations of the
Company limited to $294 million aggregate principal amount (subject to Section
310 of the Indenture). This Note is one of
<PAGE>
3
the Initial Notes referred to in the Indenture. The Notes include the Initial
Notes and any Exchange Notes issued in exchange for the Initial Notes pursuant
to the Indenture and the Registration Rights Agreement. The Initial Notes and
the Exchange Notes are treated as a single class of securities under the
Indenture. The Indenture imposes certain limitations on the Incurrence of
Indebtedness by the Company and its Restricted Subsidiaries, the payment of
dividends on, and the purchase or redemption of, Capital Stock of the Company
and its Restricted Subsidiaries, certain purchases or redemptions of
Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of
Restricted Subsidiaries, investments of the Company and its Restricted
Subsidiaries and transactions with Affiliates. In addition, the Indenture limits
the ability of the Company and its Subsidiaries to restrict distributions and
dividends from Restricted Subsidiaries.
5. Optional Redemption
-------------------
The Notes will be redeemable, at the Company's option, in whole or in
part, at any time and from time to time on and after November 1, 2002 and prior
to maturity, upon not less than 30 nor more than 90 days' prior notice mailed by
first class mail to each Holder's registered address, at the following
redemption prices (expressed as a percentage of the Accreted Value thereof),
plus accrued and unpaid interest, if any, to the redemption date (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date), if redeemed during the 12 month period
beginning on November 1 of the years indicated below:
Year Redemption Price
---- ----------------
2002............................... 105.250%
2003............................... 103.500%
2004............................... 101.750%
2005 and thereafter................ 100.000%
In addition, at any time and from time to time prior to November 1,
2000, the Company may redeem up to 33-1/3% of the originally issued principal
amount at maturity of Notes at a redemption price equal to 110.5% of the
Accreted Value at the redemption date of the Notes so redeemed with the net
proceeds of one or more Equity Offerings by the Company; provided, however, that
at least 50% of the originally issued principal amount at maturity of Notes must
remain outstanding immediately after each such redemption and that any such
redemption occurs within 90 days following the closing of any such Equity
Offering.
The aggregate principal amount of the Notes and the Senior
Subordinated Notes to be redeemed shall be allocated by the Company between the
Notes and the Senior Subordinated Notes in the Company's sole discretion.
6. Notice of Redemption
--------------------
Notice of redemption will be mailed at least 30 days but not more than
90 days before the redemption date to each Holder of Notes to be redeemed at his
registered address. Notes in denominations of principal amount larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of and accrued and unpaid interest on all
Notes (or portions thereof) to be redeemed on the redemption date is deposited
with the Paying Agent on or before the redemption date and certain other
conditions are satisfied, on and after such date interest ceases to accrue on
such Notes (or such portions thereof) called for redemption.
7. Put Provisions
--------------
Upon a Change of Control, any Holder of Notes will have the right to
cause the Company to repurchase all or any part of the Notes of such Holder at a
repurchase price equal to 101% of the principal
<PAGE>
4
amount thereof plus accrued and unpaid interest to the date of repurchase as
provided in, and subject to the terms of, the Indenture.
8. Subordination and Ranking
-------------------------
The Notes are subordinated to Senior Indebtedness, as defined in the
Indenture. To the extent provided in the Indenture, Senior Indebtedness must be
paid before the Notes may be paid. The Company agrees, and each Noteholder by
accepting a Note agrees, to the subordination provisions contained in the
Indenture and authorizes the Trustee to give them effect and appoints the
Trustee as attorney-in-fact for such purpose. The Notes and the Senior
Subordinated Notes will in all respects rank pari passu with each other and with
all other Senior Subordinated Indebtedness of the Company.
9. Denominations; Transfer; Exchange
---------------------------------
The Notes are in registered form without coupons in denominations of
principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer
or exchange Notes in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements or transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not register the transfer of or exchange of (i)
any Note selected for redemption (except, in the case of a Note to be redeemed
in part, the portion of the Note not to be redeemed) for a period beginning 15
days before a selection of Notes to be redeemed and ending on the date of such
selection or (ii) any Notes for a period beginning 15 days before an interest
payment date and ending on such interest payment date.
10. Persons Deemed Owners
---------------------
The registered holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Defeasance
----------
Subject to certain conditions set forth in the Indenture, the Company
at any time may terminate some or all of its obligations under the Notes and the
Indenture if the Company deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Notes to redemption
or maturity, as the case may be. The Company in its sole discretion can defease
either or both of the Notes and the Senior Subordinated Notes.
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders of
at least a majority in principal amount of the outstanding Notes and (ii) any
default or noncompliance with any provision may be waived with the written
consent of the Holders of a majority in principal amount of the outstanding
Notes. Subject to certain exceptions set forth in the Indenture, without the
consent of any Noteholder, the Company and the Trustee may amend the Indenture
or the Notes to cure any ambiguity, omission, defect or inconsistency, or to
comply with Article 5 of the Indenture, or to provide for uncertificated Notes
in addition to or in place of certificated Notes, or to add guarantees with
respect to the Notes or to secure the Notes, or to add additional covenants or
surrender rights and powers conferred on the Company, or to comply with any
request of the SEC in
<PAGE>
connection with qualifying the Indenture under the Act, or to make any change
that does not adversely affect the rights of any Noteholder, or to provide for
the issuance of Exchange Notes.
The Notes and the Senior Subordinated Notes will vote together as a
single class of securities under the Indenture with respect to matters on which
Holders are required or permitted to vote.
14. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) a default in any
payment of interest on any Note when due (whether or not such payment is
prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated Maturity,
upon optional redemption, upon required repurchase, upon declaration or
otherwise, whether or not such payment is prohibited by Article 13 of the
Indenture, (iii) the failure by the Company to comply with its obligations under
Section 801 of the Indenture, (iv) the failure by the Company to comply for 30
days after written notice with any of its obligations under Section 1016 of the
Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019
or 1020 of the Indenture (in each case, other than a failure to purchase Notes
when required under Sections 1016 or 1017 of the Indenture), (v) the failure by
the Company to comply for 60 days after notice with its other agreements
contained in the Notes or the Indentures, (vi) the failure by the Company or any
Significant Subsidiary to pay any Indebtedness within any applicable grace
period after final maturity or the acceleration of any such Indebtedness by the
holders thereof because of a default if the total amount of such Indebtedness
unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary, (viii)
the rendering of any judgment or decree for the payment of money in an amount
(net of any insurance or indemnity payments actually received in respect thereof
prior to or within 90 days from the entry thereof, or to be received in respect
thereof in the event any appeal thereof shall be unsuccessful) in excess of
$20.0 million against the Company or a Significant Subsidiary that is not
discharged, bonded or insured by a third Person if (A) an enforcement proceeding
thereon is commenced or (B) such judgment or decree remains outstanding for a
period of 90 days following such judgment or decree and is not discharged,
waived or stayed or (ix) the failure of any Guarantee of the Notes by a
Guarantor made pursuant to Section 1020 of the Indenture to be in full force and
effect (except as contemplated by the terms thereof or of the Indenture) or the
denial or disaffirmation in writing by any such Guarantor of its obligations
under the Indenture or any such Guarantee if such Default continues for 10 days.
If an Event of Default occurs and is continuing, the Trustee or the Holders of
at least a majority in principal amount of the outstanding applicable Notes may
declare all such Notes to be due and payable immediately. Certain events of
bankruptcy or insolvency are Events of Default which will result in the Notes
being due and payable immediately upon the occurrence of such Events of Default.
Noteholders may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Noteholders notice of any continuing Default or Event of Default
(except a Default or Event of Default in payment of principal or interest) if it
determines that withholding notice is in their interest.
15. Trustee Dealings with the Company
---------------------------------
Subject to certain limitations set forth in the Indenture, the Trustee
under the Indenture, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with and collect obligations
owed to it by the Company or its affiliates and may otherwise deal with the
Company or its affiliates with the same rights it would have if it were not
Trustee.
<PAGE>
6
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Noteholder waives and
releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
--------------
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent acting on its behalf) manually signs the
certificate of authentication on the other side of this Note.
18. Registration Rights
-------------------
The Holder of this Note is entitled to the benefits of the
Registration Rights Agreement, dated as of November 4, 1997 (the "Registration
Rights Agreement"), between the Company and the Initial Purchasers named
therein. In the event that either (i) an Exchange Offer Registration Statement
is not filed with the SEC on or prior to 60 days after the Issue Date, (A) an
Exchange Offer Registration Statement or a Shelf Registration Statement is not
declared effective within 150 days after the Issue Date, or (B) the Exchange
Offer is not consummated on or prior to 180 days after the Issue Date in respect
of tendered Notes and a Shelf Registration Statement has not been declared
effective or a Shelf Registration Statement is filed and declared effective
within 150 days after the Issue Date but shall thereafter cease to be effective
(at any time that the Company is obligated to maintain the effectiveness
thereof) without being succeeded within 45 days by an additional Registration
Statement filed and declared effective (each such event referred to in clauses
(A) and (B), a "Registration Default"), the Company will pay liquidated damages
to each holder of Transfer Restricted Securities (as defined in the Registration
Rights Agreement), during the period of one or more such Registration Defaults,
in an amount equal to $.192 per week per $1,000 Accreted Value of the Notes
constituting Transfer Restricted Securities held by such holder until the
applicable Registration Statement is filed or declared effective, the Exchange
Offer is consummated or the Shelf Registration Statement again becomes
effective, as the case may be, provided that, except in certain limited
circumstances, the Company's obligation to pay liquidated damages will terminate
upon consummation of the Exchange Offer. All accrued liquidated damages shall
be paid to holders in the same manner as interest payments on the Notes on semi-
annual payment dates which correspond to interest payment dates for the Notes.
Following the cure of all Registration Defaults, the accrual of liquidated
damages will cease.
19. Abbreviations
-------------
Customary abbreviations may be used in the name of a Noteholder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants
in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act).
20. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Noteholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
<PAGE>
7
21. Governing Law
-------------
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY
LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF NEW YORK.
The Company will furnish to any Noteholder upon written request and
without charge to the Noteholder a copy of the Indenture. Requests may be made
to:
Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, GA 30346
Attention of General Counsel
[Remainder of Page Intentionally Left Blank]
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Note on the books of the
Company. The agent may substitute another to act for him.
________________________________________________________________________________
Date:____________________ Your Signature:___________________
Signature Guarantee:______________________________
(Signature must be guaranteed)
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Note.
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
In connection with any transfer or exchange of any of the Notes evidenced by
this certificate occurring prior to the date that is two years after the later
of the date of original issuance of such Notes and the last date, if any, on
which such Notes were owned by the Company or any Affiliate of the Company, the
undersigned confirms that such Notes are being:
CHECK ONE BOX BELOW:
1[_] acquired for the undersigned's own account, without transfer; or
2[_] transferred to the Company; or
3[_] transferred pursuant to and in compliance with Rule 144A under
the Securities Act of 1933; or
4[_] transferred pursuant to an effective registration statement under
the Securities Act of 1933; or
5[_] transferred pursuant to and in compliance with Regulation S under
the Securities Act of 1933; or
6[_] transferred to an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of
1933), that has furnished to the Trustee a signed letter
containing certain representations and agreements (the form of
which letter appears on the reverse side of this Note); or
<PAGE>
2
7[_] transferred pursuant to another available exemption from the
registration requirements of the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee may refuse to register any of
the Notes evidenced by this certificate in the name of any person other than the
registered holder thereof; provided, however, that if box (5), (6) or (7) is
checked, the Trustee or the Company may require, prior to registering any such
transfer of the Notes, in their sole discretion, such legal opinions,
certifications and other information as the Trustee or the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933, such as the exemption provided by
Rule 144 under such Act.
______________________________
Signature
Signature Guarantee:
_________________________________ ______________________________
(Signature must be guaranteed) Signature
____________________________________________________________
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE
The following increases or decreases in this Global Note have been
made:
<TABLE>
<CAPTION>
Principal Amount of this Signature of authorized
Date of Amount of decrease in Principal Amount of increase in Principal Global Note following signatory of Trustee or
Exchange Amount of this Global Note Amount of this Global Note such decrease or increase Notes Custodian
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.6 or 4.8 of the Indenture, check the box:
[_]
If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 4.6 or 4.8 of the Indenture, state the amount in
principal amount (must be integral multiple of $1,000): $
Date: __________ Your Signature ______________________________________________
(Sign exactly as your name appears on the
other side of the Note)
Signature Guarantee: _______________________________________
(Signature must be guaranteed)
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
Form of Certificate To Be Delivered in Connection with Transfers to
Institutional Accredited Investors
[date]
PARAGON HEALTH NETWORK, INC.
c/o IBJ Schroder Bank & Trust Company, as Trustee
1 State Street, 11th Floor
New York, New York 10004
Attention: Corporate Trust Administration
Ladies and Gentlemen:
This certificate is delivered to request a transfer of $__________
principal amount of the 10 1/2% Senior Subordinated Discount Notes due 2007 (the
"Notes") of Paragon Health Network, Inc. (the "Company").
Upon transfer, the Notes would be registered in the name of the new
beneficial owner as follows:
Name:
Address:
Taxpayer ID Number:
The undersigned represents and warrants to you that:
(1) We are an institutional "accredited investor" (as defined in Rules
501(a)(1), (2), (3) and (7) under the Securities Act of 1933, as amended (the
"Securities Act")), purchasing for our own account or for the account of an
institutional "accredited investor" at least $250,000 principal amount of the
Notes, and we are acquiring the Notes not with a view to, or for offer or sale
in connection with, any distribution in violation of the Securities Act. We
have such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of our investment in the Notes and
invest in or purchase securities similar to the Notes in the normal course of
our business. We and any accounts for which we are acting are each able to bear
the economic risk of our or its investment.
(2) We understand that the Notes have not been registered under the
Securities Act and, unless so registered, may not be sold except as permitted in
the following sentence. We agree on our own behalf and on behalf of any
investor account for which we are purchasing Notes to offer, sell or otherwise
transfer such Notes prior to the date which is two years after the later of the
date of original issue and the last date on which the Company or any affiliate
of the Company was the owner of such Notes (or any predecessor thereto) (the
"Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to
a registration statement which has been declared effective under the Securities
Act, (c) in a transaction complying with the requirements of Rule 144A under the
Securities Act, to a person we reasonably believe is a qualified institutional
buyer under Rule 144A (a "QIB") that purchases for its own account or for the
account of a QIB and to whom notice is given that the transfer is being made in
reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the
United States within the meaning of Regulation S under the Securities Act, (e)
to an institutional "accredited investor" within the meaning of Rule 501(a)(1),
(2), (3) or (7) under the Securities Act that is purchasing for its own account
or for the account of such an institutional "accredited investor", in each case
in a minimum principal amount of Notes of $250,000 or (f) pursuant to any other
available exemption from the registration requirements of the Securities Act,
subject in each of the foregoing cases to any requirement of law that the
disposition of our property or the property
<PAGE>
2
of such investor account or accounts be at all times within our or their control
and in compliance with any applicable state securities laws. The foregoing
restrictions on resale will not apply subsequent to the Resale Restriction
Termination Date. If any resale or other transfer of the Notes is proposed to be
made pursuant to clause (e) above prior to the Resale Restriction Termination
Date, the transferor shall deliver a letter from the transferee substantially in
the form of this letter to the Company and the Trustee, which shall provide,
among other things, that the transferee is an institutional "accredited
investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the
Securities Act and that it is acquiring such Notes for investment purposes and
not for distribution in violation of the Securities Act. Each purchaser
acknowledges that the Company and the Trustee reserve the right prior to any
offer, sale or other transfer prior to the Resale Termination Date of the Notes
pursuant to clauses (d), (e) or (f) above to require the delivery of an opinion
of counsel, certifications and/or other information satisfactory to the Company
and the Trustee.
TRANSFEREE:
BY:
Upon transfer the Notes would be registered in the name of the new beneficial
owner as follows:
TAXPAYER ID
NAME ADDRESS NUMBER:
---- ------- -------
Very truly yours,
[Name of Transferor]
By:______________________________ _________________________________
Name: Signature Medallion Guaranteed
Title:
<PAGE>
EXHIBIT 4.11
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH
REGISTRATION.
THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR
OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION
TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY
WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE), ONLY (A) TO THE
COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE
FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A
THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE
UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E)
TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN
ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN
EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF
SUCH NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE
IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F)
PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEES RIGHT PRIOR TO ANY
SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO REQUIRE
THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION
SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING CLAUSE (E), A
CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS
COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS
LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE
RESTRICTION TERMINATION DATE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT
NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
SECTIONS 306 AND 307 OF THE INDENTURE.
<PAGE>
No. 1 Principal Amount $271,550,000
CUSIP NO. 698940 AA 1
ISIN: US 698940 AA 10
9 1/2% Senior Subordinated Note due 2007
Paragon Health Network, Inc., a Delaware corporation promises to pay
to Cede & Co., or registered assigns, the principal sum of Two Hundred Seventy
One Million Five Hundred Fifty Thousand Dollars on November 1, 2007.
Interest Payment Dates: May 1 and November 1.
Record Dates: April 15 and October 15.
Additional provisions of this Note are set forth on the other side of
this Note.
Dated: November 4, 1997 PARAGON HEALTH NETWORK, INC.
By:/s/ Keith B. Pitts
------------------------------
Keith B. Pitts
Chairman, President and
Chief Executive Officer
By:/s/ Charles B. Carden
------------------------------
Charles B. Carden
Executive Vice President and
Chief Financial Officer
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
IBJ SCHRODER BANK & TRUST COMPANY
as Trustee, certifies that this
is one of the Notes referred to
in the Indenture.
By /s/ Terrence Rawlins
- ---------------------------------
Authorized Signatory November 4, 1997
<PAGE>
2
9 1/2% Senior Subordinated Note due 2007
1. Interest
--------
Paragon Health Network, Inc., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company")) promises to pay interest on the
principal amount of this Note at the rate per annum shown above.
The Company will pay interest semi-annually in cash and in arrears to
Holders of record at the close of business on the April 15 and October 15
immediately preceding the interest payment date on May 1 and November 1 of each
year, commencing May 1, 1998. Interest on the 9 1/2% Senior Subordinated Notes
due 2007 (the "Notes") will accrue from the most recent date to which interest
has been paid on the Notes or, if no interest has been paid, from November 4,
1997. The Company shall pay interest on overdue principal or premium, if any
(plus interest on such interest to the extent lawful), at the rate borne by the
Notes to the extent lawful. Interest will be computed on the basis of 360-day
year of twelve 30-day months.
2. Method of Payment
-----------------
By at least 10:00 a.m. (New York City time) on the date on which any
principal of or interest on the Notes is due and payable, the Company shall
irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay
such principal, premium, if any, and/or interest. The Company will pay interest
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the April 15 or October 15 next preceding the
interest payment date even if the Notes are cancelled, repurchased or redeemed
after the record date and on or before the interest payment date. Holders must
surrender Notes to a Paying Agent to collect principal payments. The Company
will pay principal and interest in money of the United States that at the time
of payment is legal tender for payment of public and private debts. However,
the Company may pay interest by check payable in such money. It may mail an
interest check to a Holder's registered address.
3. Trustee, Paying Agent and Registrar
-----------------------------------
Initially, IBJ Schroder Bank & Trust Company, a New York banking
corporation (the "Trustee"), will act as Trustee, Paying Agent and Registrar.
IBJ Schroder Bank & Trust Company will also act as the Trustee for
$294,000,000 aggregate principal amount of 10 1/2% Senior Subordinated Discount
Notes due 2007 (the "Senior Subordinated Discount Notes"). The Company may
appoint and change any Paying Agent, Registrar or co-registrar without notice to
any Noteholder. The Company or any of its domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar or co-registrar.
4. Indenture
---------
The Company issued the Notes under an Indenture dated as of November
4, 1997 (as it may be amended or supplemented from time to time in accordance
with the terms thereof, the "Indenture"), among the Company and the Trustee. The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. (S)(S)
-----
77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Capitalized
terms used herein and not defined herein have the meanings ascribed thereto in
the Indenture. The Notes are subject to all such terms, and Noteholders are
referred to the Indenture and the Act for a statement of those terms.
The Notes are general unsecured senior subordinated obligations of
the Company limited to $275 million aggregate principal amount (subject to
Section 310 of the Indenture). This Note is one of the Initial Notes referred to
in the Indenture. The Notes include the Initial Notes and any Exchange Notes
issued in exchange for the Initial Notes pursuant to the Indenture and the
Registration Rights Agreement.
<PAGE>
The Initial Notes and the Exchange Notes are treated as a single class of
securities under the Indenture. The Indenture imposes certain limitations on the
Incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the
payment of dividends on, and the purchase or redemption of, Capital Stock of the
Company and its Restricted Subsidiaries, certain purchases or redemptions of
Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of
Restricted Subsidiaries, investments of the Company and its Restricted
Subsidiaries and transactions with Affiliates. In addition, the Indenture limits
the ability of the Company and its Subsidiaries to restrict distributions and
dividends from Restricted Subsidiaries.
5. Optional Redemption
-------------------
The Notes will be redeemable, at the Company's option, in whole or in
part, at any time and from time to time on and after November 1, 2002 and prior
to maturity, upon not less than 30 nor more than 90 days prior notice mailed by
first-class mail to each Holder's registered address, at the following
redemption prices (expressed as a percentage of principal amount), plus accrued
interest, if any, to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
November 1 of the years set forth below:
Year Redemption Price
---- ----------------
2002................................. 104.750%
2003................................. 103.167%
2004................................. 101.583%
2005 and thereafter.................. 100.000%
In addition, at any time and from time to time prior to November 1,
2000, the Company may redeem in the aggregate up to 33-1/3% of the original
aggregate principal amount of the Notes with the proceeds of one or more Equity
Offerings by the Company at a redemption price (expressed as a percentage of
principal amount thereof) of 109.5% plus accrued interest, if any, to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided, however, that at least 50% of the original aggregate principal amount
of the Notes must remain outstanding after each such redemption and that any
such redemption occurs within 90 days following the closing of any such Equity
Offering.
The aggregate principal amount of the Notes and the Senior
Subordinated Discount Notes to be redeemed shall be allocated by the Company
between the Notes and the Senior Subordinated Discount Notes in the Company's
sole discretion.
6. Notice of Redemption
--------------------
Notice of redemption will be mailed at least 30 days but not more than
90 days before the redemption date to each Holder of Notes to be redeemed at his
registered address. Notes in denominations of principal amount larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of and accrued and unpaid interest on all
Notes (or portions thereof) to be redeemed on the redemption date is deposited
with the Paying Agent on or before the redemption date and certain other
conditions are satisfied, on and after such date interest ceases to accrue on
such Notes (or such portions thereof) called for redemption.
<PAGE>
4
7. Put Provisions
--------------
Upon a Change of Control, any Holder of Notes will have the right to
cause the Company to repurchase all or any part of the Notes of such Holder at a
repurchase price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase as provided in, and subject to the
terms of, the Indenture.
8. Subordination and Ranking
-------------------------
The Notes are subordinated to Senior Indebtedness, as defined in the
Indenture. To the extent provided in the Indenture, Senior Indebtedness must be
paid before the Notes may be paid. The Company agrees, and each Noteholder by
accepting a Note agrees, to the Subordination provisions contained in the
Indenture and authorizes the Trustee to give them effect and appoints the
Trustee as attorney-in-fact for such purpose. The Notes and the Senior
Subordinated Discount Notes will in all respects rank pari passu with each other
and with all other Senior Subordinated Indebtedness of the Company.
9. Denominations; Transfer; Exchange
---------------------------------
The Notes are in registered form without coupons in denominations of
principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer
or exchange Notes in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements or transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not register the transfer of or exchange of (i)
any Note selected for redemption (except, in the case of a Note to be redeemed
in part, the portion of the Note not to be redeemed) for a period beginning 15
days before a selection of Notes to be redeemed and ending on the date of such
selection or (ii) any Notes for a period beginning 15 days before an interest
payment date and ending on such interest payment date.
10. Persons Deemed Owners
---------------------
The registered holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Defeasance
----------
Subject to certain conditions set forth in the Indenture, the Company
at any time may terminate some or all of its obligations under the Notes and the
Indenture if the Company deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Notes to redemption
or maturity, as the case may be. The Company in its sole discretion can defease
either or both of the Notes and the Senior Subordinated Discount Notes.
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders of
at least a majority in principal amount of the outstanding Notes and (ii) any
default or noncompliance with any provision may be waived with the written
consent of the Holders of a majority in principal amount of the outstanding
Notes. Subject to certain exceptions set forth in the Indenture, without the
consent of any Noteholder, the Company and the Trustee
<PAGE>
5
may amend the Indenture or the Notes to cure any ambiguity, omission, defect or
inconsistency, or to comply with Article 5 of the Indenture, or to provide for
uncertificated Notes in addition to or in place of certificated Notes, or to add
guarantees with respect to the Notes or to secure the Notes, or to add
additional covenants or surrender rights and powers conferred on the Company, or
to comply with any request of the SEC in connection with qualifying the
Indenture under the Act, or to make any change that does not adversely affect
the rights of any Noteholder, or to provide for the issuance of Exchange Notes.
The Notes and the Senior Subordinated Discount Notes will vote
together as a single class of securities under the Indenture with respect to
matters on which Holders are required or permitted to vote.
14. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) a default in any
payment of interest on any Note when due (whether or not such payment is
prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated Maturity,
upon optional redemption, upon required repurchase, upon declaration or
otherwise, whether or not such payment is prohibited by Article 13 of the
Indenture, (iii) the failure by the Company to comply with its obligations under
Section 801 of the Indenture, (iv) the failure by the Company to comply for 30
days after written notice with any of its obligations under Section 1016 of the
Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019
or 1020 of the Indenture (in each case, other than a failure to purchase Notes
when required under Sections 1016 or 1017 of the Indenture), (v) the failure by
the Company to comply for 60 days after notice with its other agreements
contained in the Notes or the Indenture, (vi) the failure by the Company or any
Significant Subsidiary to pay any indebtedness within any applicable grace
period after final maturity or the acceleration of any such indebtedness by the
holders thereof because of a default if the total amount of such Indebtedness
unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary, (viii)
the rendering of any judgment or decree for the payment of money in an amount
(net of any insurance or indemnity payments actually received in respect thereof
prior to or within 90 days from the entry thereof, or to be received in respect
thereof in the event any appeal thereof shall be unsuccessful) in excess of
$20.0 million against the Company or a Significant Subsidiary that is not
discharged, bonded or insured by a third Person if (A) an enforcement proceeding
thereon is commenced or (B) such judgment or decree remains outstanding for a
period of 90 days following such judgment or decree and is not discharged,
waived or stayed or (ix) the failure of any Guarantee of the Notes by a
Guarantor made pursuant to Section 1020 of the Indenture to be in full force and
effect (except as contemplated by the terms thereof or of the Indenture) or the
denial or disaffirmation in writing by any such Guarantor of its obligations
under the Indenture or any such Guarantee if such Default continues for 10 days.
If an Event of Default occurs and is continuing, the Trustee or the Holders of
at least a majority in principal amount of the outstanding applicable Notes may
declare all such Notes to be due and payable immediately. Certain events of
bankruptcy or insolvency are Events of Default which will result in the Notes
being due and payable immediately upon the occurrence of such Events of Default.
Noteholders may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Noteholders notice of any continuing Default or Event of Default
(except a Default or Event of Default in payment of principal or interest) if it
determines that withholding notice is in their interest.
15. Trustee Dealings with the Company
---------------------------------
Subject to certain limitations set forth in the Indenture, the Trustee
under the Indenture, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with and collect obligations
owed to it by the Company or its affiliates and may otherwise deal with the
Company or its affiliates with the same rights it would have if it were not
Trustee.
<PAGE>
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Noteholder waives and
releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
--------------
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent acting on its behalf) manually signs the
certificate of authentication on the other side of this Note.
18. Registration Rights
-------------------
The Holder of this Note is entitled to the benefits of the
Registration Rights Agreement, dated as of November 4, 1997 (the "Registration
Rights Agreement"), between the Company and the Initial Purchasers named
therein. In the event that either (i) an Exchange Offer Registration Statement
is not filed with the SEC on or prior to 60 days after the Issue Date, (A) an
Exchange Offer Registration Statement or a Shelf Registration Statement is not
declared effective within 150 days after the Issue Date, or (B) the Exchange
Offer is not consummated on or prior to 180 days after the Issue Date in respect
of tendered Notes and a Shelf Registration Statement has not been declared
effective or a Shelf Registration Statement is filed and declared effective
within 150 days after the Issue Date but shall thereafter cease to be effective
(at any time that the Company is obligated to maintain the effectiveness
thereof) without being succeeded within 45 days by an additional Registration
Statement filed and declared effective (each such event referred to in clauses
(A) and (B), a "Registration Default"), the Company will pay liquidated damages
to each holder of Transfer Restricted Securities (as defined in the Registration
Rights Agreement), during the period of one or more such Registration Defaults,
in an amount equal to $.192 per week per $1,000 principal amount of the Notes
constituting Transfer Restricted Securities held by such holder until the
applicable Registration Statement is filed or declared effective, the Exchange
Offer is consummated or the Shelf Registration Statement again becomes
effective, as the case may be, provided that, except in certain limited
circumstances, the Company's obligation to pay liquidated damages will terminate
upon consummation of the Exchange Offer. All accrued liquidated damages shall be
paid to holders in the same manner as interest payments on the Notes on semi-
annual payment dates which correspond to interest payment dates for the Notes.
Following the cure of all Registration Defaults, the accrual of liquidated
damages will cease.
19. Abbreviations
-------------
Customary abbreviations may be used in the name of a Noteholder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants
in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act).
20. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Noteholders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
<PAGE>
7
21. Governing Law
-------------
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY
LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF NEW YORK.
The Company will furnish to any Noteholder upon written request and
without charge to the Noteholder a copy of the Indenture. Requests may be made
to:
Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, GA 30346
Attention of General Counsel
[Remainder of Page Intentionally Left Blank]
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc.sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Note on the books of the Company.
The agent may substitute another to act for him.
________________________________________________________________________________
Date: ___________________ Your Signature: __________________
Signature Guarantee: ____________________________________
(Signature must be guaranteed)
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Note.
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for, STAMP), pursuant to S.E.C. Rule
17Ad-15.
In connection with any transfer or exchange of any of the Notes evidenced by
this certificate occurring prior to the date that is two years after the later
of the date of original issuance of such Notes and the last date, if any, on
which such Notes were owned by the Company or any Affiliate of the Company, the
undersigned confirms that such Notes are being:
CHECK ONE BOX BELOW:
1 [_] acquired for the undersigned's own account, without transfer; or
2 [_] transferred to the Company; or
3 [_] transferred pursuant to and in compliance with Rule 144A under
the Securities Act of 1933; or
4 [_] transferred pursuant to an effective registration statement under
the Securities Act of 1933; or
5 [_] transferred pursuant to and in compliance with Regulation S under
the Securities Act of 1933; or
6 [_] transferred to an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of
1933), that has furnished to the Trustee a signed letter
containing certain representations and agreements (the form of
which letter appears in Section 308 of the Indenture); or
<PAGE>
2
7 [_] transferred pursuant to another available exemption from the
registration requirements of the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee may refuse to register any of
the Notes evidenced by this certificate in the name of any person other than the
registered holder thereof; provided, however, that if box (5), (6) or (7) is
checked, the Trustee or the Company may require, prior to registering any such
transfer of the Notes, in their sole discretion, such legal opinions,
certifications and other information as the Trustee or the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933, such as the exemption provided by
Rule 144 under such Act.
__________________________
Signature
Signature Guarantee:
___________________________________ __________________________
(Signature must be guaranteed) Signature
______________________________________________________________
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, as amended, and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Date: ________________ ________________________________
NOTICE: To be executed by and executive officer.
<PAGE>
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE
The following increases or decreases in this Global Note have been made:
<TABLE>
<CAPTION>
Principal Amount
of this Global Signature of authorized
Date of Amount of decrease in Principal Amount of Increase in Principal Note following such signatory of Trustee or
Exchange Amount of this Global Note Amount of this Global Note decrease or increase Notee Custodian
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 1016 or 1017 of the Indenture, check the box:
[_]
If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 1016 or 1017 of the Indenture, state the amount in
principal amount (must be integral multiple of $1,000): $
Date:__________ Your Signature______________________________________
(Sign exactly as your name appears on the
other side of the Note)
Signature Guarantee:___________________________________________
(Signature must be guaranteed)
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings, and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
EXHIBIT 4.12
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH
REGISTRATION.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS
EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN
AN OFFSHORE TRANSACTION, (2) BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR
OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION
TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY
WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE), ONLY (A) TO THE
COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE
FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A
THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE
UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E)
TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN
ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN
EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF
SUCH NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE
IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F)
PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO
ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO
REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER
INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING
CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF
THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE
TRUSTEE. THIS LEGEND WILL BE REMOVED AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND
INCLUDING THE LATER OF (A) THE DAY ON WHICH THE NOTES ARE OFFERED TO PERSONS
OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE
CLOSING OF THE ORIGINAL OFFERING. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM
BY REGULATION S UNDER THE SECURITIES ACT.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
<PAGE>
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT
NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
SECTIONS 306 AND 307 OF THE INDENTURE.
[Remainder of Page Intentionally Left Blank]
<PAGE>
No. 1 Principal Amount $3,450,000
CUSIP NO. U69879 AA 9
ISIN: USU 69879 AA 95
9 1/2% Senior Subordinated Note due 2007
Paragon Health Network, Inc., a Delaware corporation promises to pay
to Cede & Co., or registered assigns, the principal sum of Three Million Four
Hundred Fifty Thousand Dollars on November 1, 2007.
Interest Payment Dates: May 1 and November 1.
Record Dates: April 15 and October 15.
Additional provisions of this Note are set forth on the other side of
this Note.
Dated: November 4, 1997 PARAGON HEALTH NETWORK, INC.
By:/s/ Keith B. Pitts
--------------------------------
Keith B. Pitts
Chairman, President and
Chief Executive Officer
By:/s/ Charles B. Carden
---------------------------------
Charles B. Carden
Executive Vice President and
Chief Financial Officer
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
IBJ SCHRODER BANK & TRUST COMPANY
as Trustee, certifies that this
is one of the Notes referred to
in the Indenture.
By /s/ Terrence Rawlins
-----------------------------
Authorized Signatory November 4, 1997
<PAGE>
2
9 1/2% Senior Subordinated Note due 2007
1. Interest
--------
Paragon Health Network, Inc., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company")) promises to pay interest on the
principal amount of this Note at the rate per annum shown above.
The Company will pay interest semi-annually in cash and in arrears to
Holders of record at the close of business on the April 15 and October 15
immediately preceding the interest payment date on May 1 and November 1 of each
year, commencing May 1, 1998. Interest on the 9 1/2% Senior Subordinated Notes
due 2007 (the "Notes") will accrue from the most recent date to which interest
has been paid on the Notes or, if no interest has been paid, from November 4,
1997. The Company shall pay interest on overdue principal or premium, if any
(plus interest on such interest to the extent lawful), at the rate borne by the
Notes to the extent lawful. Interest will be computed on the basis of a 360-day
year of twelve 30-day months.
2. Method of Payment
-----------------
By at least 10:00 a.m. (New York City time) on the date on which any
principal of or interest on the Notes is due and payable, the Company shall
irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay
such principal, premium, if any, and/or interest. The Company will pay interest
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the April 15 or October 15 next preceding the
interest payment date even if the Notes are cancelled, repurchased or redeemed
after the record date and on or before the interest payment date. Holders must
surrender Notes to a Paying Agent to collect principal payments. The Company
will pay principal and interest in money of the United States that at the time
of payment is legal tender for payment of public and private debts. However,
the Company may pay interest by check payable in such money. It may mail an
interest check to a Holder's registered address.
3. Trustee, Paying Agent and Registrar
-----------------------------------
Initially, IBJ Schroder Bank & Trust Company, a New York banking
corporation (the "Trustee"), will act as Trustee, Paying Agent and Registrar.
IBJ Schroder Bank & Trust Company will also act as the Trustee for $294,000,000
aggregate principal amount of 10 1/2% Senior Subordinated Discount Notes due
2007 (the "Senior Subordinated Discount Notes"). The Company may appoint and
change any Paying Agent, Registrar or co-registrar without notice to any
Noteholder. The Company or any of its domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar or co-registrar.
4. Indenture
---------
The Company issued the Notes under an Indenture dated as of November
4, 1997 (as it may be amended or supplemented from time to time in accordance
with the terms thereof, the "Indenture"), among the Company and the Trustee.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
------
(S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Capitalized terms used herein and not defined herein have the meanings ascribed
thereto in the Indenture. The Notes are subject to all such terms, and
Noteholders are referred to the Indenture and the Act for a statement of those
terms.
The Notes are general unsecured senior subordinated obligations of the
Company limited to $275 million aggregate principal amount (subject to Section
310 of the Indenture). This Note is one of the Initial Notes referred to in the
Indenture. The Notes include the Initial Notes and any Exchange Notes issued in
exchange for the Initial Notes pursuant to the Indenture and the Registration
Rights Agreement.
<PAGE>
3
The Initial Notes and the Exchange Notes are treated as a single class of
securities under the Indenture. The Indenture imposes certain limitations on the
Incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the
payment of dividends on, and the purchase or redemption of, Capital Stock of the
Company and its Restricted Subsidiaries, certain purchases or redemptions of
Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of
Restricted Subsidiaries, investments of the Company and its Restricted
Subsidiaries and transactions with Affiliates. In addition, the Indenture limits
the ability of the Company and its Subsidiaries to restrict distributions and
dividends from Restricted Subsidiaries.
5. Optional Redemption
-------------------
The Notes will be redeemable, at the Company's option, in whole or in
part, at any time and from time to time on and after November 1, 2002 and prior
to maturity, upon not less than 30 nor more than 90 days' prior notice mailed by
first-class mail to each Holder's registered address, at the following
redemption prices (expressed as a percentage of principal amount), plus accrued
interest, if any, to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
November 1 of the years set forth below:
Year Redemption Price
---- ----------------
2002................................ 104.750%
2003................................ 103.167%
2004................................ 101.583%
2005 and thereafter................. 100.000%
In addition, at any time and from time to time prior to November 1,
2000, the Company may redeem in the aggregate up to 33-1/3% of the original
aggregate principal amount of the Notes with the proceeds of one or more Equity
Offerings by the Company at a redemption price (expressed as a percentage of
principal amount thereof) of 109.5% plus accrued interest, if any, to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided, however, that at least 50% of the original aggregate principal amount
of the Notes must remain outstanding after each such redemption and that any
such redemption occurs within 90 days following the closing of any such Equity
Offering.
The aggregate principal amount of the Notes and the Senior
Subordinated Discount Notes to be redeemed shall be allocated by the Company
between the Notes and the Senior Subordinated Discount Notes in the Company's
sole discretion.
6. Notice of Redemption
--------------------
Notice of redemption will be mailed at least 30 days but not more than
90 days before the redemption date to each Holder of Notes to be redeemed at his
registered address. Notes in denominations of principal amount larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of and accrued and unpaid interest on all
Notes (or portions thereof) to be redeemed on the redemption date is deposited
with the Paying Agent on or before the redemption date and certain other
conditions are satisfied, on and after such date interest ceases to accrue on
such Notes (or such portions thereof) called for redemption.
<PAGE>
4
7. Put Provisions
--------------
Upon a Change of Control, any Holder of Notes will have the right to
cause the Company to repurchase all or any part of the Notes of such Holder at a
repurchase price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase as provided in, and subject to the
terms of, the Indenture.
8. Subordination and Ranking
-------------------------
The Notes are subordinated to Senior Indebtedness, as defined in the
Indenture. To the extent provided in the Indenture, Senior Indebtedness must be
paid before the Notes may be paid. The Company agrees, and each Noteholder by
accepting a Note agrees, to the subordination provisions contained in the
Indenture and authorizes the Trustee to give them effect and appoints the
Trustee as attorney-in-fact for such purpose. The Notes and the Senior
Subordinated Discount Notes will in all respects rank pari passu with each other
and with all other Senior Subordinated Indebtedness of the Company.
9. Denominations; Transfer; Exchange
---------------------------------
The Notes are in registered form without coupons in denominations of
principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer
or exchange Notes in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements or transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not register the transfer of or exchange of (i)
any Note selected for redemption (except, in the case of a Note to be redeemed
in part, the portion of the Note not to be redeemed) for a period beginning 15
days before a selection of Notes to be redeemed and ending on the date of such
selection or (ii) any Notes for a period beginning 15 days before an interest
payment date and ending on such interest payment date.
10. Persons Deemed Owners
---------------------
The registered holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Defeasance
----------
Subject to certain conditions set forth in the Indenture, the Company
at any time may terminate some or all of its obligations under the Notes and the
Indenture if the Company deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Notes to redemption
or maturity, as the case may be. The Company in its sole discretion can defease
either or both of the Notes and the Senior Subordinated Discount Notes.
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders of
at least a majority in principal amount of the outstanding Notes and (ii) any
default or noncompliance with any provision may be waived with the written
consent of the Holders of a majority in principal amount of the outstanding
Notes. Subject to certain exceptions set forth in the Indenture, without the
consent of any Noteholder, the Company and the Trustee
<PAGE>
5
may amend the Indenture or the Notes to cure any ambiguity, omission, defect or
inconsistency, or to comply with Article 5 of the Indenture, or to provide for
uncertificated Notes in addition to or in place of certificated Notes, or to add
guarantees with respect to the Notes or to secure the Notes, or to add
additional covenants or surrender rights and powers conferred on the Company, or
to comply with any request of the SEC in connection with qualifying the
Indenture under the Act, or to make any change that does not adversely affect
the rights of any Noteholder, or to provide for the issuance of Exchange Notes.
The Notes and the Senior Subordinated Discount Notes will vote
together as a single class of securities under the Indenture with respect to
matters on which Holders are required or permitted to vote.
14. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) a default in any
payment of interest on any Note when due (whether or not such payment is
prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated Maturity,
upon optional redemption, upon required repurchase, upon declaration or
otherwise, whether or not such payment is prohibited by Article 13 of the
Indenture, (iii) the failure by the Company to comply with its obligations under
Section 801 of the Indenture, (iv) the failure by the Company to comply for 30
days after written notice with any of its obligations under Section 1016 of the
Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019
or 1020 of the Indenture (in each case, other than a failure to purchase Notes
when required under Sections 1016 or 1017 of the Indenture), (v) the failure by
the Company to comply for 60 days after notice with its other agreements
contained in the Notes or the Indenture, (vi) the failure by the Company or any
Significant Subsidiary to pay any Indebtedness within any applicable grace
period after final maturity or the acceleration of any such Indebtedness by the
holders thereof because of a default if the total amount of such Indebtedness
unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary, (viii)
the rendering of any judgment or decree for the payment of money in an amount
(net of any insurance or indemnity payments actually received in respect thereof
prior to or within 90 days from the entry thereof, or to be received in respect
thereof in the event any appeal thereof shall be unsuccessful) in excess of
$20.0 million against the Company or a Significant Subsidiary that is not
discharged, bonded or insured by a third Person if (A) an enforcement proceeding
thereon is commenced or (B) such judgment or decree remains outstanding for a
period of 90 days following such judgment or decree and is not discharged,
waived or stayed or (ix) the failure of any Guarantee of the Notes by a
Guarantor made pursuant to Section 1020 of the Indenture to be in full force and
effect (except as contemplated by the terms thereof or of the Indenture) or the
denial or disaffirmation in writing by any such Guarantor of its obligations
under the Indenture or any such Guarantee if such Default continues for 10 days.
If an Event of Default occurs and is continuing, the Trustee or the Holders of
at least a majority in principal amount of the outstanding applicable Notes may
declare all such Notes to be due and payable immediately. Certain events of
bankruptcy or insolvency are Events of Default which will result in the Notes
being due and payable immediately upon the occurrence of such Events of Default.
Noteholders may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Noteholders notice of any continuing Default or Event of Default
(except a Default or Event of Default in payment of principal or interest) if it
determines that withholding notice is in their interest.
15. Trustee Dealings with the Company
---------------------------------
Subject to certain limitations set forth in the Indenture, the Trustee
under the Indenture, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with and collect obligations
owed to it by the Company or its affiliates and may otherwise deal with the
Company or its affiliates with the same rights it would have if it were not
Trustee.
<PAGE>
6
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Noteholder waives and
releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
--------------
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent acting on its behalf) manually signs the
certificate of authentication on the other side of this Note.
18. Registration Rights
-------------------
The Holder of this Note is entitled to the benefits of the
Registration Rights Agreement, dated as of November 4, 1997 (the "Registration
Rights Agreement"), between the Company and the Initial Purchasers named
therein. In the event that either (i) an Exchange Offer Registration Statement
is not filed with the SEC on or prior to 60 days after the Issue Date, (A) an
Exchange Offer Registration Statement or a Shelf Registration Statement is not
declared effective within 150 days after the Issue Date, or (B) the Exchange
Offer is not consummated on or prior to 180 days after the Issue Date in respect
of tendered Notes and a Shelf Registration Statement has not been declared
effective or a Shelf Registration Statement is filed and declared effective
within 150 days after the Issue Date but shall thereafter cease to be effective
(at any time that the Company is obligated to maintain the effectiveness
thereof) without being succeeded within 45 days by an additional Registration
Statement filed and declared effective (each such event referred to in clauses
(A) and (B), a "Registration Default"), the Company will pay liquidated damages
to each holder of Transfer Restricted Securities (as defined in the Registration
Rights Agreement), during the period of one or more such Registration Defaults,
in an amount equal to $.192 per week per $1,000 principal amount of the Notes
constituting Transfer Restricted Securities held by such holder until the
applicable Registration Statement is filed or declared effective, the Exchange
Offer is consummated or the Shelf Registration Statement again becomes
effective, as the case may be, provided that, except in certain limited
circumstances, the Company's obligation to pay liquidated damages will terminate
upon consummation of the Exchange Offer. All accrued liquidated damages shall be
paid to holders in the same manner as interest payments on the Notes on semi-
annual payment dates which correspond to interest payment dates for the Notes.
Following the cure of all Registration Defaults, the accrual of liquidated
damages will cease.
19. Abbreviations
-------------
Customary abbreviations may be used in the name of a Noteholder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants
in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act).
20. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Noteholders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
<PAGE>
7
21. Governing Law
-------------
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY
LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF NEW YORK.
The Company will furnish to any Noteholder upon written request and
without charge to the Noteholder a copy of the Indenture. Requests may be made
to:
Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, GA 30346
Attention of General Counsel
[Remainder of Page Intentionally Left Blank]
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Note on the books of the
Company. The agent may substitute another to act for him.
________________________________________________________________________________
Date:____________________ Your Signature:___________________
Signature Guarantee:_____________________________________
(Signature must be guaranteed)
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Note.
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for, STAMP), pursuant to S.E.C. Rule
17Ad-15.
In connection with any transfer or exchange of any of the Notes evidenced by
this certificate occurring prior to the date that is two years after the later
of the date of original issuance of such Notes and the last date, if any, on
which such Notes were owned by the Company or any Affiliate of the Company, the
undersigned confirms that such Notes are being:
CHECK ONE BOX BELOW:
1[_] acquired for the undersigned's own account, without transfer; or
2[_] transferred to the Company; or
3[_] transferred pursuant to and in compliance with Rule 144A under
the Securities Act of 1933; or
4[_] transferred pursuant to an effective registration statement under
the Securities Act of 1933; or
5[_] transferred pursuant to and in compliance with Regulation S under
the Securities Act of 1933; or
6[_] transferred to an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of
1933), that has furnished to the Trustee a signed letter
containing certain representations and agreements (the form of
which letter appears in Section 308 of the Indenture); or
<PAGE>
2
7[_] transferred pursuant to another available exemption from the
registration requirements of the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee may refuse to register any of
the Notes evidenced by this certificate in the name of any person other than the
registered holder thereof; provided, however, that if box (5), (6) or (7) is
checked, the Trustee or the Company may require, prior to registering any such
transfer of the Notes, in their sole discretion, such legal opinions,
certifications and other information as the Trustee or the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933, such as the exemption provided by
Rule 144 under such Act.
_________________________________
Signature
Signature Guarantee:
__________________________________ _____________________________
(Signature must be guaranteed) Signature
____________________________________________________________
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE
The following increases or decreases in this Global Note have been made:
<TABLE>
<CAPTION>
Principal Amount of this Signature of authorized
Date of Amount of decrease in Principal Amount of increase in Principal Global Note following such signatory or Trustee or
Exchange Amount of this Global Note Amount of this Global Note decrease or increase Notes Custodian
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 1016 or 1017 of the Indenture, check the box:
[_]
If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 1016 or 1017 of the Indenture, state the amount in
principal amount (must be integral multiple of $1,000): $
Date: __________ Your Signature_____________________________________________
(Sign exactly as your name appears on
the other side of the Note)
Signature Guarantee: _______________________________________
(Signature must be guaranteed)
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
Form of Certificate To Be Delivered in Connection with Transfers under
Regulation S
[date]
IBJ Schroder Bank & Trust Company, as Trustee
1 State Street, 11th Floor
New York, New York 10004
Attention: Corporate Trust Administration
Re: PARAGON HEALTH NETWORK, INC. (the "Company")
9 1/2% Senior Subordinated Notes due 2007
Ladies and Gentlemen:
In connection with our proposed sale of $________ aggregate principal
amount of the Notes, we confirm that such sale has been effected pursuant to and
in accordance with Regulation S under the United States Securities Act of 1933,
as amended (the "Securities Act"), and, accordingly, we represent that:
A. the offer of the Notes was not made to a person in the United
States;
B. either (i) at the time the buy order was originated, the
transferee was outside the United States or we and any person acting on our
behalf reasonably believed that the transferee was outside the United
States or (ii) the transaction was executed in, on or through the
facilities of a designated off-shore securities market and neither we nor
any person acting on our behalf knows that the transaction has been pre-
arranged with a buyer in the United States;
C. no directed selling efforts have been made in the United States
in contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S, as applicable; and
D. the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
In addition, if the sale is made during a restricted period and the
provisions of Rule 903(c)(3) or Rule 904(c)(1) of Regulation S are applicable
thereto, we confirm that such sale has been made in accordance with the
applicable provisions of Rule 903(c)(3) or Rule 904(c)(1), as the case may be.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:_________________________ __________________________________
Authorized Signature Signature Medallion Guaranteed
<PAGE>
EXHIBIT 4.13
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH
REGISTRATION.
THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR
OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION
TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY
WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE), ONLY (A) TO THE
COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE
FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A
THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE
UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E)
TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTES FOR ITS OWN
ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN
EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF
SUCH NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE
IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F)
PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO
ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO
REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER
INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING
CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF
THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE
TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE
RESALE RESTRICTION TERMINATION DATE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN
THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT
NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
SECTIONS 306 AND 307 OF THE INDENTURE.
<PAGE>
No. 1 Principal Amount $0
CUSIP NO. 698940 AC 7
9 1/2% Senior Subordinated Note due 2007
Paragon Health Network, Inc., a Delaware corporation promises to pay
to Cede & Co., or registered assigns, the principal sum of Zero Dollars on
November 1, 2007.
Interest Payment Dates: May 1 and November 1.
Record Dates: April 15 and October 15.
Additional provisions of this Note are set forth on the other side of
this Note.
Dated: November 4, 1997 PARAGON HEALTH NETWORK, INC.
By:/s/ Keith B. Pitts
-------------------------------
Keith B. Pitts
Chairman, President and
Chief Executive Officer
By:/s/ Charles B. Carden
--------------------------------
Charles B. Carden
Executive Vice President and
Chief Financial Officer
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
IBJ SCHRODER BANK & TRUST COMPANY
as Trustee, certifies that this
is one of the Notes referred to
in the Indenture.
By /s/ Terrence Rawlins
--------------------------
Authorized Signatory November 4, 1997
<PAGE>
2
9 1/2% Senior Subordinated Note due 2007
1. Interest
--------
Paragon Health Network, Inc., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company")) promises to pay interest on the
principal amount of this Note at the rate per annum shown above.
The Company will pay interest semi-annually in cash and in arrears to
Holders of record at the close of business on the April 15 and October 15
immediately preceding the interest payment date on May 1 and November 1 of each
year, commencing May 1, 1998. Interest on the 9 1/2% Senior Subordinated Notes
due 2007 (the "Notes") will accrue from the most recent date to which interest
has been paid on the Notes or, if no interest has been paid, from November 4,
1997. The Company shall pay interest on overdue principal or premium, if any
(plus interest on such interest to the extent lawful), at the rate borne by the
Notes to the extent lawful. Interest will be computed on the basis of a 360-day
year of twelve 30-day months.
2. Method of Payment
-----------------
By at least 10:00 a.m. (New York City time) on the date on which any
principal of or interest on the Notes is due and payable, the Company shall
irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay
such principal, premium, if any, and/or interest. The Company will pay interest
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the April 15 or October 15 next preceding the
interest payment date even if the Notes are cancelled, repurchased or redeemed
after the record date and on or before the interest payment date. Holders must
surrender Notes to a Paying Agent to collect principal payments. The Company
will pay principal and interest in money of the United States that at the time
of payment is legal tender for payment of public and private debts. However,
the Company may pay interest by check payable in such money. It may mail an
interest check to a Holder's registered address.
3. Trustee, Paying Agent and Registrar
-----------------------------------
Initially, IBJ Schroder Bank & Trust Company, a New York banking
corporation (the "Trustee"), will act as Trustee, Paying Agent and Registrar.
IBJ Schroder Bank & Trust Company will also act as the Trustee for $294,000,000
aggregate principal amount of 10 1/2% Senior Subordinated Discount Notes due
2007 (the "Senior Subordinated Discount Notes"). The Company may appoint and
change any Paying Agent, Registrar or co-registrar without notice to any
Noteholder. The Company or any of its domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar or co-registrar.
4. Indenture
---------
The Company issued the Notes under an Indenture dated as of November
4, 1997 (as it may be amended or supplemented from time to time in accordance
with the terms thereof, the "Indenture"), among the Company and the Trustee.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
------
(S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Capitalized terms used herein and not defined herein have the meanings ascribed
thereto in the Indenture. The Notes are subject to all such terms, and
Noteholders are referred to the Indenture and the Act for a statement of those
terms.
The Notes are general unsecured senior subordinated obligations of the
Company limited to $275 million aggregate principal amount (subject to Section
310 of the Indenture). This Note is one of the Initial Notes referred to in the
Indenture. The Notes include the Initial Notes and any Exchange Notes issued in
exchange for the Initial Notes pursuant to the Indenture and the Registration
Rights Agreement.
<PAGE>
3
The Initial Notes and the Exchange Notes are treated as a single class of
securities under the Indenture. The Indenture imposes certain limitations on
the Incurrence of Indebtedness by the Company and its Restricted Subsidiaries,
the payment of dividends on, and the purchase or redemption of, Capital Stock of
the Company and its Restricted Subsidiaries, certain purchases or redemptions of
Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of
Restricted Subsidiaries, investments of the Company and its Restricted
Subsidiaries and transactions with Affiliates. In addition, the Indenture
limits the ability of the Company and its Subsidiaries to restrict distributions
and dividends from Restricted Subsidiaries.
5. Optional Redemption
-------------------
The Notes will be redeemable, at the Company's option, in whole or in
part, at any time and from time to time on and after November 1, 2002 and prior
to maturity, upon not less than 30 nor more than 90 days' prior notice mailed by
first-class mail to each Holder's registered address, at the following
redemption prices (expressed as a percentage of principal amount), plus accrued
interest, if any, to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
November 1 of the years set forth below:
Year Redemption Price
---- ----------------
2002.................................. 104.750%
2003.................................. 103.167%
2004.................................. 101.583%
2005 and thereafter................... 100.000%
In addition, at any time and from time to time prior to November 1,
2000, the Company may redeem in the aggregate up to 33-1/3% of the original
aggregate principal amount of the Notes with the proceeds of one or more Equity
Offerings by the Company at a redemption price (expressed as a percentage of
principal amount thereof) of 109.5% plus accrued interest, if any, to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided, however, that at least 50% of the original aggregate principal amount
of the Notes must remain outstanding after each such redemption and that any
such redemption occurs within 90 days following the closing of any such Equity
Offering.
The aggregate principal amount of the Notes and the Senior
Subordinated Discount Notes to be redeemed shall be allocated by the Company
between the Notes and the Senior Subordinated Discount Notes in the Company's
sole discretion.
6. Notice of Redemption
--------------------
Notice of redemption will be mailed at least 30 days but not more than
90 days before the redemption date to each Holder of Notes to be redeemed at his
registered address. Notes in denominations of principal amount larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of and accrued and unpaid interest on all
Notes (or portions thereof) to be redeemed on the redemption date is deposited
with the Paying Agent on or before the redemption date and certain other
conditions are satisfied, on and after such date interest ceases to accrue on
such Notes (or such portions thereof) called for redemption.
<PAGE>
4
7. Put Provisions
--------------
Upon a Change of Control, any Holder of Notes will have the right to
cause the Company to repurchase all or any part of the Notes of such Holder at a
repurchase price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase as provided in, and subject to the
terms of, the Indenture.
8. Subordination and Ranking
-------------------------
The Notes are subordinated to Senior Indebtedness, as defined in the
Indenture. To the extent provided in the Indenture, Senior Indebtedness must be
paid before the Notes may be paid. The Company agrees, and each Noteholder by
accepting a Note agrees, to the subordination provisions contained in the
Indenture and authorizes the Trustee to give them effect and appoints the
Trustee as attorney-in-fact for such purpose. The Notes and the Senior
Subordinated Discount Notes will in all respects rank pari passu with each other
and with all other Senior Subordinated Indebtedness of the Company.
9. Denominations; Transfer; Exchange
---------------------------------
The Notes are in registered form without coupons in denominations of
principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer
or exchange Notes in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements or transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not register the transfer of or exchange of (i)
any Note selected for redemption (except, in the case of a Note to be redeemed
in part, the portion of the Note not to be redeemed) for a period beginning 15
days before a selection of Notes to be redeemed and ending on the date of such
selection or (ii) any Notes for a period beginning 15 days before an interest
payment date and ending on such interest payment date.
10. Persons Deemed Owners
---------------------
The registered holder of this Note may be treated as the owner of it
for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Defeasance
----------
Subject to certain conditions set forth in the Indenture, the Company
at any time may terminate some or all of its obligations under the Notes and the
Indenture if the Company deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Notes to redemption
or maturity, as the case may be. The Company in its sole discretion can defease
either or both of the Notes and the Senior Subordinated Discount Notes.
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders of
at least a majority in principal amount of the outstanding Notes and (ii) any
default or noncompliance with any provision may be waived with the written
consent of the Holders of a majority in principal amount of the outstanding
Notes. Subject to certain exceptions set forth in the Indenture, without the
consent of any Noteholder, the Company and the Trustee
<PAGE>
5
may amend the Indenture or the Notes to cure any ambiguity, omission, defect or
inconsistency, or to comply with Article 5 of the Indenture, or to provide for
uncertificated Notes in addition to or in place of certificated Notes, or to add
guarantees with respect to the Notes or to secure the Notes, or to add
additional covenants or surrender rights and powers conferred on the Company, or
to comply with any request of the SEC in connection with qualifying the
Indenture under the Act, or to make any change that does not adversely affect
the rights of any Noteholder, or to provide for the issuance of Exchange Notes.
The Notes and the Senior Subordinated Discount Notes will vote
together as a single class of securities under the Indenture with respect to
matters on which Holders are required or permitted to vote.
14. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) a default in any
payment of interest on any Note when due (whether or not such payment is
prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated Maturity,
upon optional redemption, upon required repurchase, upon declaration or
otherwise, whether or not such payment is prohibited by Article 13 of the
Indenture, (iii) the failure by the Company to comply with its obligations under
Section 801 of the Indenture, (iv) the failure by the Company to comply for 30
days after written notice with any of its obligations under Section 1016 of the
Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019
or 1020 of the Indenture (in each case, other than a failure to purchase Notes
when required under Sections 1016 or 1017 of the Indenture), (v) the failure by
the Company to comply for 60 days after notice with its other agreements
contained in the Notes or the Indenture, (vi) the failure by the Company or any
Significant Subsidiary to pay any Indebtedness within any applicable grace
period after final maturity or the acceleration of any such Indebtedness by the
holders thereof because of a default if the total amount of such Indebtedness
unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary, (viii)
the rendering of any judgment or decree for the payment of money in an amount
(net of any insurance or indemnity payments actually received in respect thereof
prior to or within 90 days from the entry thereof, or to be received in respect
thereof in the event any appeal thereof shall be unsuccessful) in excess of
$20.0 million against the Company or a Significant Subsidiary that is not
discharged, bonded or insured by a third Person if (A) an enforcement proceeding
thereon is commenced or (B) such judgment or decree remains outstanding for a
period of 90 days following such judgment or decree and is not discharged,
waived or stayed or (ix) the failure of any Guarantee of the Notes by a
Guarantor made pursuant to Section 1020 of the Indenture to be in full force and
effect (except as contemplated by the terms thereof or of the Indenture) or the
denial or disaffirmation in writing by any such Guarantor of its obligations
under the Indenture or any such Guarantee if such Default continues for 10 days.
If an Event of Default occurs and is continuing, the Trustee or the Holders of
at least a majority in principal amount of the outstanding applicable Notes may
declare all such Notes to be due and payable immediately. Certain events of
bankruptcy or insolvency are Events of Default which will result in the Notes
being due and payable immediately upon the occurrence of such Events of Default.
Noteholders may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Noteholders notice of any continuing Default or Event of Default
(except a Default or Event of Default in payment of principal or interest) if it
determines that withholding notice is in their interest.
15. Trustee Dealings with the Company
---------------------------------
Subject to certain limitations set forth in the Indenture, the Trustee
under the Indenture, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with and collect obligations
owed to it by the Company or its affiliates and may otherwise deal with the
Company or its affiliates with the same rights it would have if it were not
Trustee.
<PAGE>
6
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the Notes
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Noteholder waives and
releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
17. Authentication
--------------
This Note shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent acting on its behalf) manually signs the
certificate of authentication on the other side of this Note.
18. Registration Rights
-------------------
The Holder of this Note is entitled to the benefits of the
Registration Rights Agreement, dated as of November 4, 1997 (the "Registration
Rights Agreement"), between the Company and the Initial Purchasers named
therein. In the event that either (i) an Exchange Offer Registration Statement
is not filed with the Commission on or prior to 60 days after the Issue Date,
(A) an Exchange Offer Registration Statement or a Shelf Registration Statement
is not declared effective within 150 days after the Issue Date, or (B) the
Exchange Offer is not consummated on or prior to 180 days after the Issue Date
in respect of tendered Notes and a Shelf Registration Statement has not been
declared effective or a Shelf Registration Statement is filed and declared
effective within 150 days after the Issue Date but shall thereafter cease to be
effective (at any time that the Company is obligated to maintain the
effectiveness thereof) without being succeeded within 45 days by an additional
Registration Statement filed and declared effective (each such event referred to
in clauses (A) and (B), a "Registration Default"), the Company will pay
liquidated damages to each holder of Transfer Restricted Securities (as defined
in the Registration Rights Agreement), during the period of one or more such
Registration Defaults, in an amount equal to $.192 per week per $1,000 principal
amount of the Notes constituting Transfer Restricted Securities held by such
holder until the applicable Registration Statement is filed or declared
effective, the Exchange Offer is consummated or the Shelf Registration Statement
again becomes effective, as the case may be, provided that, except in certain
limited circumstances, the Company's obligation to pay liquidated damages will
terminate upon consummation of the Exchange Offer. All accrued liquidated
damages shall be paid to holders in the same manner as interest payments on the
Notes on semi-annual payment dates which correspond to interest payment dates
for the Notes. Following the cure of all Registration Defaults, the accrual of
liquidated damages will cease.
19. Abbreviations
-------------
Customary abbreviations may be used in the name of a Noteholder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants
in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act).
20. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Notes and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Noteholders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
<PAGE>
7
21. Governing Law
-------------
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY
LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF NEW YORK.
The Company will furnish to any Noteholder upon written request and
without charge to the Noteholder a copy of the Indenture. Requests may be made
to:
Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, GA 30346
Attention of General Counsel
[Remainder of Page Intentionally Left Blank]
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Note on the books of the
Company. The agent may substitute another to act for him.
________________________________________________________________________________
Date:____________________ Your Signature:___________________
Signature Guarantee:_____________________________________
(Signature must be guaranteed)
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Note.
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for, STAMP), pursuant to S.E.C. Rule
17Ad-15.
In connection with any transfer or exchange of any of the Notes evidenced by
this certificate occurring prior to the date that is two years after the later
of the date of original issuance of such Notes and the last date, if any, on
which such Notes were owned by the Company or any Affiliate of the Company, the
undersigned confirms that such Notes are being:
CHECK ONE BOX BELOW:
1[_] acquired for the undersigned's own account, without transfer; or
2[_] transferred to the Company; or
3[_] transferred pursuant to and in compliance with Rule 144A under
the Securities Act of 1933; or
4[_] transferred pursuant to an effective registration statement under
the Securities Act of 1933; or
5[_] transferred pursuant to and in compliance with Regulation S under
the Securities Act of 1933; or
6[_] transferred to an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of
1933), that has furnished to the Trustee a signed letter
containing certain representations and agreements (the form of
which letter appears on the reverse side of this Note); or
<PAGE>
2
7[_] transferred pursuant to another available exemption from the
registration requirements of the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee may refuse to register any of
the Notes evidenced by this certificate in the name of any person other than the
registered holder thereof; provided, however, that if box (5), (6) or (7) is
checked, the Trustee or the Company may require, prior to registering any such
transfer of the Notes, in their sole discretion, such legal opinions,
certifications and other information as the Trustee or the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933, such as the exemption provided by
Rule 144 under such Act.
_________________________________
Signature
Signature Guarantee:
________________________________ _________________________________
(Signature must be guaranteed) Signature
____________________________________________________________
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE
The following increases or decreases in this Global Note have been made:
<TABLE>
<CAPTION>
Date of Exchange Amount of decrease in Amount of increase in Principal Amount of Signature of authorized
Principal Amount of Principal Amount of this Global Note signatory of Trustee or
this Global Note this Global Note following such decrease Notes Custodian
or increase
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 1016 or 1017 of the Indenture, check the box:
[_]
If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 1016 or 1017 of the Indenture, state the amount in
principal amount (must be integral multiple of $1,000): $
Date: __________ Your Signature_____________________________________________
(Sign exactly as your name appears on the
other side of the Note)
Signature Guarantee: _______________________________________
(Signature must be guaranteed)
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions) with
membership in the Securities Transfer Agents Medallion Program ("STAMP") or such
other signature guarantee medallion program as may be approved by the Note
Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
Form of Certificate To Be Delivered in Connection with Transfers to
Institutional Accredited Investors
[date]
PARAGON HEALTH NETWORK, INC.
c/o IBJ Schroder Bank & Trust Company, as Trustee
1 State Street, 11th Floor
New York, New York 10004
Attention: Corporate Trust Administration
Ladies and Gentlemen:
This certificate is delivered to request a transfer of $__________
principal amount of the 9 1/2% Senior Subordinated Notes due 2007 (the "Notes")
of Paragon Health Network, Inc. (the "Company").
Upon transfer, the Notes would be registered in the name of the new
beneficial owner as follows:
Name:
Address:
Taxpayer ID Number:
The undersigned represents and warrants to you that:
(1) We are an institutional "accredited investor" (as defined in Rules
501(a)(1), (2), (3) and (7) under the Securities Act of 1933, as amended (the
"Securities Act")), purchasing for our own account or for the account of an
institutional "accredited investor" at least $250,000 principal amount of the
Notes, and we are acquiring the Notes not with a view to, or for offer or sale
in connection with, any distribution in violation of the Securities Act. We
have such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of our investment in the Notes and
invest in or purchase securities similar to the Notes in the normal course of
our business. We and any accounts for which we are acting are each able to bear
the economic risk of our or its investment.
(2) We understand that the Notes have not been registered under the
Securities Act and, unless so registered, may not be sold except as permitted in
the following sentence. We agree on our own behalf and on behalf of any
investor account for which we are purchasing Notes to offer, sell or otherwise
transfer such Notes prior to the date which is two years after the later of the
date of original issue and the last date on which the Company or any affiliate
of the Company was the owner of such Notes (or any predecessor thereto) (the
"Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to
a registration statement which has been declared effective under the Securities
Act, (c) in a transaction complying with the requirements of Rule 144A under the
Securities Act, to a person we reasonably believe is a qualified institutional
buyer under Rule 144A (a "QIB") that purchases for its own account or for the
account of a QIB and to whom notice is given that the transfer is being made in
reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the
United States within the meaning of Regulation S under the Securities Act, (e)
to an institutional "accredited investor" within the meaning of Rule 501(a)(1),
(2), (3) or (7) under the Securities Act that is purchasing for its own account
or for the account of such an institutional "accredited investor", in each case
in a minimum principal amount of Notes of $250,000 or (f) pursuant to any other
available exemption from the registration requirements of the Securities Act,
subject in each of the foregoing cases to any requirement of law that the
disposition of our property or the property of such investor account or accounts
be at all times within our or their control and in compliance with any
applicable state securities laws. The foregoing restrictions on resale will not
apply subsequent to the Resale
<PAGE>
2
Restriction Termination Date. If any resale or other transfer of the Notes is
proposed to be made pursuant to clause (e) above prior to the Resale Restriction
Termination Date, the transferor shall deliver a letter from the transferee
substantially in the form of this letter to the Company and the Trustee, which
shall provide, among other things, that the transferee is an institutional
"accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7)
under the Securities Act and that it is acquiring such Notes for investment
purposes and not for distribution in violation of the Securities Act. Each
purchaser acknowledges that the Company and the Trustee reserve the right prior
to any offer, sale or other transfer prior to the Resale Termination Date of the
Notes pursuant to clauses (d), (e) or (f) above to require the delivery of an
opinion of counsel, certifications and/or other information satisfactory to the
Company and the Trustee.
TRANSFEREE:
BY:
Upon transfer the Notes would be registered in the name of the new beneficial
owner as follows:
TAXPAYER ID
NAME ADDRESS NUMBER:
- ------ ------- -------
Very truly yours,
[Name of Transferor]
By:______________________________ _________________________________
Name: Signature Medallion Guaranteed
Title:
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
Employment Agreement dated as of November 4, 1997 between KEITH B.
PITTS (the "Executive") and PARAGON HEALTH NETWORK, INC., a Delaware corporation
(the "Company").
WHEREAS, the Company desires to employ the Executive as its Chairman
of the Board and Chief Executive Officer, and the Executive desires to accept
such employment, for the term and upon the other conditions hereinafter set
forth; and
WHEREAS, the parties desire to enter into this Agreement setting forth
the terms and conditions of the employment relationship of the Executive with
the Company.
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein .
2. Term. This Agreement shall become effective on the date of the
----
consummation of the transactions contemplated by the Amended and Restated
Agreement and Plan of Merger dated as of September 17, 1997 among Apollo
Management, L.P., on behalf of one or more managed investment funds, Apollo LCA
Acquisition Corp. and Living Centers of America, Inc. and the Amended and
Restated Agreement and Plan of Merger dated as of September 17, 1997 among
Living Centers of America, Inc., GranCare, Inc. and Apollo Management, L.P., on
behalf of one or more funds under management (the "Effective Date"). This
Agreement is for the four-year period (the "Term") commencing on the Effective
Date and terminating on the fourth anniversary of the Effective Date, or upon
the Executive's earlier death, disability or other termination of employment
pursuant to Section 11; provided, however, that commencing on the fourth
anniversary of the Effective Date and on each anniversary thereafter, the Term
shall automatically be extended for one additional year unless, not later than
90 days prior to any such anniversary, either party hereto shall have notified
the other party hereto in writing that such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as Chairman
--------
of the Board and Chief Executive Officer of the Company or in such other senior
executive position in the Company as the Executive shall approve.
4. Duties and Reporting Relationship. During the Term, the
---------------------------------
Executive shall, on a full time basis, use his skills and render services to the
best of his abilities in supervising and conducting the operations of the
Company and shall not engage in any other business activities except with the
prior written approval of the Board of Directors of the Company (the "Board") or
its duly authorized designee. Notwithstanding the preceding sentence, nothing
contained herein shall prevent the Executive from (a) serving as a director of
any company, provided, that, the Executive is not required to devote a material
-------- ----
amount of his time to such service or (b) except as provided in Section 15(c),
acquiring an investment in any entity, provided, that, the Executive
--------
<PAGE>
does not participate in the management or operation of such entity. The
Executive shall report to the Board and, subject to the powers, authorities and
responsibilities vested in the Company's Board under the General Corporation Law
of the State of Delaware and in duly constituted committees of the Board, the
Executive shall have responsibility and authority for the overall strategic
policies, management and leadership of the Company. The Executive shall also
perform such other executive and administrative duties (not inconsistent with
the position of Chairman of the Board and Chief Executive Officer) as the
Executive may reasonably be expected to be capable of performing on behalf of
the Company, as may from time to time be authorized or directed by the Board.
The Executive agrees to be employed by the Company in all such capacities for
the Term, subject to all the covenants and conditions hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at the principal executive offices of the Company, except
for required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Execution Bonus. On the Effective Date, the Company
---------------
shall pay to the Executive $200,000 (subject to any applicable payroll or other
taxes required to be withheld).
(b) Base Salary. The Executive's base salary hereunder
-----------
shall be $700,000 a year, payable monthly. The Board shall review such base
salary at least annually and make such adjustment from time to time as it may
deem advisable, but the base salary shall not at any time be less than $700,000
a year.
(c) Annual Bonus. The Company shall provide the Executive
------------
with an annual bonus plan providing the Executive with an opportunity to earn an
annual bonus equal to between fifty percent (50%) and one hundred fifty percent
(150%) of his base salary if the Company achieves for the relevant year certain
financial targets established pursuant to such plan.
7. Vacation, Holidays and Sick Leave. During the Term, the
---------------------------------
Executive shall be entitled to paid vacation, paid holidays and sick leave in
accordance with the Company's standard policies for its senior executive
officers.
8. Business Expenses. The Executive shall be reimbursed for all
-----------------
ordinary and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive
----------------------------
shall be eligible to participate fully in all health benefits, insurance
programs, pension and retirement plans and other employee benefit and
compensation arrangements available to senior officers of the Company generally.
2
<PAGE>
10. Stock Options. The Company, pursuant to the terms of its stock
-------------
option plan (and as approved by the Compensation Committee of the Board of
Director), shall grant to the Executive as of the Effective Date, stock options
to purchase 488,500 shares of common stock of the Company, which represents
approximately three and three tenths percent (3.3%) of the fully diluted common
shares of the Company. Such stock options shall, in accordance with the
Company's stock option plan (i) expire ten (10) years from the Effective Date or
ninety (90) days after the Executive's Date of Termination, if earlier, (ii)
vest and become exercisable on each of the four anniversaries of the Effective
Date in the amount equal to one-fourth (1/4) of the stock options granted, (iii)
be exercisable, in the event of the Executive's termination of employment, for a
period of ninety (90) days following his Date of Termination; (iv) in the event
that the Executive's employment is terminated for any reason other than by the
Company following a Change in Control or by the Executive for Good Reason, be
forfeited to the extent not vested on the Date of Termination; and (v) have an
exercise price per share equal to the fair market value of a share of common
stock of the Company as of the Effective Date, which shall equal the closing
price of a share of GranCare, Inc. on the Effective Date, divided by .23457. The
Executive shall be eligible for additional stock option awards under the stock
option plan of the Company and, in this regard, the compensation committee of
the Board may consider whether, but not be obligated, to award the Executive
additional stock options under such plan.
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be
-------
terminated without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall
automatically terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity
due to physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any twelve (12) month period, and no
reasonable accommodation can be made that will allow Executive to perform
his essential functions, the Company may terminate the Executive's
employment hereunder for any such incapacity (a "Disability").
(c) Termination by the Company. The Company may terminate
--------------------------
the Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the
Executive to perform his duties hereunder (other than any such failure resulting
from the Executive's incapacity due to physical or mental illness), which has
not ceased within ten (10) days after a written demand for substantial
performance is delivered to the Executive by the Company, which demand
identifies the manner in which the Company believes that the Executive has not
performed such duties, (ii) the engaging by the Executive in willful misconduct
or an act of moral turpitude which is materially injurious to the Company,
monetarily or otherwise (including, but not limited to, conduct described in
Section 15) or (iii) the conviction of the Executive of, or the entering of a
3
<PAGE>
plea of nolo contendere by, the Executive with respect to, a felony.
Notwithstanding the foregoing, the Executive's employment hereunder shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the entire membership of the
Board, other than the Executive, at a meeting of the Board at which the
Executive recuses himself (after written notice to the Executive and a
reasonable opportunity for the Executive, together with the Executive's counsel,
to be heard before the Board), finding that in the good faith opinion of the
Board the Executive should be terminated for Cause.
(d) Termination by the Executive. The Executive shall be
----------------------------
entitled to terminate his employment hereunder (A) for Good Reason, (B) if his
health should become impaired to an extent that makes his continued performance
of his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written statement
from a qualified doctor to such effect and provided, further, that, at the
Company's request, the Executive shall submit to an examination by a doctor
selected by the Company and such doctor shall have concurred in the conclusion
of the Executive's doctor or (C) without the Executive's express written
consent, any failure by the Company to comply with any material provision of
this Agreement, which failure has not been cured within ten (10) days after
notice of such noncompliance has been given by the Executive to the Company. For
purposes of this Agreement, "Good Reason" shall mean the occurrence (without the
Executive's express written consent), following a Change in Control during the
term of this Agreement, of any one of the following acts by the Company, or
failures by the Company to act, unless, in the case of any act or failure to act
described below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect thereof:
(i) any change in the Executive's title,
authorities, responsibilities (including reporting responsibilities) which,
in the Executive's reasonable judgment, represents an adverse change from
his status, title, position or responsibilities (including reporting
responsibilities) which were in effect immediately prior to the Change in
Control or from his status, title, position or responsibilities (including
reporting responsibilities) which were in effect following a Change in
Control pursuant to the Executive's consent to accept any such change; the
assignment to him of any duties or work responsibilities which are
inconsistent with such status, title, position or work responsibilities; or
any removal of the Executive from, or failure to reappoint or reelect him
to any of such positions, except if any such changes are because of
Disability, retirement, death or Cause;
(ii) a reduction by the Company in the
Executive's annual base salary as in effect on the date hereof or as the
same may be increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company and all
senior executives of any Person (as defined in Section 11(h)(i) below) in
control of the Company provided in no event shall any such reduction reduce
--------
the Executive's base salary below $700,000;
4
<PAGE>
(iii) the relocation of the Executive's office at
which he is to perform his duties, to a location more than fifty (50) miles
from the location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's business to
an extent substantially consistent with his business travel obligations
prior to the Change in Control;
(iv) the failure by the Company, without the
Executive's consent, to pay to the Executive any portion of the Executive's
current compensation, or to pay to the Executive any portion of an
installment of deferred compensation under any deferred compensation
program of the Company, within seven (7) days of the date such compensation
is due;
(v) the failure by the Company to continue to
provide the Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any of
the Company's pension, life insurance, medical, health and accident, or
disability plans in which the Executive was participating immediately prior
to the Change in Control, unless the Executive participates after the
Change in Control in other comparable benefit plans generally available to
senior executives of the Company and senior executives of any Person in
control of the Company;
(vi) the adverse and substantial alteration of
the nature and quality of the office space within which the Executive
performed his duties prior to a Change in Control, as well as in the
secretarial and administrative support provided to the Executive, provided,
however, that a reasonable alteration of the nature and quality of the
office space or the secretarial or administrative support provided to the
Executive as a result of reasonable measures implemented by the Company to
effectuate a cost-reduction or consolidation program shall not constitute
Good Reason hereunder; or
(vii) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 11(f) below; for purposes of this
Agreement, no such purported termination shall be effective.
The Executive's continued employment for 6 months shall constitute consent to,
and a waiver of rights with respect to, any act or failure to act constituting
Good Reason hereunder.
(e) Voluntary Resignation. Should the Executive wish to
---------------------
resign from his position with the Company or terminate his employment for other
than Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company ("Notice Period"), setting forth the reasons and
specifying the date as of which his resignation is to become effective. During
the Notice Period, the Executive shall cooperate fully with the Company in
achieving a smooth transition of the Executive's duties and responsibilities to
such person(s) as
5
<PAGE>
may be designated by the Company. The Company reserves the right to accelerate
the Date of Termination by giving the Executive notice and payment of amounts
due to the Executive under Section 6(b) and, to the extent applicable, Section
6(c) for the balance of the Notice Period. The Company's obligation to continue
to employ the Executive or to continue payment of the amounts described in the
preceding sentence shall cease immediately if: (1) the Executive has not
satisfied his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause. If the Executive terminates his employment for other than Good Reason
within twelve (12) months from the Effective Date, the Executive shall be
obligated to refund the $250,000 that he received prior to the Effective Date
for relocation and related expenses.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be communicated
by written Notice of Termination to the other party hereto in accordance with
Section 19. "Notice of Termination" shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon and shall set forth
in reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean
-------------------
(i) if the Executive's employment is terminated because of death, the date of
the Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the Executive's
employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for
any other reason (other than death or Disability), the date specified in the
Notice of Termination (which, in the case of a termination for Good Reason shall
not be less than fifteen (15) nor more than sixty (60) days from the date such
Notice of Termination is given, and in the case of a termination for any other
reason shall not be less than thirty (30) days (sixty (60) days in the case of a
termination under Subsection (e) hereof) from the date such Notice of
Termination is given).
(h) Change in Control. For purposes of this Agreement, a
-----------------
Change in Control of the Company shall have occurred if:
(i) any "Person" (as defined in Section 3(a)(9)
of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and
used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the
Company or any of its subsidiaries, (2) any trustee or other fiduciary
holding securities under an employee benefit plan of the Company or any of
its subsidiaries, (3) an underwriter temporarily holding securities
pursuant to an offering of such securities, (4) any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially
the same proportions as their ownership of the Company's common stock or
(5) Apollo Management, L.P., any of its affiliates and any investments
funds managed by it (collectively, "Apollo"))), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more than
50% of the combined voting power of the Company's then outstanding voting
securities;
6
<PAGE>
(ii) during any period of not more than two
consecutive years, not including any period prior to the date of this
Agreement, individuals who at the beginning of such period constitute the
Board, and any new director (other than a director designated by a person
(other than Apollo) who has entered into an agreement with the Company to
effect a transaction described in clause (i), (iii), or (iv) of this
Section 1l(h)) whose election by the Board or nomination for election by
the Company's stockholders was (A) made pursuant to the Stockholders
Agreement dated as of November 4, 1997 or (B) approved by a vote of at
least two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute at least a majority thereof;
(iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation, other
than both (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being converted into
voting securities of the surviving or parent entity) 50% or more of the
combined voting power of the voting securities of the Company or such
surviving or parent entity outstanding immediately after such merger or
consolidation or (B) a merger or consolidation in which no person acquires
50% or more of the combined voting power of the Company's then outstanding
securities; or
(iv) the stockholders of the Company approve a
plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets (or any transaction having a similar effect) other than such a sale
or disposition to Apollo.
(i) Resignation as Member of Board. If the Executive's
------------------------------
employment by the Company is terminated for any reason, the Executive hereby
agrees that he shall simultaneously submit his resignation as a member of the
Board in writing on or before the Date of Termination. If the Executive fails to
submit such required resignation in writing, the provisions of this Section 1
l(i) may be deemed by the Company to constitute the Executive's written
resignation as a member of the Board effective as of the Date of Termination.
(j) Return of Property. When the Executive shall cease to
------------------
be employed by the Company, the Executive shall promptly surrender to the
Company all Company property, including without limitation, all records and
other documents obtained by him or entrusted to him during the course of his
employment with the Company provided, however, that the Executive may retain
-------- -------
copies of such documents as necessary for the Executive's personal records for
federal income tax purposes.
7
<PAGE>
12. Compensation During Disability. Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform
his duties hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his full salary
at the rate then in effect for such period until his employment is terminated
pursuant to Section 1 l(b)(ii) hereof, provided that payments so made to the
Executive during the Disability Period shall be reduced by the sum of the
amounts, if any, payable to the Executive with respect to such period under
disability benefit plans of the Company or under the Social Security disability
insurance program, and which amounts were not previously applied to reduce any
such payment.
(b) If the Executive's employment is terminated by his
death or Disability, the Company shall pay (i) any amounts due to the Executive
under Section 6(b) through the date of such termination and (ii) an amount equal
to the bonus he would have received for the fiscal year that ends on or
immediately after the Date of Termination, assuming the Company achieved the
lowest target level for which a bonus is paid under the plan described in
Section 6(c), prorated for the period beginning on the first day of the fiscal
year in which occurs the Date of Termination through the Date of Termination. In
addition, if the Executive's employment is terminated by his death, the Company
shall continue to pay to his estate his salary for an additional six months at
the rate then in effect.
(c) If the Executive's employment shall be terminated by
the Company for Cause or by the Executive for other than Good Reason, the
Company shall pay the Executive his full salary through the Date of Termination
at the rate in effect at the time Notice of Termination is given, and the
Company shall have no further obligations to the Executive under this Agreement.
(d) If (A) following a Change in Control the Company shall
terminate the Executive's employment in breach of this Agreement, or (B)
following a Change in Control the Executive shall terminate his employment for
Good Reason, then
(i) the Company shall pay the Executive his full
salary through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any, to
which the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, at the time such payments are
due;
(ii) in lieu of any further salary payments to the
Executive for periods subsequent to the Date of Termination, the Company
shall pay as liquidated damages to the Executive an aggregate amount equal
to the product of (A) the sum of (1) the Executive's annual salary rate in
effect as of the Date of Termination and (2) the average of the annual
bonuses actually paid to the Executive by the Company with respect to the
two fiscal years which immediately precede the year of the Term in which
the Date of Termination occurs provided if there was a bonus or bonuses
--------
paid to the Executive with
8
<PAGE>
respect only to one fiscal year which immediately precedes the year of the
Term in which the Date of Termination occurs, then such single year's bonus
or bonuses shall be utilized in the calculation pursuant to this clause
(2), provided, further, that for purposes of this Agreement, if the Date of
-------- -------
Termination occurs before the end of the first fiscal year that ends after
the Effective Date, the amount of the bonus paid by the Company to the
Executive shall be deemed to be $700,000 and (B) the number three (3);
(iii) the Company shall (x) continue coverage for
the Executive, on the same terms and conditions as would be applicable if
the Executive were an active Employee, under the Company's life insurance,
medical, health, disability and similar welfare benefit plans for a period
equal to the greater of the remainder of the Term and eighteen (18) months,
and (y) provide the benefits which the Executive would have been entitled
to receive pursuant to any supplemental retirement plan maintained by the
Company had his employment continued at the rate of compensation specified
herein for the remainder of the Term. Benefits otherwise receivable by the
Executive pursuant to clause (x) of this Section 12(d)(iii) shall be
reduced to the extent comparable benefits are actually received by the
Executive from a subsequent employer during the period during which the
Company is required to provide such benefits, and the Executive shall
report any such benefits actually received by him to the Company; and
(iv) the payments provided for in this Section
12(d) (other than Section 12(d)(iii)) shall be made not later than the
thirtieth day following the Date of Termination, provided, however, that if
the amounts of such payments, and the limitation on such payments set forth
in Section 16 hereof, cannot be finally determined on or before such day,
the Company shall pay to the Executive on such day an estimate, as
determined in good faith by the Company, of the minimum amount of such
payments to which the Executive is clearly entitled and shall pay the
remainder of such payments (together with interest at the rate provided in
section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as
the amount thereof can be determined but in no event later than the
sixtieth (60th) day after the Date of Termination. In the event that the
amount of the estimated payments exceeds the amount determined by the
Company within six (6) months after payment to have been due, such excess
shall constitute a loan by the Company to the Executive, payable no later
than the thirtieth (30th) business day after demand by the Company
(together with interest at the rate provided in section 1274(b)(2)(B) of
the Code). At the time that payments are made under this Section 12(d), the
Company shall provide the Executive with a written statement setting forth
the manner in which such payments were calculated and the basis for such
calculations including, without limitation, any opinions or other advice
the Company has received from outside counsel, auditors or consultants (and
any such opinions or advice which are in writing shall be attached to the
statement).
9
<PAGE>
(e) If prior to any Change of Control the Company shall
terminate the Executive's employment without Cause or the Executive terminates
his employment under clause (C) of Section 11(d) hereof, then
(i) the Company shall pay the Executive his full
salary through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any, to
which the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, at the time such payments are
due;
(ii) in lieu of any further salary payments to
the Executive for periods subsequent to the Date of Termination, the
Company shall pay as liquidated damages to the Executive an aggregate
amount equal to the product of (A) the sum of (1) the Executive's annual
salary rate in effect as of the Date of Termination and (2) the average of
the annual bonuses actually paid to the Executive by the Company with
respect to the two fiscal years which immediately precede the year of the
Term in which the Date of Termination occurs provided if there was a bonus
--------
or bonuses paid to the Executive with respect only to one fiscal year which
immediately precedes the year of the Term in which the Date of Termination
occurs, then such single year's bonus or bonuses shall be utilized in the
calculation pursuant to this clause (2), provided, further, that for
-------- -------
purposes of this Agreement, if the Date of Termination occurs before the
end of the first fiscal year that ends after the Effective Date, the amount
of the bonus paid by the Company to the Executive shall be deemed to be
$700,000 and (B) the lesser of (x) the number three (3) and (y) the greater
of (aa) the number of years (including partial years) remaining in the Term
and (bb) the number two (2); such amount to be paid in substantially equal
monthly installments during the period commencing with the month
immediately following the month in which the Date of Termination occurs and
ending with the month corresponding to the end of the Term hereunder; and
(iii) the Company shall (x) continue coverage for
the Executive, on the same terms and conditions as would be applicable if
the Executive were an active employee, under the Company's life insurance,
medical, health, disability and similar welfare benefit plans for a period
equal to the greater of the remainder of the Term and eighteen (18) months,
and (y) provide the benefits which the Executive would have been entitled
to receive pursuant to any supplemental retirement plan maintained by the
Company had his employment continued at the rate of compensation specified
herein for the remainder of the Term. Benefits otherwise receivable by the
Executive pursuant to clause (x) of this Section 12(e)(iii) shall be
reduced to the extent comparable benefits are actually received by the
Executive from a subsequent employer during the period during which the
Company is required to provide such benefits, and the Executive shall
report any such benefits actually received by him to the Company.
10
<PAGE>
(f) If the Executive shall terminate his employment under
clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the
Executive his full salary through the Date of Termination at the rate in effect
at the time Notice of Termination is given, and the Company shall have no
further obligations to the Executive under this Agreement.
(g) The Executive shall not be required to mitigate the
amount of any payment provided for in this Section 12 by seeking other
employment or otherwise, and, except as provided in Sections 12(d) and 12(e)
hereof, the amount of any payment or benefit provided for in this Section 12
shall not be reduced by any compensation earned by the Executive as the result
of employment by another employer or by retirement benefits.
(h) Release. Prior to making any payment pursuant to
-------
Sections 12(d)(ii) and 12(d)(iii) or Sections 12(e)(ii) and 12(e)(iii),
whichever is applicable, the Company shall have the right to require the
Executive to sign, and the Executive hereby agrees to sign, an agreement to be
bound by the terms of Section 15 of this Agreement and a waiver of all claims
the Executive may have (including any claims under the Age Discrimination in
Employment Act), other than claims for payments or benefits hereunder or claims
for indemnification for director or officer liability, in connection with the
termination of the Executive's employment with the Company and the Company may
withhold payment of such amount until the period during which the Executive may
revoke such waiver (normally seven days) has elapsed.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement
has been authorized by all necessary corporate action of the Company and is a
valid and binding agreement of the Company enforceable against it in accordance
with its terms. The Company agrees and covenants that it will (i) provide the
Executive with customary director and officer indemnification; and (ii) maintain
director and officer liability insurance which is of a type customarily
maintained by companies of similar size and with a similar business as the
Company.
(b) The Executive represents and warrants that he is not a
party to any agreement or instrument which would prevent him from entering into
or performing his duties in any way under this Agreement. The Executive agrees
and covenants that he will obtain, and submit to, such physical examinations as
may be necessary to facilitate the Company obtaining an insurance policy for its
benefit insuring the life of the Executive.
14. Successors: Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
11
<PAGE>
(b) This Agreement is a personal contract and the rights
and interests of the Executive hereunder may not be sold, transferred, assigned,
pledged, encumbered, or hypothecated by him, except as otherwise expressly
permitted by the provisions of this Agreement. This Agreement shall inure to the
benefit of and be enforceable by the Executive and his personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amount would still
be payable to him hereunder had the Executive continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to his devisee, legatee or other designee or, if there
is no such designee, to his estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that he will not at
any time during or at any time after the end of the Term, directly or
indirectly, use for his own account, or disclose to any person, firm or
corporation, other than authorized officers, directors and employees of the
Company or its subsidiaries, Confidential Information (as hereinafter defined)
that is treated as trade secrets by the Company and will not at any time during
or for a period of five (5) years after the end of the Term, directly or
indirectly, use for his own account, or disclose to any person, firm or
corporation, other than authorized officers, directors and employees of the
Company or its subsidiaries, any other Confidential Information. As used herein,
"Confidential Information" of the Company means information of any kind, nature
or description which is disclosed to or otherwise known to the Executive as a
direct or indirect consequence of his association with the Company, which
information is not generally known to the public or in the business in which the
Company is engaged or which information relates to specific investment
opportunities within the scope of the Company's business which were considered
by the Executive or the Company during the term of this Agreement. Confidential
Information that is treated as confidential trade secrets by the Company shall
include, but not be limited to, strategic operating plans and budgets, policy
and procedure manuals, computer programs, financial forms and information,
patient or resident lists and accounts, supplier information, accounting forms
and procedures, personnel policies, information pertaining to the salaries,
positions and performance reviews of the Company's employees, information on the
methods of the Company's operations, research and data developed by or for the
benefit of the Company and information relating to revenues, costs, profits and
the financial condition of the Company. During the Term and for a period of two
years following the termination of the Executive's employment, the Executive
shall not induce any employee of the Company or its subsidiaries to terminate
his or her employment by the Company or its subsidiaries in order to obtain
employment by any person, firm or corporation affiliated with the Executive.
(b) The Executive covenants and agrees that any
information, materials, ideas, discoveries, techniques or programs developed or
discovered by the Executive in connection with the performance of his duties
hereunder shall remain the sole and exclusive property of the Company and, to
the extent it constitutes Confidential Information, shall be subject to the
covenants containeed in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term
and, if the Executive's employment is terminated by the Executive for other than
Good Reason, for a
12
<PAGE>
period of two (2) years following the termination of the Executive's employment,
the Executive shall not, directly or indirectly, own an interest in, operate,
join, control, or participate as a partner, director, principal, officer, or
agent of, enter into the employment of, or act as a consultant to, in any case
in which he has control or supervision over a significant portion of any entity
(i) whose principal business is the operation of one or more skilled nursing
facilities or (ii) which operates a skilled nursing business that is material in
relation to the Company's comparable business and (iii) in either case, which
derives at least 10% of its skilled nursing facility revenue from facilities
which are located within 35 miles of a center or facility operated by the
Company. Notwithstanding anything herein to the contrary, the foregoing
provisions of this Section 15(c) shall not prevent the Executive from acquiring
securities representing not more than 5% of the outstanding voting securities of
any publicly held corporation.
(d) Without limiting the right of the Company to pursue all
other legal and equitable remedies available for violation by the Executive of
the covenants contained in this Section 15, it is expressly agreed by the
Executive and the Company that such other remedies cannot fully compensate the
Company for any such violation and that the Company shall be entitled to
injunctive relief, without the necessity of proving actual monetary loss, to
prevent any such violation or any continuing violation thereof. Each party
intends and agrees that if in any action before any court or agency legally
empowered to enforce the covenants contained in this Section 15, any term,
restriction, covenant or promise contained herein is found to be unreasonable
and accordingly unenforceable, then such term, restriction, covenant or promise
shall be deemed modified to the extent necessary to make it enforceable by such
court or agency. The covenants contained in Section 15 shall survive the
conclusion of the Executive's employment by the Company.
16. Prohibition on Parachute Payments.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement,
in the event that at any time on or after the first anniversary of the Effective
Date any payment or benefit received or to be received by the Executive in
connection with a Change in Control of the Company or the termination of the
Executive's employment (whether pursuant to the terms of this Agreement or any
other plan, arrangement or agreement with the Company, any person whose actions
result in a Change in Control or any Person affiliated with the Company or such
Person) (all such payments and benefits, including, without limitation, base
salary and bonus payments, being hereinafter called "Total Payments") would not
be deductible (in whole or in part), by the Company, an affiliate or any Person
making such payment or providing such benefit as a result of section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent
necessary to make such portion of the Total Payments deductible (and after
taking into account any reduction in the Total Payments provided by reason of
section 280G of the Code in such other plan, arrangement or agreement), (A) such
cash payments shall first be reduced (if necessary, to zero), and (B) all other
non-cash payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation, (i) no portion of the
Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the Date of Termination shall be taken
into account, (ii) no portion of the Total Payments shall be taken into account
which in the opinion of tax counsel selected by the Company's independent
auditors and reasonably acceptable to the Executive does
13
<PAGE>
not constitute a "parachute payment" within the meaning of section 280G(b)(2) of
the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such
payments shall be reduced only to the extent necessary so that the Total
Payments (other than those referred to in clauses (i) or (ii)) in their entirety
constitute reasonable compensation for services actually rendered within the
meaning of section 280G(b)(4)(B) of the Code or are otherwise not subject to
disallowance as deductions, in the opinion of the tax counsel referred to in
clause (ii); and (iv) the value of any non-cash benefit or any deferred payment
or benefit included in the Total Payments shall be determined by the Company's
independent auditors in accordance with the principles of sections 280G(d)(3)
and (4) of the Code.
(b) If it is established pursuant to a final determination
of a court or an Internal Revenue Service proceeding that, notwithstanding the
good faith of the Executive and the Company in applying the terms of this
Section 16, the aggregate "parachute payments" paid to or for the Executive's
benefit are in an amount that would result in any portion of such "parachute
payments" not being deductible by reason of section 280G of the Code, then the
Executive shall have an obligation to pay the Company upon demand an amount
equal to the sum of (i) the excess of the aggregate "parachute payments" paid to
or for the Executive's benefit over the aggregate "parachute payments" that
could have been paid to or for the Executive's benefit without any portion of
such "parachute payments" not being deductible by reason of section 280G of the
Code; and (ii) interest on the amount set forth in clause (i) of this sentence
at the rate provided in section 1274(b)(2)(B) of the Code from the date of the
Executive's receipt of such excess until the date of such payment.
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification. Waiver. No provision of this
---------------------------------
Agreement may be amended or waived unless such amendment or waiver is agreed to
in writing, signed by the Executive and by a duly authorized officer of the
Company. No waiver by any party hereto of any breach by another party hereto of
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Notices Any notice to be given hereunder shall be in writing and
-------
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
14
<PAGE>
To Executive at: Keith B. Pitts
_____________________________
_____________________________
_____________________________
To the Company at: Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
20. Severability. If any provision of this Agreement or the
------------
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances other than those to which it
is so determined to be invalid and unenforceable, shall not be affected thereby,
and each provision hereof shall be validated and shall be enforced to the
fullest extent permitted by law.
21. Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
22. Governing Law: Attorney's Fees.
------------------------------
(a) This Agreement will be governed by and construed in
accordance with the laws of the State of Georgia, without regard to its
conflicts of laws principles.
(b) The prevailing party in any dispute arising out of this
Agreement shall be entitled to be paid its reasonable attorney's fees incurred
in connection with such dispute from the other party to such dispute.
23. Dispute Resolution. The Executive and the Company shall not
------------------
initiate legal proceedings relating in any way to this Agreement or to the
Executive's employment or termination from employment with the Company until
thirty days after the party against whom the claim is made ("respondent")
receives written notice from the claiming party of the specific nature of any
purported claims and the amount of any purported damages attributable to each
such claim. The Executive and the Company further agree that if respondent
submits the claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty day period, the claiming party
may not institute arbitration or other legal proceedings against respondent
until the earlier of: (a) the completion of good-faith mediation efforts or (b)
90 days after the date on which the respondent received written notice of the
claimant's claim(s); provided, however, that nothing in this Section 23 shall
prohibit the Company from pursuing
15
<PAGE>
injunctive or other equitable relief against the Executive prior to,
contemporaneous with, or subsequent to invoking or participating in these
dispute resolution processes. The Company shall pay the cost of the Mediator.
24. Headings. All descriptive headings of sections and paragraphs in
--------
this Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
25. Withholdings All payments to the Executive under this Agreement
------------
shall be reduced by all applicable withholding required by federal, state or
local tax laws.
26. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
BY: /s/ Susan Thomas Whittle
-------------------------------
NAME: Susan Thomas Whittle
TITLE: Senior Vice President and
General Counsel
THE EXECUTIVE
/s/ Keith B. Pitts
----------------------------------
Keith B. Pitts
16
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
Employment Agreement dated as of ____________, 1997 between John D. Lee
(the "Executive") and Paragon Health Network, Inc., a Delaware corporation (the
"Company").
WHEREAS, the Company desires to employ the Executive as Senior Vice
President, Post-Acute Care Division, East and the Executive desires to accept
such employment, for the term and upon the other conditions hereinafter set
forth; and
WHEREAS, as a condition of entering into this Agreement, the Executive
agrees to waive the Executive's rights, if any, against the Company and any
predecessor company (including GranCare, Inc.) under (i) any employment
agreement and (ii) any other plan, arrangement or agreement of any kind that
provides any form of severance payments; and
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company;
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term. This Agreement shall commence on the date hereof (the
----
"Effective Date") and continue for the two-year period (the "Term") terminating
on the second anniversary of the Effective Date, or upon the Executive's earlier
death, disability or other termination of employment pursuant to Section 11;
provided, however, that commencing on the second anniversary of the Effective
Date and on each anniversary thereafter, the Term shall automatically be
extended for one additional year unless, not later than 90 days prior to any
such anniversary, either party hereto shall have notified the other party hereto
in writing that such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as Senior Vice
--------
President, Post-Acute Care Division, East of the Company or in such other
executive position in the Company as the Executive shall approve.
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee. The Executive shall also perform such other executive and
administrative duties (not inconsistent with the position of Senior Vice
President, Post-Acute Care Division, East) as the Executive may reasonably be
expected to be capable of performing on behalf of the Company, as may from time
to time be authorized or directed by the Board. The
<PAGE>
Executive agrees to be employed by the Company in all such capacities for the
Term, subject to all the covenants and conditions hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at the offices of the Company in Hickory, North Carolina,
except for required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder shall be
-----------
$225,000 a year, payable monthly and prorated for any partial year of
employment. The Board shall review such base salary at least annually and
make such adjustment from time to time as it may deem advisable, but the
base salary shall not at any time be less than $225,000 a year.
(b) Annual Bonus. The Company shall provide the Executive with an
------------
opportunity to earn upon achievement of target performance, an annual bonus
equal to fifty percent (50%) of his base salary (the "Target Bonus"), with
a minimum bonus of between fifty percent (50%) of Target Bonus upon
achievement of threshold performance and an opportunity to earn up to one
hundred fifty percent (150%) of the Target Bonus for performance in excess
of the targets.
(c) Execution Bonus. On the Effective Date, the Company shall pay to
---------------
the Executive $200,000 (subject to any applicable payroll or other taxes
required to be withheld).
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its senior vice presidents.
8. Business Expenses. The Executive shall be reimbursed for all ordinary
-----------------
and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive shall be
----------------------------
eligible to participate fully in all health benefits, insurance programs,
pension and retirement plans and other employee benefit and compensation
arrangements available to vice presidents of the Company generally.
10. Stock Options. The Company, pursuant to the terms of its stock option
-------------
plan, may grant to the Executive, stock options to purchase a number of shares
of common stock.
2
<PAGE>
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be terminated
-------
without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall automatically
terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any eighteen (18) month period,
and no reasonable accommodation can be made that will allow Executive
to perform his essential functions, the Company may terminate the
Executive's employment hereunder for any such incapacity (a
"Disability").
(c) Termination by the Company. The Company may terminate the
--------------------------
Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal
by the Executive to perform his duties hereunder (other than any such
failure resulting from the Executive's incapacity due to physical or mental
illness), which has not ceased within ten (10) days after a written demand
for substantial performance is delivered to the Executive by the Company,
which demand identifies the manner in which the Company believes that the
Executive has not performed such duties, (ii) the engaging by the Executive
in willful misconduct or an act of moral turpitude which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct which violates Section 15 hereof) or (iii) the
conviction of the Executive of, or the entering of a plea of nolo
contendere by, the Executive with respect to, a felony.
(d) Termination by the Executive. The Executive shall be entitled to
----------------------------
terminate his employment hereunder (A) for Good Reason, (B) if his health
should become impaired to an extent that makes his continued performance of
his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) without the
Executive's express written consent, any failure by the Company to comply
with any material provision of this Agreement, which failure has not been
cured within ten (10) days after notice of such noncompliance has been
given by the Executive to the Company. For purposes of this Agreement,
"Good Reason" shall mean the occurrence following a Change in Control
during the term of this Agreement, of any one of the following acts by the
Company, or failures by the Company to act, unless, in the case of any act
or failure to act described
3
<PAGE>
below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect
thereof:
(i) any material diminution in the Executive's authorities or
responsibilities (including reporting responsibilities) which were in
effect immediately prior to the Change in Control or from his status,
title, position or responsibilities (including reporting
responsibilities) which were in effect following a Change in Control
pursuant to the Executive's consent to accept any such change; the
assignment to him of any duties or work responsibilities which are
inconsistent with such status, title, position or work
responsibilities; or any removal of the Executive from, or failure to
reappoint or reelect him to any of such positions, except if any such
changes are because of Disability, retirement, death or Cause;
(ii) a reduction by the Company in the Executive's base salary
or Target Bonus as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company
and all senior executives of any Person (as defined in Section
11(h)(i) below) in control of the Company provided in no event shall
any such reduction reduce the Executive's base salary below $225,000;
(iii) the relocation of the Executive's office at which he is to
perform his duties, to a location more than fifty (50) miles from the
location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's
business to an extent substantially consistent with his business
travel obligations prior to the Change in Control;
(iv) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's
current compensation;
(v) the failure by the Company to continue to provide the
Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any
of the Company's pension, life insurance, medical, health and
accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control, unless the Executive
participates after the Change in Control in other comparable benefit
plans generally available to senior executives of the Company and
senior executives of any Person in control of the Company;
(vi) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 11(f) below; for purposes of this
Agreement, no such purported termination shall be effective.
4
<PAGE>
The Executive's continued employment for 6 months following any act or failure
to act constituting Good Reason hereunder without the delivery of a Notice of
Termination shall constitute consent to, and a waiver of rights with respect to,
such act or failure to act.
(e) Voluntary Resignation. Should the Executive wish to resign from
---------------------
his position with the Company or terminate his employment for other than
Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company ("Notice Period"), setting forth the reasons
and specifying the date as of which his resignation is to become effective.
During the Notice Period, the Executive shall cooperate fully with the
Company in achieving a smooth transition of the Executive's duties and
responsibilities to such person(s) as may be designated by the Company. The
Company reserves the right to accelerate the Date of Termination by giving
the Executive notice and payment of amounts due to the Executive under
Section 6(a) and, to the extent applicable, Section 6(b) for the balance of
the Notice Period. The Company's obligation to continue to employ the
Executive or to continue payment of the amounts described in the preceding
sentence shall cease immediately if: (1) the Executive has not satisfied
his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause. If the Executive terminates his employment for other than Good
Reason within twelve (12) months from the Effective Date, the Executive
shall be obligated to refund the amount that was received under Section
6(c) of this Agreement.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 19. "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i) if the
-------------------
Executive's employment is terminated because of death, the date of the
Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the
Executive's employment is terminated pursuant to Subsection (c), (d) or (e)
hereof or for any other reason (other than death or Disability), the date
specified in the Notice of Termination which shall not be less than sixty
(60) days from the date such Notice of Termination is given.
(h) Change in Control. For purposes of this Agreement, a Change in
-----------------
Control of the Company shall have occurred if
(i) any "Person" (as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") as modified and
used in Sections 13(d) and 14(d) of the Exchange Act (other than (1)
the Company or any of its subsidiaries, (2) any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries, (3) an
5
<PAGE>
underwriter temporarily holding securities pursuant to an offering of
such securities, (4) any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions
as their ownership of the Company's common stock or (5) Apollo
Management, LP, any of its affiliates and any investments funds
managed by it (collectively, "Apollo"))), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more
than 50% of the combined voting power of the Company's then
outstanding voting securities;
(ii) during any period of not more than two (2) consecutive
years, not including any period prior to the date of this Agreement,
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person
(other than Apollo) who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii), or (iv) of
this Section 1l(h)) whose election by the Board or nomination for
election by the Company's stockholders was (A) made pursuant to the
Stockholders Agreement affecting the Company dated October 31, 1997 or
(B) approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority
thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
both (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or parent entity)
50% or more of the combined voting power of the voting securities of
the Company or such surviving or parent entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation in
which no person acquires 50% or more of the combined voting power of
the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or
any transaction having a similar effect) other than such a sale or
disposition to Apollo.
(i) Return of Property. When the Executive ceases to be employed by
------------------
the Company, the Executive will promptly surrender to the Company all
Company property, including without limitation, all records and other
documents obtained by him or entrusted to him during the course of his
employment with the Company provided, however, that the Executive may
retain copies of such documents as necessary for the Executive's personal
records for federal income tax purposes.
6
<PAGE>
12. Compensation During Disability; Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his base
salary at the rate then in effect for such period until his employment is
terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so
made to the Executive during the Disability Period shall be reduced by the
sum of the amounts, if any, payable to the Executive with respect to such
period under disability benefit plans of the Company or under the Social
Security disability insurance program, and which amounts were not
previously applied to reduce any such payment.
(b) If the Executive's employment is terminated by his death or
Disability, the Company shall pay (i) any base salary due to the Executive
under Section 6(a) through the date of such termination and (ii) an amount
equal to the Target Bonus he would have received for the fiscal year that
ends on or immediately after the Date of Termination, assuming the Company
achieved the lowest target level for which a bonus is paid under the plan
described in Section 6(b), prorated for the period beginning on the first
day of the fiscal year in which occurs the Date of Termination through the
Date of Termination. In addition, if the Executive's employment is
terminated by his death, the Company shall continue to pay to his estate
his salary for an additional six months at the rate then in effect.
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay
the Executive his base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, and the Company shall
have no further obligations to the Executive under this Agreement.
(d) If following a Change in Control (A) the Company terminates the
Executive's employment without Cause, or (B) the Executive terminates his
employment for Good Reason, then
(i) the Company shall pay the Executive his base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any,
to which the Executive is entitled as of the Date of Termination under
any compensation plan or program of the Company, at the time such
payments are due;
(ii) in lieu of any further salary payments to the Executive
for periods subsequent to the Date of Termination, the Company shall
pay as liquidated damages to the Executive an aggregate amount equal
to the product of (A) the sum of (1) the Executive's base salary at
the rate in effect of the Date of Termination and (2) the average of
the annual bonuses actually paid to the Executive by the Company with
respect to the two (2) fiscal years which immediately precede the year
of the Term which the Date of Termination occurs
7
<PAGE>
provided if there was bonus or bonuses paid to the Executive with
--------
respect only to one fiscal year that immediately precedes the year
within the Term in which the Date of Termination occurs, then such
single year's bonus or bonuses shall be utilized in the calculation
pursuant to this clause (2), provided, further, that for purposes of
this Agreement, if the Date of Termination occurs before the end of
the first fiscal year that ends after the Effective Date, the amount
of the bonus paid by the Company to the Executive shall be deemed to
be the Target Bonus and (B) the number two (2);
(iii) the Company shall pay the Executive an amount equal to the
prorated Target Bonus that would have been paid for the period
beginning on the first day of the fiscal year in which the Date of
Termination occurs;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active Employee, under the Company's life insurance, medical,
health and similar welfare benefit plans (other then group disability
benefits) for a period of twenty-four (24) months. Benefits otherwise
receivable by the Executive pursuant to this Section 12(d)(iv) shall
be reduced to the extent comparable benefits are actually received by
the Executive from a subsequent employer during the period during
which the Company is required to provide such benefits, and the
Executive shall report any such benefits actually received by him to
the Company; and
(v) the payments provided for in this Section 12(d) (other
than Section 12(d)(iv)) shall be made not later than the thirtieth
(30th) day following the Date of Termination, provided, however, that
if the amounts of such payments, and the limitation on such payments
set forth in Section 16 hereof, cannot be finally determined on or
before such day, the Company shall pay to the Executive on such day an
estimate, as determined in good faith by the Company, of the minimum
amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code (as defined in
Section 16)) as soon as the amount thereof can be determined but in no
event later than the sixtieth (60th) day after the Date of
Termination. In the event that the amount of the estimated payments
exceeds the amount determined by the Company within six (6) months
after payment to have been due, such excess shall constitute a loan by
the Company to the Executive, payable no later than the thirtieth
(30th) business day after demand by the Company (together with
interest at the rate provided in section 1274(b)(2)(B) of the Code).
At the time that payments are made under this Section 12(d), the
Company shall provide the Executive with a written statement setting
forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or
other advice the Company has received from outside counsel, auditors
or consultants (and any such opinions or advice which are in writing
shall be attached to the statement).
8
<PAGE>
(vi) If the Executive continues to be employed by the Company
for one (1) year after a Change of Control and has not by such time
given Notice of Termination for Good Reason, the Executive will have
waived his right to exercise his rights under Section 12(d) hereof
with respect to any act or failure to act which constitutes Good
Reason.
(e) If the Executive terminates his employment under clause (C) of
Section 11(d) hereof or, prior to any Change of Control, the Company
terminates the Executive's employment without Cause, then
(i) the Company shall pay the Executive his base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any,
to which the Executive is entitled as of the Date of Termination under
any compensation plan or program of the Company, at the time such
payments are due;
(ii) the Company shall pay to the Executive the greater of
either (A) the remaining amount of base salary owed for the Term; or
(B) an aggregate amount equal to the sum of (1) nine (9) months of the
Executive's base salary at the rate in effect as of the Date of
Termination plus (2) one (1) additional month of the Executive's base
salary at such rate for each full year of service beyond the first
anniversary of this Agreement, not to exceed eighteen (18) months of
base salary payments; such amount to be paid in substantially equal
monthly installments during the period commencing with the month
immediately following the month in which the Date of Termination
occurs or in a lump sum payment, as decided by the Company;
(iii) the Company shall pay the Executive his Target Bonus
prorated for the period beginning on the first day of the fiscal year
in which occurs the Date of Termination through the Date of
Termination;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active employee, under the Company's life insurance, medical,
health, and similar welfare benefit plans (other then group
disability) for a period not to exceed the number of months the
Executive will be paid under Section 12(e)(ii) beginning on the Date
of Termination;
(v) benefits otherwise receivable by the Executive pursuant to
clause (iv) of this Section 12(e) shall be reduced to the extent
comparable benefits are actually received by the Executive from a
subsequent employer during the period which the Company is required to
provide such benefits, and the Executive shall report any such
benefits actually received by him to the Company;
9
<PAGE>
(vi) the payments made to the Executive under Section 12(e)
hereof will be reduced by the amount of payments provided for by any
subsequent employer of the executive for a position obtained after the
Date of Termination.
(f) If the Executive experiences a termination under Section 12(d) or
12(e) hereof, until the Executive finds another full-time position or for 6
months, whichever is earlier, the Company shall provide the Executive with
professional outplacement services of the Executive's choosing and shall
reimburse the Executive documented incidental outplacement expenses
directly related to the Executive's job search such as resume mailing,
interview trips, and clerical support, subject to a maximum cost of $10,000
for such outplacement services and incidental expenses. The Executive's
choice of professional outplacement services is subject to the Company's
reasonable prior approval. If the Company has not approved or disapproved
of the Executive's choice within ten (10) business days of receiving notice
of such choice, the Company will be deemed to have given is approval. Any
approval by the Company will be in writing and will state the basis for
such disapproval. The Executive will not be entitled to receive cash or
lieu of the professional outplacement services provided pursuant to this
Section.
(g) If the Executive shall terminate his employment under clause (B)
of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his
base salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, and the Company shall have no further
obligations to the Executive under this Agreement.
(h) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, and, except as provided in Sections 12(e) hereof, the amount of
any payment or benefit provided for in this Section 12 shall not be reduced
by any compensation earned by the Executive as the result of employment by
another employer or by retirement benefits.
(i) Release. Prior to making any payment pursuant to Sections
-------
12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is
applicable, the Company shall have the right to require the Executive to
sign, and the Executive hereby agrees to sign, an agreement to be bound by
the terms of Section 15 of this Agreement and a waiver of all claims the
Executive may have (including any claims under the Age Discrimination in
Employment Act), and the Company may withhold payment of such amount until
the period during which the Executive may revoke such waiver (normally
seven days) has elapsed.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid
and binding agreement of the Company enforceable against it in accordance
with its terms.
10
<PAGE>
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement. The Executive agrees
and covenants that he will obtain, and submit to, such physical
examinations as may be necessary to facilitate the Company obtaining an
insurance policy for its benefit insuring the life of the Executive.
14. Successors: Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
(b) This Agreement is a personal contract and the rights and
interests of the Executive hereunder may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him, except as otherwise
expressly permitted by the provisions of this Agreement. This Agreement
shall inure to the benefit of and be enforceable by the Executive and his
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Executive should die
while any amount would still be payable to him hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his
devisee, legatee or other designee or, if there is no such designee, to his
estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that he will not at any time
during or at any time after the end of the Term, directly or indirectly,
use for his own account, or disclose to any person, firm or corporation,
other than authorized officers, directors and employees of the Company or
its subsidiaries, Confidential Information (as hereinafter defined) that is
treated as trade secrets by the Company and will not at any time during or
for a period equal to the number of payments which are being made under
Section 12(e) hereof directly or indirectly, use for his own account, or
disclose to any person, firm or corporation, other than authorized
officers, directors and employees of the Company or its subsidiaries, any
other Confidential Information. As used herein, "Confidential Information"
of the Company means information of any kind, nature or description which
is disclosed to or otherwise known to the Executive as a direct or indirect
consequence of his association with the Company, which information is not
generally known to the public or in the business in which the Company is
engaged or which information relates to specific investment opportunities
within the scope of the Company's business which were considered by the
Executive or the Company during the term of this Agreement. Confidential
Information that is treated as confidential trade secrets by the Company
shall include, but not be limited to, strategic operating plans and
budgets, policy and procedure manuals, computer programs, financial forms
and information, patient or resident lists and accounts, supplier
information, accounting forms and procedures, personnel policies,
11
<PAGE>
information pertaining to the salaries, positions and performance reviews
of the Company's employees, information on the methods of the Company's
operations, research and data developed by or for the benefit of the
Company and information relating to revenues, costs, profits and the
financial condition of the Company. During the Term and for a period of two
years following the termination of the Executive's employment, the
Executive shall not induce any employee of the Company or its subsidiaries
to terminate his or her employment by the Company or its subsidiaries in
order to obtain employment by any person, firm or corporation affiliated
with the Executive.
(b) The Executive covenants and agrees that any information,
materials, ideas, discoveries, techniques or programs developed or
discovered by the Executive in connection with the performance of his
duties hereunder shall remain the sole and exclusive property of the
Company and, to the extent it constitutes Confidential Information, shall
be subject to the covenants contained in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term and, if
the Executive's employment is terminated by the Executive for other than
Good Reason, for a period of two (2) years following the termination of the
Executive's employment, the Executive shall not, directly or indirectly,
own an interest in, operate, join, control, or participate as a partner,
director, principal, officer, or agent of, enter into the employment of, or
act as a consultant to, in any case in which he has control or supervision
over a significant portion of any entity (i) whose principal business is
the operation of one or more skilled nursing facilities or (ii) which
operates a skilled nursing business that is material in relation to the
Company's comparable business and (iii) in either case, which derives at
least 10% of its skilled nursing facility revenue from facilities which are
located within 35 miles of centers or facilities operated by the Company.
Notwithstanding anything herein to the contrary, the foregoing provisions
of this Section 15(c) shall not prevent the Executive from acquiring
securities representing not more than 5% of the outstanding voting
securities of any publicly held corporation.
(d) Without limiting the right of the Company to pursue all other
legal and equitable remedies available for violation by the Executive of
the covenants contained in this Section 15, it is expressly agreed by the
Executive and the Company that such other remedies cannot fully compensate
the Company for any such violation and that the Company shall be entitled
to injunctive relief, without the necessity of proving actual monetary
loss, to prevent any such violation or any continuing violation thereof.
Each party intends and agrees that if in any action before any court or
agency legally empowered to enforce the covenants contained in this Section
15, any term, restriction, covenant or promise contained herein is found to
be unreasonable and accordingly unenforceable, then such term, restriction,
covenant or promise shall be deemed modified to the extent necessary to
make it enforceable by such court or agency. The covenants contained in
Section 15 shall survive the conclusion of the Executive's employment by
the Company.
12
<PAGE>
16. Prohibition on Parachute Payments.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement, any
payment or benefit received or to be received by the Executive in
connection with a Change in Control of the Company or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company, any person
whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (all such payments and benefits, including,
without limitation, base salary and bonus payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part), by
the Company, an affiliate or any Person making such payment or providing
such benefit as a result of section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), then, to the extent necessary to make such
portion of the Total Payments deductible (and after taking into account any
reduction in the Total Payments provided by reason of section 280G of the
Code in such other plan, arrangement or agreement), (A) such cash payments
shall first be reduced (if necessary, to zero), and (B) all other non-cash
payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation (i) no portion o the
Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the Date of Termination shall be
taken into account, (ii) no portion of the Total Payments shall be taken
into account which in the opinion of tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Executive does not
constitute a "parachute payment" within the meaning of section 280G(b)(2)
of the Code, including by reason of section 280G(b)(4)(A) of the Code,
(iii) such payments shall be reduced only to the extent necessary so that
the Total Payments (other than those referred to in clauses (i) or (ii)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4)(B) o the Code or are
otherwise not subject to disallowance as deductions, in the opinion of the
tax counsel referred to in clause (ii); and (iv) the value of any non-cash
benefit or any deferred payment or benefit included in the Total Payments
shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of this
Section 16, the aggregate "parachute payments" paid to or for the
Executive's benefit are in an amount that would result in any portion of
such "parachute payments" not being deductible by reason of section 280G of
the Code, then the Executive shall have an obligation to pay the Company
upon demand an amount equal to the sum of (i) the excess of the aggregate
"parachute payments" paid to or for the Executive's benefit over the
aggregate "parachute payments" that could have been paid to or for the
Executive's benefit without any portion of such "parachute payments" not
being deductible by reason of section 280G of the Code; and (ii) interest
on the amount set forth in clause (i) of this sentence at the rate provided
in section 1274(b)(2)(B) of the Code from the date of the Executive's
receipt of such excess until the date of such payment.
13
<PAGE>
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification. Waiver. No provision of this Agreement may
---------------------------------
be amended or waived unless such amendment or waiver is agreed to in writing,
signed by the Executive and by a duly authorized officer of the Company. No
waiver by any party hereto of any breach by another party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Notices. Any notice to be given hereunder shall be in writing and
-------
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Executive at: John D. Lee
______________________________
______________________________
______________________________
To the Company at: Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
20. Severability. If any provision of this Agreement or the application of
------------
any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.
21. Survivorship. The respective rights and obligations of the parties
------------
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
14
<PAGE>
22. Governing Law: Attorney's Fees.
------------------------------
(a) This Agreement will be governed by and construed in accordance
with the laws of the State of Georgia, without regard to its conflicts of
laws principles.
(b) The prevailing party in any dispute arising out of this Agreement
shall be entitled to be paid its reasonable attorney's fees incurred in
connection with such dispute from the other party to such dispute.
23. Dispute Resolution. The Executive and the Company shall not initiate
------------------
legal proceedings relating in any way to this Agreement or to the Executive's
employment or termination from employment with the Company until thirty (30)
days after the party against whom the claim is made ("respondent") receives
written notice from the claiming party of the specific nature of any purported
claims and the amount of any purported damages attributable to each such claim.
The Executive and the Company further agree that if respondent submits the
claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty (30) day period, the claiming
party may not institute arbitration or other legal proceedings against
respondent until the earlier of: (a) the completion of good-faith mediation
efforts or (b) 90 days after the date on which the respondent received written
notice of the claimant's claim(s); provided, however, that nothing in this
Section 23 shall prohibit the Company from pursuing injunctive or other
equitable relief against the Executive prior to, contemporaneous with, or
subsequent to invoking or participating in these dispute resolution processes.
The Company shall pay the cost of the mediator.
24. Headings. All descriptive headings of sections and paragraphs in this
--------
Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
25. Withholdings. All payments to the Executive under this Agreement
------------
shall be reduced by all applicable withholding required by federal, state or
local tax laws.
26. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
27. Release of Prior Employment Agreement. The Executive hereby releases
-------------------------------------
the Company and any predecessor company (including GranCare, Inc. and Living
Centers of America, Inc.) from all obligations under any employment agreement
entered into by the Executive and Living Centers of America, Inc., including any
obligation to pay severance or other post-termination benefits, which shall be
upon the execution hereof terminated and of no further force or effect;
provided, however, that in no event shall this release affect the Executive's
rights under any grant or award under any stock option or stock award plans of
the Company and any predecessor company (including GranCare, Inc. and Living
Centers of America, Inc.).
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
BY:__________________________________
NAME:________________________________
TITLE:_______________________________
EXECUTIVE
---------------------------------------
John D. Lee
16
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
Employment Agreement dated as of November 4, 1997 between Susan Thomas
Whittle (the "Executive") and Paragon Health Network, Inc., a Delaware
corporation (the "Company").
WHEREAS, the Company desires to employ the Executive as Senior Vice
President, General Counsel and Secretary and the Executive desires to accept
such employment, for the term and upon the other conditions hereinafter set
forth; and
WHEREAS, as a condition of entering into this Agreement, the Executive
agrees to waive the Executive's rights, if any, against the Company and any
predecessor company (including GranCare, Inc.) under (i) any employment
agreement and (ii) any other plan, arrangement or agreement of any kind that
provides any form of severance payments; and
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company;
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term. This Agreement shall commence on the date hereof (the
----
"Effective Date") and continue for the two-year period (the "Term") terminating
on the second anniversary of the Effective Date, or upon the Executive's earlier
death, disability or other termination of employment pursuant to Section 11;
provided, however, that commencing on the second anniversary of the Effective
Date and on each anniversary thereafter, the Term shall automatically be
extended for one additional year unless, not later than 90 days prior to any
such anniversary, either party hereto shall have notified the other party hereto
in writing that such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as Senior Vice
--------
President, General Counsel and Secretary of the Company or in such other
executive position in the Company as the Executive shall approve.
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee. The Executive shall also perform such other executive and
administrative duties (not inconsistent with the position of Senior Vice
President, General Counsel and Secretary) as the Executive may reasonably be
expected to be capable of
<PAGE>
performing on behalf of the Company, as may from time to time be authorized or
directed by the Board. The Executive agrees to be employed by the Company in all
such capacities for the Term, subject to all the covenants and conditions
hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at the principal executive offices of the Company, except
for required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder shall be
-----------
$290,000 a year, payable monthly and prorated for any partial year of
employment. The Board shall review such base salary at least annually and
make such adjustment from time to time as it may deem advisable, but the
base salary shall not at any time be less than $290,000 a year.
(b) Annual Bonus. The Company shall provide the Executive with an
------------
opportunity to earn upon achievement of target performance, an annual bonus
equal to fifty percent (50%) of his base salary (the "Target Bonus"), with
a minimum bonus of between fifty percent (50%) of Target Bonus upon
achievement of threshold performance and an opportunity to earn up to one
hundred fifty percent (150%) of the Target Bonus for performance in excess
of the targets.
(c) Execution Bonus. On the Effective Date, the Company shall pay to
---------------
the Executive $350,000.
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its senior vice presidents.
8. Business Expenses. The Executive shall be reimbursed for all ordinary
-----------------
and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive shall be
----------------------------
eligible to participate fully in all health benefits, insurance programs,
pension and retirement plans and other employee benefit and compensation
arrangements available to vice presidents of the Company generally.
10. Stock Options The Company, pursuant to the terms of its stock option
-------------
plan, may grant to the Executive, stock options to purchase a number of shares
of common stock.
2
<PAGE>
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be terminated
-------
without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall automatically
terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any eighteen (18) month period,
and no reasonable accommodation can be made that will allow Executive
to perform his essential functions, the Company may terminate the
Executive's employment hereunder for any such incapacity (a
"Disability").
(c) Termination by the Company. The Company may terminate the
--------------------------
Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal
by the Executive to perform his duties hereunder (other than any such
failure resulting from the Executive's incapacity due to physical or mental
illness), which has not ceased within ten (10) days after a written demand
for substantial performance is delivered to the Executive by the Company,
which demand identifies the manner in which the Company believes that the
Executive has not performed such duties, (ii) the engaging by the Executive
in willful misconduct or an act of moral turpitude which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct which violates Section 15 hereof) or (iii) the
conviction of the Executive of, or the entering of a plea of nolo
contendere by, the Executive with respect to, a felony.
(d) Termination by the Executive. The Executive shall be entitled to
----------------------------
terminate his employment hereunder (A) for Good Reason, (B) if his health
should become impaired to an extent that makes his continued performance of
his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) without the
Executive's express written consent, any failure by the Company to comply
with any material provision of this Agreement, which failure has not been
cured within ten (10) days after notice of such noncompliance has been
given by the Executive to the Company. For purposes of this Agreement,
"Good Reason" shall mean the occurrence following a Change in Control
during the term of this Agreement, of any one of the following acts by the
Company, or failures by the Company to act, unless, in the case of any act
or failure to act described
3
<PAGE>
below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect
thereof:
(i) any material diminution in the Executive's authorities or
responsibilities (including reporting responsibilities) which were in
effect immediately prior to the Change in Control or from his status,
title, position or responsibilities (including reporting
responsibilities) which were in effect following a Change in Control
pursuant to the Executive's consent to accept any such change; the
assignment to him of any duties or work responsibilities which are
inconsistent with such status, title, position or work
responsibilities; or any removal of the Executive from, or failure to
reappoint or reelect him to any of such positions, except if any such
changes are because of Disability, retirement, death or Cause;
(ii) a reduction by the Company in the Executive's base salary
or Target Bonus as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company
and all senior executives of any Person (as defined in Section
11(h)(i) below) in control of the Company provided in no event shall
any such reduction reduce the Executive's base salary below $290,000;
(iii) the relocation of the Executive's office at which he is to
perform his duties, to a location more than fifty (50) miles from the
location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's
business to an extent substantially consistent with his business
travel obligations prior to the Change in Control;
(iv) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's
current compensation;
(v) the failure by the Company to continue to provide the
Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any
of the Company's pension, life insurance, medical, health and
accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control, unless the Executive
participates after the Change in Control in other comparable benefit
plans generally available to senior executives of the Company and
senior executives of any Person in control of the Company;
(vi) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 11(f) below; for purposes of this
Agreement, no such purported termination shall be effective.
4
<PAGE>
The Executive's continued employment for 6 months following any act or failure
to act constituting Good Reason hereunder without the delivery of a Notice of
Termination shall constitute consent to, and a waiver of rights with respect to,
such act or failure to act.
(e) Voluntary Resignation. Should the Executive wish to resign from
---------------------
his position with the Company or terminate his employment for other than
Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company ("Notice Period"), setting forth the reasons
and specifying the date as of which his resignation is to become effective.
During the Notice Period, the Executive shall cooperate fully with the
Company in achieving a smooth transition of the Executive's duties and
responsibilities to such person(s) as may be designated by the Company. The
Company reserves the right to accelerate the Date of Termination by giving
the Executive notice and payment of amounts due to the Executive under
Section 6(a) and, to the extent applicable, Section 6(b) for the balance of
the Notice Period. The Company's obligation to continue to employ the
Executive or to continue payment of the amounts described in the preceding
sentence shall cease immediately if: (1) the Executive has not satisfied
his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause. If the Executive terminates his employment for other than Good
Reason within twelve (12) months from the Effective Date, the Executive
shall be obligated to refund the amount that was received under Section
6(c) of this Agreement.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 19. "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i) if the
-------------------
Executive's employment is terminated because of death, the date of the
Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the
Executive's employment is terminated pursuant to Subsection (c), (d) or (e)
hereof or for any other reason (other than death or Disability), the date
specified in the Notice of Termination which shall not be less than sixty
(60) days from the date such Notice of Termination is given.
(h) Change in Control. For purposes of this Agreement, a Change in
-----------------
Control of the Company shall have occurred if
(i) any "Person" (as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") as modified and
used in Sections 13(d) and 14(d) of the Exchange Act (other than (1)
the Company or any of its subsidiaries, (2) any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries, (3) an
5
<PAGE>
underwriter temporarily holding securities pursuant to an offering of
such securities, (4) any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions
as their ownership of the Company's common stock or (5) Apollo
Management, LP, any of its affiliates and any investments funds
managed by it (collectively, "Apollo"))), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more
than 50% of the combined voting power of the Company's then
outstanding voting securities;
(ii) during any period of not more than two (2) consecutive
years, not including any period prior to the date of this Agreement,
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person
(other than Apollo) who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii), or (iv) of
this Section 1l(h)) whose election by the Board or nomination for
election by the Company's stockholders was (A) made pursuant to the
Stockholders Agreement affecting the Company dated October 31, 1997 or
(B) approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority
thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
both (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or parent entity)
50% or more of the combined voting power of the voting securities of
the Company or such surviving or parent entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation in
which no person acquires 50% or more of the combined voting power of
the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or
any transaction having a similar effect) other than such a sale or
disposition to Apollo.
(i) Return of Property. When the Executive ceases to be employed by
------------------
the Company, the Executive will promptly surrender to the Company all
Company property, including without limitation, all records and other
documents obtained by him or entrusted to him during the course of his
employment with the Company provided, however, that the Executive may
retain copies of such documents as necessary for the Executive's personal
records for federal income tax purposes.
6
<PAGE>
12. Compensation During Disability; Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his base
salary at the rate then in effect for such period until his employment is
terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so
made to the Executive during the Disability Period shall be reduced by the
sum of the amounts, if any, payable to the Executive with respect to such
period under disability benefit plans of the Company or under the Social
Security disability insurance program, and which amounts were not
previously applied to reduce any such payment.
(b) If the Executive's employment is terminated by his death or
Disability, the Company shall pay (i) any base salary due to the Executive
under Section 6(a) through the date of such termination and (ii) an amount
equal to the Target Bonus he would have received for the fiscal year that
ends on or immediately after the Date of Termination, assuming the Company
achieved the lowest target level for which a bonus is paid under the plan
described in Section 6(b), prorated for the period beginning on the first
day of the fiscal year in which occurs the Date of Termination through the
Date of Termination. In addition, if the Executive's employment is
terminated by his death, the Company shall continue to pay to his estate
his salary for an additional six months at the rate then in effect.
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay
the Executive his base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, and the Company shall
have no further obligations to the Executive under this Agreement.
(d) If following a Change in Control (A) the Company terminates the
Executive's employment without Cause, or (B) the Executive terminates his
employment for Good Reason, then
(i) the Company shall pay the Executive his base salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given and all other unpaid amounts, if any, to which
the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, at the time such payments
are due;
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay
as liquidated damages to the Executive an aggregate amount equal to
the product of (A) the sum of (1) the Executive's base salary at the
rate in effect of the Date of Termination and (2) the average of the
annual bonuses actually paid to the Executive by the Company with
respect to the two (2) fiscal years which immediately precede the year
of the Term which the Date of Termination occurs
7
<PAGE>
provided if there was bonus or bonuses paid to the Executive with
--------
respect only to one fiscal year that immediately precedes the year
within the Term in which the Date of Termination occurs, then such
single year's bonus or bonuses shall be utilized in the calculation
pursuant to this clause (2), provided, further, that for purposes of
-------- -------
this Agreement, if the Date of Termination occurs before the end of
the first fiscal year that ends after the Effective Date, the amount
of the bonus paid by the Company to the Executive shall be deemed to
be the Target Bonus and (B) the number two (2.0);
(iii) the Company shall pay the Executive an amount equal to the
prorated Target Bonus that would have been paid for the period
beginning on the first day of the fiscal year in which the Date of
Termination occurs;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active Employee, under the Company's life insurance, medical,
health and similar welfare benefit plans (other then group disability
benefits) for a period of twenty-four (24) months. Benefits otherwise
receivable by the Executive pursuant to this Section 12(d)(iv) shall
be reduced to the extent comparable benefits are actually received by
the Executive from a subsequent employer during the period during
which the Company is required to provide such benefits, and the
Executive shall report any such benefits actually received by him to
the Company; and
(v) the payments provided for in this Section 12(d) (other than
Section 12(d)(iv)) shall be made not later than the thirtieth (30th)
day following the Date of Termination, provided, however, that if the
amounts of such payments, and the limitation on such payments set
forth in Section 16 hereof, cannot be finally determined on or before
such day, the Company shall pay to the Executive on such day an
estimate, as determined in good faith by the Company, of the minimum
amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code (as defined in
Section 16)) as soon as the amount thereof can be determined but in no
event later than the sixtieth (60th) day after the Date of
Termination. In the event that the amount of the estimated payments
exceeds the amount determined by the Company within six (6) months
after payment to have been due, such excess shall constitute a loan by
the Company to the Executive, payable no later than the thirtieth
(30th) business day after demand by the Company (together with
interest at the rate provided in section 1274(b)(2)(B) of the Code).
At the time that payments are made under this Section 12(d), the
Company shall provide the Executive with a written statement setting
forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or
other advice the Company has received from outside counsel, auditors
or consultants (and any such opinions or advice which are in writing
shall be attached to the statement).
8
<PAGE>
(vi) If the Executive continues to be employed by the Company
for one (1) year after a Change of Control and has not by such time
given Notice of Termination for Good Reason, the Executive will have
waived his right to exercise his rights under Section 12(d) hereof
with respect to any act or failure to act which constitutes Good
Reason.
(e) If the Executive terminates his employment under clause (C) of
Section 11(d) hereof or, prior to any Change of Control, the Company
terminates the Executive's employment without Cause, then
(i) the Company shall pay the Executive his base salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given and all other unpaid amounts, if any, to which
the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, at the time such payments
are due;
(ii) the Company shall pay to the Executive the greater of
either (A) the remaining amount of base salary owed for the Term; or
(B) an aggregate amount equal to the sum of (1) nine (9) months of the
Executive's base salary at the rate in effect as of the Date of
Termination plus (2) one (1) additional month of the Executive's base
salary at such rate for each full year of service beyond the first
anniversary of this Agreement, not to exceed eighteen (18) months of
base salary payments; such amount to be paid in substantially equal
monthly installments during the period commencing with the month
immediately following the month in which the Date of Termination
occurs or in a lump sum payment, as decided by the Company;
(iii) the Company shall pay the Executive his Target Bonus
prorated for the period beginning on the first day of the fiscal year
in which occurs the Date of Termination through the Date of
Termination;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active employee, under the Company's life insurance, medical,
health, and similar welfare benefit plans (other then group
disability) for a period not to exceed the number of months the
Executive will be paid under Section 12(e)(ii) beginning on the Date
of Termination;
(v) benefits otherwise receivable by the Executive pursuant to
clause (iv) of this Section 12(e) shall be reduced to the extent
comparable benefits are actually received by the Executive from a
subsequent employer during the period which the Company is required to
provide such benefits, and the Executive shall report any such
benefits actually received by him to the Company;
9
<PAGE>
(vi) the payments made to the Executive under Section 12(e)
hereof will be reduced by the amount of payments provided for by any
subsequent employer of the executive for a position obtained after the
Date of Termination.
(f) If the Executive experiences a termination under Section 12(d) or
12(e) hereof, until the Executive finds another full-time position or for 6
months, whichever is earlier, the Company shall provide the Executive with
professional outplacement services of the Executive's choosing and shall
reimburse the Executive documented incidental outplacement expenses
directly related to the Executive's job search such as resume mailing,
interview trips, and clerical support, subject to a maximum cost of $10,000
for such outplacement services and incidental expenses. The Executive's
choice of professional outplacement services is subject to the Company's
reasonable prior approval. If the Company has not approved or disapproved
of the Executive's choice within ten (10) business days of receiving notice
of such choice, the Company will be deemed to have given is approval. Any
approval by the Company will be in writing and will state the basis for
such disapproval. The Executive will not be entitled to receive cash or
lieu of the professional outplacement services provided pursuant to this
Section.
(g) If the Executive shall terminate his employment under clause (B)
of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his
base salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, and the Company shall have no further
obligations to the Executive under this Agreement.
(h) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, and, except as provided in Sections 12(e) hereof, the amount of
any payment or benefit provided for in this Section 12 shall not be reduced
by any compensation earned by the Executive as the result of employment by
another employer or by retirement benefits.
(i) Release. Prior to making any payment pursuant to Sections
-------
12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is
applicable, the Company shall have the right to require the Executive to
sign, and the Executive hereby agrees to sign, an agreement to be bound by
the terms of Section 15 of this Agreement and a waiver of all claims the
Executive may have (including any claims under the Age Discrimination in
Employment Act), and the Company may withhold payment of such amount until
the period during which the Executive may revoke such waiver (normally
seven days) has elapsed.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid
and binding agreement of the Company enforceable against it in accordance
with its terms.
10
<PAGE>
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement. The Executive agrees
and covenants that he will obtain, and submit to, such physical
examinations as may be necessary to facilitate the Company obtaining an
insurance policy for its benefit insuring the life of the Executive.
14. Successors: Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
(b) This Agreement is a personal contract and the rights and
interests of the Executive hereunder may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him, except as otherwise
expressly permitted by the provisions of this Agreement. This Agreement
shall inure to the benefit of and be enforceable by the Executive and his
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Executive should die
while any amount would still be payable to him hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his
devisee, legatee or other designee or, if there is no such designee, to his
estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that he will not at any time
during or at any time after the end of the Term, directly or indirectly,
use for his own account, or disclose to any person, firm or corporation,
other than authorized officers, directors and employees of the Company or
its subsidiaries, Confidential Information (as hereinafter defined) that is
treated as trade secrets by the Company and will not at any time during or
for a period equal to the number of payments which are being made under
Section 12(e) hereof directly or indirectly, use for his own account, or
disclose to any person, firm or corporation, other than authorized
officers, directors and employees of the Company or its subsidiaries, any
other Confidential Information. As used herein, "Confidential Information"
of the Company means information of any kind, nature or description which
is disclosed to or otherwise known to the Executive as a direct or indirect
consequence of his association with the Company, which information is not
generally known to the public or in the business in which the Company is
engaged or which information relates to specific investment opportunities
within the scope of the Company's business which were considered by the
Executive or the Company during the term of this Agreement. Confidential
Information that is treated as confidential trade secrets by the Company
shall include, but not be limited to, strategic operating plans and
budgets, policy and procedure manuals, computer programs, financial forms
and information, patient or resident lists and accounts, supplier
information, accounting forms and procedures, personnel policies,
11
<PAGE>
information pertaining to the salaries, positions and performance reviews
of the Company's employees, information on the methods of the Company's
operations, research and data developed by or for the benefit of the
Company and information relating to revenues, costs, profits and the
financial condition of the Company. During the Term and for a period of two
years following the termination of the Executive's employment, the
Executive shall not induce any employee of the Company or its subsidiaries
to terminate his or her employment by the Company or its subsidiaries in
order to obtain employment by any person, firm or corporation affiliated
with the Executive.
(b) The Executive covenants and agrees that any information,
materials, ideas, discoveries, techniques or programs developed or
discovered by the Executive in connection with the performance of his
duties hereunder shall remain the sole and exclusive property of the
Company and, to the extent it constitutes Confidential Information, shall
be subject to the covenants contained in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term and, if
the Executive's employment is terminated by the Executive for other than
Good Reason, for a period of two (2) years following the termination of the
Executive's employment, the Executive shall not, directly or indirectly,
own an interest in, operate, join, control, or participate as a partner,
director, principal, officer, or agent of, enter into the employment of, or
act as a consultant to, in any case in which he has control or supervision
over a significant portion of any entity (i) whose principal business is
the operation of one or more skilled nursing facilities or (ii) which
operates a skilled nursing business that is material in relation to the
Company's comparable business and (iii) in either case, which derives at
least 10% of its skilled nursing facility revenue from facilities which are
located within 35 miles of centers or facilities operated by the Company.
Notwithstanding anything herein to the contrary, the foregoing provisions
of this Section 15(c) shall not prevent the Executive from acquiring
securities representing not more than 5% of the outstanding voting
securities of any publicly held corporation.
(d) Without limiting the right of the Company to pursue all other
legal and equitable remedies available for violation by the Executive of
the covenants contained in this Section 15, it is expressly agreed by the
Executive and the Company that such other remedies cannot fully compensate
the Company for any such violation and that the Company shall be entitled
to injunctive relief, without the necessity of proving actual monetary
loss, to prevent any such violation or any continuing violation thereof.
Each party intends and agrees that if in any action before any court or
agency legally empowered to enforce the covenants contained in this Section
15, any term, restriction, covenant or promise contained herein is found to
be unreasonable and accordingly unenforceable, then such term, restriction,
covenant or promise shall be deemed modified to the extent necessary to
make it enforceable by such court or agency. The covenants contained in
Section 15 shall survive the conclusion of the Executive's employment by
the Company.
12
<PAGE>
16. Prohibition on Parachute Payments.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement, any
payment or benefit received or to be received by the Executive in
connection with a Change in Control of the Company or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company, any person
whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (all such payments and benefits, including,
without limitation, base salary and bonus payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part), by
the Company, an affiliate or any Person making such payment or providing
such benefit as a result of section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), then, to the extent necessary to make such
portion of the Total Payments deductible (and after taking into account any
reduction in the Total Payments provided by reason of section 280G of the
Code in such other plan, arrangement or agreement), (A) such cash payments
shall first be reduced (if necessary, to zero), and (B) all other non-cash
payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation (i) no portion o the
Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the Date of Termination shall be
taken into account, (ii) no portion of the Total Payments shall be taken
into account which in the opinion of tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Executive does not
constitute a "parachute payment" within the meaning of section 280G(b)(2)
of the Code, including by reason of section 280G(b)(4)(A) of the Code,
(iii) such payments shall be reduced only to the extent necessary so that
the Total Payments (other than those referred to in clauses (i) or (ii)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4)(B) o the Code or are
otherwise not subject to disallowance as deductions, in the opinion of the
tax counsel referred to in clause (ii); and (iv) the value of any non-cash
benefit or any deferred payment or benefit included in the Total Payments
shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of this
Section 16, the aggregate "parachute payments" paid to or for the
Executive's benefit are in an amount that would result in any portion of
such "parachute payments" not being deductible by reason of section 280G of
the Code, then the Executive shall have an obligation to pay the Company
upon demand an amount equal to the sum of (i) the excess of the aggregate
"parachute payments" paid to or for the Executive's benefit over the
aggregate "parachute payments" that could have been paid to or for the
Executive's benefit without any portion of such "parachute payments" not
being deductible by reason of section 280G of the Code; and (ii) interest
on the amount set forth in clause (i) of this sentence at the rate provided
in section 1274(b)(2)(B) of the Code from the date of the Executive's
receipt of such excess until the date of such payment.
13
<PAGE>
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification. Waiver. No provision of this Agreement may
---------------------------------
be amended or waived unless such amendment or waiver is agreed to in writing,
signed by the Executive and by a duly authorized officer of the Company. No
waiver by any party hereto of any breach by another party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Notices. Any notice to be given hereunder shall be in writing and
-------
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Executive at: Susan Thomas Whittle
____________________________
____________________________
____________________________
To the Company at: Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
20. Severability. If any provision of this Agreement or the application of
------------
any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.
21. Survivorship. The respective rights and obligations of the parties
------------
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
14
<PAGE>
22. Governing Law: Attorney's Fees.
------------------------------
(a) This Agreement will be governed by and construed in accordance
with the laws of the State of Georgia, without regard to its conflicts of
laws principles.
(b) The prevailing party in any dispute arising out of this Agreement
shall be entitled to be paid its reasonable attorney's fees incurred in
connection with such dispute from the other party to such dispute.
23. Dispute Resolution. The Executive and the Company shall not initiate
------------------
legal proceedings relating in any way to this Agreement or to the Executive's
employment or termination from employment with the Company until thirty (30)
days after the party against whom the claim is made ("respondent") receives
written notice from the claiming party of the specific nature of any purported
claims and the amount of any purported damages attributable to each such claim.
The Executive and the Company further agree that if respondent submits the
claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty (30) day period, the claiming
party may not institute arbitration or other legal proceedings against
respondent until the earlier of: (a) the completion of good-faith mediation
efforts or (b) 90 days after the date on which the respondent received written
notice of the claimant's claim(s); provided, however, that nothing in this
Section 23 shall prohibit the Company from pursuing injunctive or other
equitable relief against the Executive prior to, contemporaneous with, or
subsequent to invoking or participating in these dispute resolution processes.
The Company shall pay the cost of the mediator.
24. Headings. All descriptive headings of sections and paragraphs in this
--------
Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
25. Withholdings. All payments to the Executive under this Agreement
------------
shall be reduced by all applicable withholding required by federal, state or
local tax laws.
26. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
27. Release of Prior Employment Agreement. The Executive hereby releases
-------------------------------------
the Company and any predecessor company (including GranCare, Inc. and Living
Centers of America, Inc.) from all obligations under any employment agreement
entered into by the Executive and Living Centers of America, Inc., including any
obligation to pay severance or other post-termination benefits, which shall be
upon the execution hereof terminated and of no further force or effect;
provided, however, that in no event shall this release affect the Executive's
rights under any grant or award under any stock option or stock award plans of
the Company and any predecessor company (including GranCare, Inc. and Living
Centers of America, Inc.).
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
BY: /s/ Keith B. Pitts
---------------------------------
NAME: Keith B. Pitts
TITLE: Chief Executive Officer
EXECUTIVE
/s/ Susan Thomas Whittle
-----------------------------------
Susan Thomas Whittle
16
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
Employment Agreement dated as of November 4, 1997 between William R.
Korslin (the "Executive") and Paragon Health Network, Inc., a Delaware
corporation (the "Company").
WHEREAS, the Company desires to employ the Executive as President,
Pharmaceutical Services Division, and the Executive desires to accept such
employment, for the term and upon the other conditions hereinafter set forth;
and
WHEREAS, as a condition of entering into this Agreement, the Executive
agrees to waive the Executive's rights, if any, against the Company and any
predecessor company (including GranCare, Inc.) under (i) any employment
agreement and (ii) any other plan, arrangement or agreement of any kind that
provides any form of severance payments; and
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company;
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term. This Agreement shall commence on the date hereof (the "Effective
----
Date") and continue for the three-year period (the "Term") terminating on the
third anniversary of the Effective Date, or upon the Executive's earlier death,
disability or other termination of employment pursuant to Section 11; provided,
however, that commencing on the second anniversary of the Effective Date and on
each anniversary thereafter, the Term shall automatically be extended for one
additional year unless, not later than 90 days prior to any such anniversary,
either party hereto shall have notified the other party hereto in writing that
such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as President,
--------
Pharmaceutical Services Division of the Company or in such other executive
position in the Company as the Executive shall approve.
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee. The Executive shall also perform such other executive and
administrative duties (not inconsistent with the position of President,
Pharmaceutical Services Division) as the Executive may reasonably be expected to
be capable of performing on behalf of the Company, as may from time to time be
authorized or directed by the Board. The Executive
<PAGE>
agrees to be employed by the Company in all such capacities for the Term,
subject to all the covenants and conditions hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at the offices of the Company in Napersville, Illinois,
except for required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder shall be
-----------
$300,000 a year, payable monthly and prorated for any partial year of
employment. The Board shall review such base salary at least annually and
make such adjustment from time to time as it may deem advisable, but the
base salary shall not at any time be less than $300,000 a year.
(b) Annual Bonus. The Company shall provide the Executive with an
------------
opportunity to earn upon achievement of target performance, an annual bonus
equal to sixty percent (60%) of his base salary (the "Target Bonus"), with
a minimum bonus of between fifty percent (50%) of Target Bonus upon
achievement of threshold performance and an opportunity to earn up to one
hundred fifty percent (150%) of the Target Bonus for performance in excess
of the targets.
(c) Execution Bonus. On the Effective Date, the Company shall pay to
---------------
the Executive $300,000 (subject to any applicable payroll or other taxes
required to be withheld) and, if the Executive has, on the first
anniversary of the date of this Agreement, met certain performance goals
established by the Company, the Company shall pay to the Executive an
additional amount of $100,000 (subject to any applicable payroll or other
taxes, required to be withheld).
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its executive vice presidents.
8. Business Expenses. The Executive shall be reimbursed for all ordinary
-----------------
and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive shall be
----------------------------
eligible to participate fully in all health benefits, insurance programs,
pension and retirement plans and other employee benefit and compensation
arrangements available to vice presidents of the Company generally.
10. Stock Options The Company, pursuant to the terms of its stock option
-------------
plan, may grant to the Executive, stock options to purchase a number of shares
of common stock.
2
<PAGE>
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be terminated
-------
without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall automatically
terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any eighteen (18) month period,
and no reasonable accommodation can be made that will allow Executive
to perform his essential functions, the Company may terminate the
Executive's employment hereunder for any such incapacity (a
"Disability").
(c) Termination by the Company. The Company may terminate the
--------------------------
Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal
by the Executive to perform his duties hereunder (other than any such
failure resulting from the Executive's incapacity due to physical or mental
illness), which has not ceased within ten (10) days after a written demand
for substantial performance is delivered to the Executive by the Company,
which demand identifies the manner in which the Company believes that the
Executive has not performed such duties, (ii) the engaging by the Executive
in willful misconduct or an act of moral turpitude which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct which violates Section 15 hereof) or (iii) the
conviction of the Executive of, or the entering of a plea of nolo
contendere by, the Executive with respect to, a felony.
(d) Termination by the Executive. The Executive shall be entitled to
----------------------------
terminate his employment hereunder (A) for Good Reason, (B) if his health
should become impaired to an extent that makes his continued performance of
his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) without the
Executive's express written consent, any failure by the Company to comply
with any material provision of this Agreement, which failure has not been
cured within ten (10) days after notice of such noncompliance has been
given by the Executive to the Company. For purposes of this Agreement,
"Good Reason" shall mean the occurrence following a Change in Control
during the term of this Agreement, of any one of the following acts by the
Company, or failures by the Company to act, unless, in the case of any act
or failure to act described
3
<PAGE>
below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect
thereof:
(i) any material diminution in the Executive's authorities or
responsibilities (including reporting responsibilities) which were in
effect immediately prior to the Change in Control or from his status,
title, position or responsibilities (including reporting
responsibilities) which were in effect following a Change in Control
pursuant to the Executive's consent to accept any such change; the
assignment to him of any duties or work responsibilities which are
inconsistent with such status, title, position or work
responsibilities; or any removal of the Executive from, or failure to
reappoint or reelect him to any of such positions, except if any such
changes are because of Disability, retirement, death or Cause;
(ii) a reduction by the Company in the Executive's base salary
or Target Bonus as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company
and all senior executives of any Person (as defined in Section
11(h)(i) below) in control of the Company provided in no event shall
any such reduction reduce the Executive's base salary below $300,000;
(iii) the relocation of the Executive's office at which he is to
perform his duties, to a location more than fifty (50) miles from the
location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's
business to an extent substantially consistent with his business
travel obligations prior to the Change in Control;
(iv) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's
current compensation;
(v) the failure by the Company to continue to provide the
Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any
of the Company's pension, life insurance, medical, health and
accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control, unless the Executive
participates after the Change in Control in other comparable benefit
plans generally available to senior executives of the Company and
senior executives of any Person in control of the Company;
(vi) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 11(f) below; for purposes of this
Agreement, no such purported termination shall be effective.
4
<PAGE>
The Executive's continued employment for 6 months following any act or failure
to act constituting Good Reason hereunder without the delivery of a Notice of
Termination shall constitute consent to, and a waiver of rights with respect to,
such act or failure to act.
(e) Voluntary Resignation. Should the Executive wish to resign from
---------------------
his position with the Company or terminate his employment for other than
Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company ("Notice Period"), setting forth the reasons
and specifying the date as of which his resignation is to become effective.
During the Notice Period, the Executive shall cooperate fully with the
Company in achieving a smooth transition of the Executive's duties and
responsibilities to such person(s) as may be designated by the Company. The
Company reserves the right to accelerate the Date of Termination by giving
the Executive notice and payment of amounts due to the Executive under
Section 6(a) and, to the extent applicable, Section 6(b) for the balance of
the Notice Period. The Company's obligation to continue to employ the
Executive or to continue payment of the amounts described in the preceding
sentence shall cease immediately if: (1) the Executive has not satisfied
his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause. If the Executive terminates his employment for other than Good
Reason within twelve (12) months from the Effective Date, the Executive
shall be obligated to refund the amount that was received under Section
6(c) of this Agreement.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 19. "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i) if the
-------------------
Executive's employment is terminated because of death, the date of the
Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the
Executive's employment is terminated pursuant to Subsection (c), (d) or (e)
hereof or for any other reason (other than death or Disability), the date
specified in the Notice of Termination which shall not be less than sixty
(60) days from the date such Notice of Termination is given.
(h) Change in Control. For purposes of this Agreement, a Change in
-----------------
Control of the Company shall have occurred if
(i) any "Person" (as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") as modified and
used in Sections 13(d) and 14(d) of the Exchange Act (other than (1)
the Company or any of its subsidiaries, (2) any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries, (3) an
5
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underwriter temporarily holding securities pursuant to an offering of
such securities, (4) any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions
as their ownership of the Company's common stock or (5) Apollo
Management, LP, any of its affiliates and any investments funds
managed by it (collectively, "Apollo"))), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more
than 50% of the combined voting power of the Company's then
outstanding voting securities;
(ii) during any period of not more than two (2) consecutive
years, not including any period prior to the date of this Agreement,
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person
(other than Apollo) who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii), or (iv) of
this Section 1l(h)) whose election by the Board or nomination for
election by the Company's stockholders was (A) made pursuant to the
Stockholders Agreement affecting the Company dated November 4, 1997 or
(B) approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority
thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
both (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or parent entity)
50% or more of the combined voting power of the voting securities of
the Company or such surviving or parent entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation in
which no person acquires 50% or more of the combined voting power of
the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or
any transaction having a similar effect) other than such a sale or
disposition to Apollo; or
(v) the approval of a sale, spin off, merger liquidation or
other transaction which results in a disposition of or transfer of
substantially all of the assets of the Pharmaceutical Services
Division (the "Division") or one or more subsidiaries which hold
substantially all of the assets of the Division.
(i) Return of Property. When the Executive ceases to be employed by
------------------
the Company, the Executive will promptly surrender to the Company all Company
property, including without limitation, all records and other documents obtained
by him or
6
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entrusted to him during the course of his employment with the Company
provided, however, that the Executive may retain copies of such documents
as necessary for the Executive's personal records for federal income tax
purposes.
12. Compensation During Disability; Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his base
salary at the rate then in effect for such period until his employment is
terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so
made to the Executive during the Disability Period shall be reduced by the
sum of the amounts, if any, payable to the Executive with respect to such
period under disability benefit plans of the Company or under the Social
Security disability insurance program, and which amounts were not
previously applied to reduce any such payment.
(b) If the Executive's employment is terminated by his death or
Disability, the Company shall pay (i) any base salary due to the Executive
under Section 6(a) through the date of such termination and (ii) an amount
equal to the Target Bonus he would have received for the fiscal year that
ends on or immediately after the Date of Termination, assuming the Company
achieved the lowest target level for which a bonus is paid under the plan
described in Section 6(b), prorated for the period beginning on the first
day of the fiscal year in which occurs the Date of Termination through the
Date of Termination. In addition, if the Executive's employment is
terminated by his death, the Company shall continue to pay to his estate
his salary for an additional six months at the rate then in effect.
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay
the Executive his base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, and the Company shall
have no further obligations to the Executive under this Agreement.
(d) If following a Change in Control (A) the Company terminates the
Executive's employment without Cause, or (B) the Executive terminates his
employment for Good Reason, then
(i) the Company shall pay the Executive his base salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given and all other unpaid amounts, if any, to which
the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, at the time such payments
are due;
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay
as liquidated damages to the Executive an aggregate amount equal to
the product of (A) the
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sum of (1) the Executive's base salary at the rate in effect of the
Date of Termination and (2) the average of the annual bonuses actually
paid to the Executive by the Company with respect to the two (2)
fiscal years which immediately precede the year of the Term which the
Date of Termination occurs provided if there was bonus or bonuses paid
--------
to the Executive with respect only to one fiscal year that immediately
precedes the year within the Term in which the Date of Termination
occurs, then such single year's bonus or bonuses shall be utilized in
the calculation pursuant to this clause (2), provided, further, that
-----------------
for purposes of this Agreement, if the Date of Termination occurs
before the end of the first fiscal year that ends after the Effective
Date, the amount of the bonus paid by the Company to the Executive
shall be deemed to be the Target Bonus and (B) the number two and one-
half (2.5);
(iii) the Company shall pay the Executive an amount equal to the
prorated Target Bonus that would have been paid for the period
beginning on the first day of the fiscal year in which the Date of
Termination occurs;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active Employee, under the Company's life insurance, medical,
health and similar welfare benefit plans (other then group disability
benefits) for a period of thirty-six (36) months. Benefits otherwise
receivable by the Executive pursuant to this Section 12(d)(iv) shall
be reduced to the extent comparable benefits are actually received by
the Executive from a subsequent employer during the period during
which the Company is required to provide such benefits, and the
Executive shall report any such benefits actually received by him to
the Company; and
(v) the payments provided for in this Section 12(d) (other than
Section 12(d)(iv)) shall be made not later than the thirtieth (30th)
day following the Date of Termination, provided, however, that if the
amounts of such payments, and the limitation on such payments set
forth in Section 16 hereof, cannot be finally determined on or before
such day, the Company shall pay to the Executive on such day an
estimate, as determined in good faith by the Company, of the minimum
amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code (as defined in
Section 16)) as soon as the amount thereof can be determined but in no
event later than the sixtieth (60th) day after the Date of
Termination. In the event that the amount of the estimated payments
exceeds the amount determined by the Company within six (6) months
after payment to have been due, such excess shall constitute a loan by
the Company to the Executive, payable no later than the thirtieth
(30th) business day after demand by the Company (together with
interest at the rate provided in section 1274(b)(2)(B) of the Code).
At the time that payments are made under this Section 12(d), the
Company shall provide the Executive with a written statement setting
forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or
other advice the
8
<PAGE>
Company has received from outside counsel, auditors or consultants
(and any such opinions or advice which are in writing shall be
attached to the statement).
(vi) If the Executive continues to be employed by the Company
for one (1) year after a Change of Control and has not by such time
given Notice of Termination for Good Reason, the Executive will have
waived his right to exercise his rights under Section 12(d) hereof
with respect to any act or failure to act which constitutes Good
Reason.
(e) If the Executive terminates his employment under clause (C) of
Section 11(d) hereof or, prior to any Change of Control, the Company
terminates the Executive's employment without Cause, then
(i) the Company shall pay the Executive his base salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given and all other unpaid amounts, if any, to which
the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, at the time such payments
are due;
(ii) the Company shall pay to the Executive the greater of
either (A) the remaining amount of base salary owed for the Term; or
(B) an aggregate amount equal to the sum of (1) twelve (12) months of
the Executive's base salary at the rate in effect as of the Date of
Termination plus (2) one (1) additional month of the Executive's base
salary at such rate for each full year of service beyond the first
anniversary of this Agreement, not to exceed twenty-four (24) months
of base salary payments; such amount to be paid in substantially equal
monthly installments during the period commencing with the month
immediately following the month in which the Date of Termination
occurs or in a lump sum payment, as decided by the Company;
(iii) the Company shall pay the Executive his Target Bonus
prorated for the period beginning on the first day of the fiscal year
in which occurs the Date of Termination through the Date of
Termination;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active employee, under the Company's life insurance, medical,
health, and similar welfare benefit plans (other then group
disability) for a period not to exceed the number of months the
Executive will be paid under Section 12(e)(ii) beginning on the Date
of Termination;
(v) benefits otherwise receivable by the Executive pursuant to
clause (iv) of this Section 12(e) shall be reduced to the extent
comparable benefits are actually received by the Executive from a
subsequent employer during the period which the Company is required to
provide such benefits, and the Executive shall report any such
benefits actually received by him to the Company;
9
<PAGE>
(vi) the payments made to the Executive under Section 12(e)
hereof will be reduced by the amount of payments provided for by any
subsequent employer of the executive for a position obtained after the
Date of Termination.
(f) If the Executive experiences a termination under Section 12(d) or
12(e) hereof, until the Executive finds another full-time position or for 6
months, whichever is earlier, the Company shall provide the Executive with
professional outplacement services of the Executive's choosing and shall
reimburse the Executive documented incidental outplacement expenses
directly related to the Executive's job search such as resume mailing,
interview trips, and clerical support, subject to a maximum cost of $10,000
for such outplacement services and incidental expenses. The Executive's
choice of professional outplacement services is subject to the Company's
reasonable prior approval. If the Company has not approved or disapproved
of the Executive's choice within ten (10) business days of receiving notice
of such choice, the Company will be deemed to have given is approval. Any
approval by the Company will be in writing and will state the basis for
such disapproval. The Executive will not be entitled to receive cash or
lieu of the professional outplacement services provided pursuant to this
Section.
(g) If the Executive shall terminate his employment under clause (B)
of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his
base salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, and the Company shall have no further
obligations to the Executive under this Agreement.
(h) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, and, except as provided in Sections 12(e) hereof, the amount of
any payment or benefit provided for in this Section 12 shall not be reduced
by any compensation earned by the Executive as the result of employment by
another employer or by retirement benefits.
(i) Release. Prior to making any payment pursuant to Sections
-------
12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is
applicable, the Company shall have the right to require the Executive to
sign, and the Executive hereby agrees to sign, an agreement to be bound by
the terms of Section 15 of this Agreement and a waiver of all claims the
Executive may have (including any claims under the Age Discrimination in
Employment Act), and the Company may withhold payment of such amount until
the period during which the Executive may revoke such waiver (normally
seven days) has elapsed.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid
and binding agreement of the Company enforceable against it in accordance
with its terms.
10
<PAGE>
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement. The Executive agrees
and covenants that he will obtain, and submit to, such physical
examinations as may be necessary to facilitate the Company obtaining an
insurance policy for its benefit insuring the life of the Executive.
14. Successors: Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
(b) This Agreement is a personal contract and the rights and
interests of the Executive hereunder may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him, except as otherwise
expressly permitted by the provisions of this Agreement. This Agreement
shall inure to the benefit of and be enforceable by the Executive and his
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Executive should die
while any amount would still be payable to him hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his
devisee, legatee or other designee or, if there is no such designee, to his
estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that he will not at any time
during or at any time after the end of the Term, directly or indirectly,
use for his own account, or disclose to any person, firm or corporation,
other than authorized officers, directors and employees of the Company or
its subsidiaries, Confidential Information (as hereinafter defined) that is
treated as trade secrets by the Company and will not at any time during or
for a period equal to the number of payments which are being made under
Section 12(e) hereof directly or indirectly, use for his own account, or
disclose to any person, firm or corporation, other than authorized
officers, directors and employees of the Company or its subsidiaries, any
other Confidential Information. As used herein, "Confidential Information"
of the Company means information of any kind, nature or description which
is disclosed to or otherwise known to the Executive as a direct or indirect
consequence of his association with the Company, which information is not
generally known to the public or in the business in which the Company is
engaged or which information relates to specific investment opportunities
within the scope of the Company's business which were considered by the
Executive or the Company during the term of this Agreement. Confidential
Information that is treated as confidential trade secrets by the Company
shall include, but not be limited to, strategic operating plans and
budgets, policy and procedure manuals, computer programs, financial forms
and information, patient or resident lists and accounts, supplier
information, accounting forms and procedures, personnel policies,
11
<PAGE>
information pertaining to the salaries, positions and performance reviews
of the Company's employees, information on the methods of the Company's
operations, research and data developed by or for the benefit of the
Company and information relating to revenues, costs, profits and the
financial condition of the Company. During the Term and for a period of two
years following the termination of the Executive's employment, the
Executive shall not induce any employee of the Company or its subsidiaries
to terminate his or her employment by the Company or its subsidiaries in
order to obtain employment by any person, firm or corporation affiliated
with the Executive.
(b) The Executive covenants and agrees that any information,
materials, ideas, discoveries, techniques or programs developed or
discovered by the Executive in connection with the performance of his
duties hereunder shall remain the sole and exclusive property of the
Company and, to the extent it constitutes Confidential Information, shall
be subject to the covenants contained in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term and, if
the Executive's employment is terminated by the Executive for other than
Good Reason, for a period of two (2) years following the termination of the
Executive's employment, the Executive shall not, directly or indirectly,
own an interest in, operate, join, control, or participate as a partner,
director, principal, officer, or agent of, enter into the employment of, or
act as a consultant to, in any case in which he has control or supervision
over a significant portion of any entity of which either (A) (i) the
principal business is the operation of one or more skilled nursing
facilities or (ii) which operates a skilled nursing business that is
material in relation to the Company's comparable business and (iii) in
either case, which derives at least 10% of its skilled nursing facility
revenue from facilities which are located within 35 miles of centers or
facilities operated by the Company or (B) (i) whose principal business is
operating or managing an institutional pharmaceutical business and (ii)
which derives at least 10% of its institutional pharmaceutical revenue from
facilities which are located within 35 miles of the centers or facilities
operated by the Company or its subsidiaries. Notwithstanding anything
herein to the contrary, the foregoing provisions of this Section 15(c)
shall not prevent the Executive from acquiring securities representing not
more than 5% of the outstanding voting securities of any publicly held
corporation.
(d) Without limiting the right of the Company to pursue all other
legal and equitable remedies available for violation by the Executive of
the covenants contained in this Section 15, it is expressly agreed by the
Executive and the Company that such other remedies cannot fully compensate
the Company for any such violation and that the Company shall be entitled
to injunctive relief, without the necessity of proving actual monetary
loss, to prevent any such violation or any continuing violation thereof.
Each party intends and agrees that if in any action before any court or
agency legally empowered to enforce the covenants contained in this Section
15, any term, restriction, covenant or promise contained herein is found to
be unreasonable and accordingly unenforceable, then such term, restriction,
covenant or promise shall be deemed modified to the extent necessary to
make it enforceable by such court or agency. The covenants
12
<PAGE>
contained in Section 15 shall survive the conclusion of the Executive's
employment by the Company.
16. Prohibition on Parachute Payments.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement, any
payment or benefit received or to be received by the Executive in
connection with a Change in Control of the Company or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company, any person
whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (all such payments and benefits, including,
without limitation, base salary and bonus payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part), by
the Company, an affiliate or any Person making such payment or providing
such benefit as a result of section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), then, to the extent necessary to make such
portion of the Total Payments deductible (and after taking into account any
reduction in the Total Payments provided by reason of section 280G of the
Code in such other plan, arrangement or agreement), (A) such cash payments
shall first be reduced (if necessary, to zero), and (B) all other non-cash
payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation (i) no portion o the
Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the Date of Termination shall be
taken into account, (ii) no portion of the Total Payments shall be taken
into account which in the opinion of tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Executive does not
constitute a "parachute payment" within the meaning of section 280G(b)(2)
of the Code, including by reason of section 280G(b)(4)(A) of the Code,
(iii) such payments shall be reduced only to the extent necessary so that
the Total Payments (other than those referred to in clauses (i) or (ii)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4)(B) o the Code or are
otherwise not subject to disallowance as deductions, in the opinion of the
tax counsel referred to in clause (ii); and (iv) the value of any non-cash
benefit or any deferred payment or benefit included in the Total Payments
shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of this
Section 16, the aggregate "parachute payments" paid to or for the
Executive's benefit are in an amount that would result in any portion of
such "parachute payments" not being deductible by reason of section 280G of
the Code, then the Executive shall have an obligation to pay the Company
upon demand an amount equal to the sum of (i) the excess of the aggregate
"parachute payments" paid to or for the Executive's benefit over the
aggregate "parachute payments" that could have been paid to or for the
Executive's benefit without any portion of such "parachute payments" not
being deductible by reason of section 280G of the Code; and (ii) interest
on the amount set forth in clause (i) of this sentence at the rate
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provided in section 1274(b)(2)(B) of the Code from the date of the
Executive's receipt of such excess until the date of such payment.
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification. Waiver. No provision of this Agreement may
-------------------------
be amended or waived unless such amendment or waiver is agreed to in writing,
signed by the Executive and by a duly authorized officer of the Company. No
waiver by any party hereto of any breach by another party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Notices. Any notice to be given hereunder shall be in writing and
-------
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Executive at: William R. Korslin
_________________________
_________________________
_________________________
To the Company at: Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
20. Severability. If any provision of this Agreement or the application of
------------
any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.
14
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21. Survivorship. The respective rights and obligations of the parties
------------
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
22. Governing Law: Attorney's Fees.
------------------------------
(a) This Agreement will be governed by and construed in accordance
with the laws of the State of Georgia, without regard to its conflicts of
laws principles.
(b) The prevailing party in any dispute arising out of this Agreement
shall be entitled to be paid its reasonable attorney's fees incurred in
connection with such dispute from the other party to such dispute.
23. Dispute Resolution. The Executive and the Company shall not initiate
------------------
legal proceedings relating in any way to this Agreement or to the Executive's
employment or termination from employment with the Company until thirty (30)
days after the party against whom the claim is made ("respondent") receives
written notice from the claiming party of the specific nature of any purported
claims and the amount of any purported damages attributable to each such claim.
The Executive and the Company further agree that if respondent submits the
claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty (30) day period, the claiming
party may not institute arbitration or other legal proceedings against
respondent until the earlier of: (a) the completion of good-faith mediation
efforts or (b) 90 days after the date on which the respondent received written
notice of the claimant's claim(s); provided, however, that nothing in this
Section 23 shall prohibit the Company from pursuing injunctive or other
equitable relief against the Executive prior to, contemporaneous with, or
subsequent to invoking or participating in these dispute resolution processes.
The Company shall pay the cost of the mediator.
24. Headings. All descriptive headings of sections and paragraphs in this
--------
Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
25. Withholdings. All payments to the Executive under this Agreement shall
------------
be reduced by all applicable withholding required by federal, state or local tax
laws.
26. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
27. Release of Prior Employment Agreement. The Executive hereby releases
-------------------------------------
the Company and any predecessor company (including GranCare, Inc. and Living
Centers of America, Inc.) from all obligations under any employment agreement
entered into by the Executive and Living Centers of America, Inc., including any
obligation to pay severance or other post-termination benefits, which shall be
upon the execution hereof terminated and of no further force or effect;
provided, however, that in no event shall this release affect the
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Executive's rights under any grant or award under any stock option or stock
award plans of the Company and any predecessor company (including GranCare, Inc.
and Living Centers of America, Inc.).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
BY: /s/ Susan Thomas Whittle
----------------------------------
NAME: Susan Thomas Whittle
TITLE: Senior Vice President and
General Counsel
EXECUTIVE
/s/ William R. Korslin
---------------------------------
William R. Korslin
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EXHIBIT 10.5
EMPLOYMENT AGREEMENT
Employment Agreement dated as of November 4, 1997 between Dennis G.
Johnston (the "Executive") and Paragon Health Network, Inc., a Delaware
corporation (the "Company").
WHEREAS, the Company desires to employ the Executive as President, Hospital
Services Division, and the Executive desires to accept such employment, for the
term and upon the other conditions hereinafter set forth; and
WHEREAS, as a condition of entering into this Agreement, the Executive
agrees to waive the Executive's rights, if any, against the Company and any
predecessor company (including GranCare, Inc.) under (i) any employment
agreement and (ii) any other plan, arrangement or agreement of any kind that
provides any form of severance payments; and
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company;
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term. This Agreement shall commence on the date hereof (the "Effective
----
Date") and continue for the three-year period (the "Term") terminating on the
third anniversary of the Effective Date, or upon the Executive's earlier death,
disability or other termination of employment pursuant to Section 11; provided,
however, that commencing on the second anniversary of the Effective Date and on
each anniversary thereafter, the Term shall automatically be extended for one
additional year unless, not later than 90 days prior to any such anniversary,
either party hereto shall have notified the other party hereto in writing that
such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as President,
--------
Hospital Services Division of the Company or in such other executive position in
the Company as the Executive shall approve.
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee. The Executive shall also perform such other executive and
administrative duties (not inconsistent with the position of President, Hospital
Services Division) as the Executive may reasonably be expected to be capable of
performing on behalf of the Company, as may from time to time be authorized or
directed by the Board. The Executive
<PAGE>
agrees to be employed by the Company in all such capacities for the Term,
subject to all the covenants and conditions hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at offices of the Company located in Dallas, Texas, except
for required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder shall be
-----------
$325,000 a year, payable monthly and prorated for any partial year of
employment. The Board shall review such base salary at least annually and
make such adjustment from time to time as it may deem advisable, but the
base salary shall not at any time be less than $325,000 a year.
(b) Annual Bonus. The Company shall provide the Executive with an
------------
opportunity to earn upon achievement of target performance, an annual bonus
equal to sixty percent (60%) of his base salary (the "Target Bonus"), with
a minimum bonus of between fifty percent (50%) of Target Bonus upon
achievement of threshold performance and an opportunity to earn up to one
hundred fifty percent (150%) of the Target Bonus for performance in excess
of the targets.
(c) Execution Bonus. On the Effective Date, the Company shall pay to
---------------
the Executive $500,000 (subject to any applicable payroll or other taxes
required to be withheld) and, if the Executive is still employed by the
Company on the third anniversary of the date of this Agreement, the Company
shall pay to the Executive an additional amount of $250,000 (subject to any
applicable payroll or other taxes, required to be withheld).
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its executive vice presidents.
8. Business Expenses. The Executive shall be reimbursed for all ordinary
-----------------
and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive shall be
----------------------------
eligible to participate fully in all health benefits, insurance programs,
pension and retirement plans and other employee benefit and compensation
arrangements available to vice presidents of the Company generally.
10. Stock Options The Company, pursuant to the terms of its stock option
-------------
plan, may grant to the Executive, stock options to purchase a number of shares
of common stock.
2
<PAGE>
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be terminated
-------
without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall automatically
terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any eighteen (18) month period, and no
reasonable accommodation can be made that will allow Executive to perform
his essential functions, the Company may terminate the Executive's
employment hereunder for any such incapacity (a "Disability").
(c) Termination by the Company. The Company may terminate the
--------------------------
Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal
by the Executive to perform his duties hereunder (other than any such
failure resulting from the Executive's incapacity due to physical or mental
illness), which has not ceased within ten (10) days after a written demand
for substantial performance is delivered to the Executive by the Company,
which demand identifies the manner in which the Company believes that the
Executive has not performed such duties, (ii) the engaging by the Executive
in willful misconduct or an act of moral turpitude which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct which violates Section 15 hereof) or (iii) the
conviction of the Executive of, or the entering of a plea of nolo
contendere by, the Executive with respect to, a felony.
(d) Termination by the Executive. The Executive shall be entitled to
terminate his employment hereunder (A) for Good Reason, (B) if his health
should become impaired to an extent that makes his continued performance of
his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) without the
Executive's express written consent, any failure by the Company to comply
with any material provision of this Agreement, which failure has not been
cured within ten (10) days after notice of such noncompliance has been
given by the Executive to the Company. For purposes of this Agreement,
"Good Reason" shall mean the occurrence following a Change in Control
during the term of this Agreement, of any one of the following acts by the
Company, or failures by the Company to act, unless, in the case of any act
or failure to act described
3
<PAGE>
below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect
thereof:
(i) any material diminution in the Executive's authorities or
responsibilities (including reporting responsibilities) which were in
effect immediately prior to the Change in Control or from his status,
title, position or responsibilities (including reporting
responsibilities) which were in effect following a Change in Control
pursuant to the Executive's consent to accept any such change; the
assignment to him of any duties or work responsibilities which are
inconsistent with such status, title, position or work
responsibilities; or any removal of the Executive from, or failure to
reappoint or reelect him to any of such positions, except if any such
changes are because of Disability, retirement, death or Cause ;
(ii) a reduction by the Company in the Executive's base salary
or Target Bonus as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company
and all senior executives of any Person (as defined in Section
11(h)(i) below) in control of the Company provided in no event shall
any such reduction reduce the Executive's base salary below $325,000;
(iii) the relocation of the Executive's office at which he is to
perform his duties, to a location more than fifty (50) miles from the
location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's
business to an extent substantially consistent with his business
travel obligations prior to the Change in Control;
(iv) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's
current compensation;
(v) the failure by the Company to continue to provide the
Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any
of the Company's pension, life insurance, medical, health and
accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control, unless the Executive
participates after the Change in Control in other comparable benefit
plans generally available to senior executives of the Company and
senior executives of any Person in control of the Company;
(vi) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 11(f) below; for purposes of this
Agreement, no such purported termination shall be effective.
4
<PAGE>
The Executive's continued employment for 6 months following any act or failure
to act constituting Good Reason hereunder without the delivery of a Notice of
Termination shall constitute consent to, and a waiver of rights with respect to,
such act or failure to act.
(e) Voluntary Resignation. Should the Executive wish to resign
---------------------
from his position with the Company or terminate his employment for other
than Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company ("Notice Period"), setting forth the reasons
and specifying the date as of which his resignation is to become effective.
During the Notice Period, the Executive shall cooperate fully with the
Company in achieving a smooth transition of the Executive's duties and
responsibilities to such person(s) as may be designated by the Company. The
Company reserves the right to accelerate the Date of Termination by giving
the Executive notice and payment of amounts due to the Executive under
Section 6(a) and, to the extent applicable, Section 6(b) for the balance of
the Notice Period. The Company's obligation to continue to employ the
Executive or to continue payment of the amounts described in the preceding
sentence shall cease immediately if: (1) the Executive has not satisfied
his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause. If the Executive terminates his employment for other than Good
Reason within twelve (12) months from the Effective Date, the Executive
shall be obligated to refund the amount that was received under Section
6(c) of this Agreement.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 19. "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i)
-------------------
if the Executive's employment is terminated because of death, the date of
the Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the
Executive's employment is terminated pursuant to Subsection (c), (d) or (e)
hereof or for any other reason (other than death or Disability), the date
specified in the Notice of Termination which shall not be less than sixty
(60) days from the date such Notice of Termination is given.
(h) Change in Control. For purposes of this Agreement, a
-----------------
Change in Control of the Company shall have occurred if
(i) any "Person" (as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") as modified and
used in Sections 13(d) and 14(d) of the Exchange Act (other than (1)
the Company or any of its subsidiaries, (2) any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries, (3) an
5
<PAGE>
underwriter temporarily holding securities pursuant to an offering of
such securities, (4) any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions
as their ownership of the Company's common stock or (5) Apollo
Management, LP, any of its affiliates and any investments funds
managed by it (collectively, "Apollo"))), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more
than 50% of the combined voting power of the Company's then
outstanding voting securities;
(ii) during any period of not more than two (2) consecutive
years, not including any period prior to the date of this Agreement,
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person
(other than Apollo) who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii), or (iv) of
this Section 1l(h)) whose election by the Board or nomination for
election by the Company's stockholders was (A) made pursuant to the
Stockholders Agreement affecting the Company dated November 4, 1997 or
(B) approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority
thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
both (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or parent entity)
50% or more of the combined voting power of the voting securities of
the Company or such surviving or parent entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation in
which no person acquires 50% or more of the combined voting power of
the Company's then outstanding securities;
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or
any transaction having a similar effect) other than such a sale or
disposition to Apollo; or .
(v) the approval of a sale, spin off, merger, liquidation or
other transaction which results in a disposition of or transfer of
substantially all of the assets of the Hospital Services Division (the
"Division") or one or more subsidiaries which hold substantially all
of the Division's assets.
(i) Return of Property. When the Executive ceases to be employed by
------------------
the Company, the Executive will promptly surrender to the Company all
Company property, including without limitation, all records and other
documents obtained by him or
6
<PAGE>
provided, however, that the Executive may retain copies of such documents
as necessary for the Executive's personal records for federal income tax
purposes.
12. Compensation During Disability; Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his base
salary at the rate then in effect for such period until his employment is
terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so
made to the Executive during the Disability Period shall be reduced by the
sum of the amounts, if any, payable to the Executive with respect to such
period under disability benefit plans of the Company or under the Social
Security disability insurance program, and which amounts were not
previously applied to reduce any such payment.
(b) If the Executive's employment is terminated by his death or
Disability, the Company shall pay (i) any base salary due to the Executive
under Section 6(a) through the date of such termination and (ii) an amount
equal to the Target Bonus he would have received for the fiscal year that
ends on or immediately after the Date of Termination, assuming the Company
achieved the lowest target level for which a bonus is paid under the plan
described in Section 6(b), prorated for the period beginning on the first
day of the fiscal year in which occurs the Date of Termination through the
Date of Termination. In addition, if the Executive's employment is
terminated by his death, the Company shall continue to pay to his estate
his salary for an additional six months at the rate then in effect.
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay
the Executive his base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, and the Company shall
have no further obligations to the Executive under this Agreement.
(d) If following a Change in Control (A) the Company terminates the
Executive's employment without Cause, or (B) the Executive terminates his
employment for Good Reason, then
(i) the Company shall pay the Executive his base salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given and all other unpaid amounts, if any, to which
the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, at the time such payments
are due;
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay
as liquidated damages to the Executive an aggregate amount equal to
the product of (A) the
7
<PAGE>
sum of (1) the Executive's base salary at the rate in effect of the
Date of Termination and (2) the average of the annual bonuses actually
paid to the Executive by the Company with respect to the two (2)
fiscal years which immediately precede the year of the Term which the
Date of Termination occurs provided if there was bonus or bonuses paid
--------
to the Executive with respect only to one fiscal year that immediately
precedes the year within the Term in which the Date of Termination
occurs, then such single year's bonus or bonuses shall be utilized in
the calculation pursuant to this clause (2), provided, further, that
-------- -------
for purposes of this Agreement, if the Date of Termination occurs
before the end of the first fiscal year that ends after the Effective
Date, the amount of the bonus paid by the Company to the Executive
shall be deemed to be the Target Bonus and (B) the number two and one-
half (2.5);
(iii) the Company shall pay the Executive an amount equal to the
prorated Target Bonus that would have been paid for the period
beginning on the first day of the fiscal year in which the Date of
Termination occurs;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active Employee, under the Company's life insurance, medical,
health and similar welfare benefit plans (other then group disability
benefits) for a period of thirty-six (36) months. Benefits otherwise
receivable by the Executive pursuant to this Section 12(d)(iv) shall
be reduced to the extent comparable benefits are actually received by
the Executive from a subsequent employer during the period during
which the Company is required to provide such benefits, and the
Executive shall report any such benefits actually received by him to
the Company; and
(v) the payments provided for in this Section 12(d) (other
than Section 12(d)(iv)) shall be made not later than the thirtieth
(30th) day following the Date of Termination, provided, however, that
if the amounts of such payments, and the limitation on such payments
set forth in Section 16 hereof, cannot be finally determined on or
before such day, the Company shall pay to the Executive on such day an
estimate, as determined in good faith by the Company, of the minimum
amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code (as defined in
Section 16)) as soon as the amount thereof can be determined but in no
event later than the sixtieth (60th) day after the Date of
Termination. In the event that the amount of the estimated payments
exceeds the amount determined by the Company within six (6) months
after payment to have been due, such excess shall constitute a loan by
the Company to the Executive, payable no later than the thirtieth
(30th) business day after demand by the Company (together with
interest at the rate provided in section 1274(b)(2)(B) of the Code).
At the time that payments are made under this Section 12(d), the
Company shall provide the Executive with a written statement setting
forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or
other advice the
8
<PAGE>
Company has received from outside counsel, auditors or consultants
(and any such opinions or advice which are in writing shall be
attached to the statement).
(vi) If the Executive continues to be employed by the Company
for one (1) year after a Change of Control and has not by such time
given Notice of Termination for Good Reason, the Executive will have
waived his right to exercise his rights under Section 12(d) hereof
with respect to any act or failure to act which constitutes Good
Reason.
(e) If the Executive terminates his employment under clause (C)
of Section 11(d) hereof or, prior to any Change of Control, the Company
terminates the Executive's employment without Cause, then
(i) the Company shall pay the Executive his base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any,
to which the Executive is entitled as of the Date of Termination under
any compensation plan or program of the Company, at the time such
payments are due;
(ii) the Company shall pay to the Executive the greater of
either (A) the remaining amount of base salary owed for the Term; or
(B) an aggregate amount equal to the sum of (1) twelve (12) months of
the Executive's base salary at the rate in effect as of the Date of
Termination plus (2) one (1) additional month of the Executive's base
salary at such rate for each full year of service beyond the first
anniversary of this Agreement, not to exceed twenty-four (24) months
of base salary payments; such amount to be paid in substantially equal
monthly installments during the period commencing with the month
immediately following the month in which the Date of Termination
occurs or in a lump sum payment, as decided by the Company;
(iii) the Company shall pay the Executive his Target Bonus
prorated for the period beginning on the first day of the fiscal year
in which occurs the Date of Termination through the Date of
Termination;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active employee, under the Company's life insurance, medical,
health, and similar welfare benefit plans (other then group
disability) for a period not to exceed the number of months the
Executive will be paid under Section 12(e)(ii) beginning on the Date
of Termination;
(v) benefits otherwise receivable by the Executive pursuant to
clause (iv) of this Section 12(e) shall be reduced to the extent
comparable benefits are actually received by the Executive from a
subsequent employer during the period which the Company is required to
provide such benefits, and the Executive shall report any such
benefits actually received by him to the Company;
9
<PAGE>
(vi) the payments made to the Executive under Section 12(e)
hereof will be reduced by the amount of payments provided for by any
subsequent employer of the executive for a position obtained after the
Date of Termination.
(f) If the Executive experiences a termination under Section
12(d) or 12(e) hereof, until the Executive finds another full-time position
or for 6 months, whichever is earlier, the Company shall provide the
Executive with professional outplacement services of the Executive's
choosing and shall reimburse the Executive documented incidental
outplacement expenses directly related to the Executive's job search such
as resume mailing, interview trips, and clerical support, subject to a
maximum cost of $10,000 for such outplacement services and incidental
expenses. The Executive's choice of professional outplacement services is
subject to the Company's reasonable prior approval. If the Company has not
approved or disapproved of the Executive's choice within ten (10) business
days of receiving notice of such choice, the Company will be deemed to have
given is approval. Any approval by the Company will be in writing and will
state the basis for such disapproval. The Executive will not be entitled to
receive cash or lieu of the professional outplacement services provided
pursuant to this Section.
(g) If the Executive shall terminate his employment under clause (B)
of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his
base salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, and the Company shall have no further
obligations to the Executive under this Agreement.
(h) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, and, except as provided in Sections 12(e) hereof, the amount of
any payment or benefit provided for in this Section 12 shall not be reduced
by any compensation earned by the Executive as the result of employment by
another employer or by retirement benefits.
(i) Release. Prior to making any payment pursuant to Sections
-------
12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is
applicable, the Company shall have the right to require the Executive to
sign, and the Executive hereby agrees to sign, an agreement to be bound by
the terms of Section 15 of this Agreement and a waiver of all claims the
Executive may have (including any claims under the Age Discrimination in
Employment Act), and the Company may withhold payment of such amount until
the period during which the Executive may revoke such waiver (normally
seven days) has elapsed.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid
and binding agreement of the Company enforceable against it in accordance
with its terms.
10
<PAGE>
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement. The Executive agrees
and covenants that he will obtain, and submit to, such physical
examinations as may be necessary to facilitate the Company obtaining an
insurance policy for its benefit insuring the life of the Executive.
14. Successors: Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
(b) This Agreement is a personal contract and the rights and
interests of the Executive hereunder may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him, except as otherwise
expressly permitted by the provisions of this Agreement. This Agreement
shall inure to the benefit of and be enforceable by the Executive and his
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Executive should die
while any amount would still be payable to him hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his
devisee, legatee or other designee or, if there is no such designee, to his
estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that he will not at any time
during or at any time after the end of the Term, directly or indirectly,
use for his own account, or disclose to any person, firm or corporation,
other than authorized officers, directors and employees of the Company or
its subsidiaries, Confidential Information (as hereinafter defined) that is
treated as trade secrets by the Company and will not at any time during or
for a period equal to the number of payments which are being made under
Section 12(e) hereof directly or indirectly, use for his own account, or
disclose to any person, firm or corporation, other than authorized
officers, directors and employees of the Company or its subsidiaries, any
other Confidential Information. As used herein, "Confidential Information"
of the Company means information of any kind, nature or description which
is disclosed to or otherwise known to the Executive as a direct or indirect
consequence of his association with the Company, which information is not
generally known to the public or in the business in which the Company is
engaged or which information relates to specific investment opportunities
within the scope of the Company's business which were considered by the
Executive or the Company during the term of this Agreement. Confidential
Information that is treated as confidential trade secrets by the Company
shall include, but not be limited to, strategic operating plans and
budgets, policy and procedure manuals, computer programs, financial forms
and information, patient or resident lists and accounts, supplier
information, accounting forms and procedures, personnel policies,
11
<PAGE>
information pertaining to the salaries, positions and performance reviews
of the Company's employees, information on the methods of the Company's
operations, research and data developed by or for the benefit of the
Company and information relating to revenues, costs, profits and the
financial condition of the Company. During the Term and for a period of two
years following the termination of the Executive's employment, the
Executive shall not induce any employee of the Company or its subsidiaries
to terminate his or her employment by the Company or its subsidiaries in
order to obtain employment by any person, firm or corporation affiliated
with the Executive.
(b) The Executive covenants and agrees that any information,
materials, ideas, discoveries, techniques or programs developed or
discovered by the Executive in connection with the performance of his
duties hereunder shall remain the sole and exclusive property of the
Company and, to the extent it constitutes Confidential Information, shall
be subject to the covenants contained in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term and, if
the Executive's employment is terminated by the Executive for other than
Good Reason, for a period of two (2) years following the termination of the
Executive's employment, the Executive shall not, directly or indirectly,
own an interest in, operate, join, control, or participate as a partner,
director, principal, officer, or agent of, enter into the employment of, or
act as a consultant to, in any case in which he has control or supervision
over a significant portion of any entity of which either (A) (i) the
principal business is the operation of one or more skilled nursing
facilities or (ii) which operates a skilled nursing business that is
material in relation to the Company's comparable business and (iii) in
either case, which derives at least 10% of its skilled nursing facility
revenue from facilities which are located within 35 miles of centers or
facilities operated by the Company or (B) (i) whose principal business is
operating or managing long term, acute hospital care facilities or (ii)
which operates a long term, acute hospital care facility that is material
in relation to the Company's or its subsidiaries' comparable business and
(iii) in either case, which derives at least 10% of its long term, acute
care facility revenue from facilities which are located within 35 miles of
centers or facilities operated by the Company or its subsidiaries.
Notwithstanding anything herein to the contrary, the foregoing provisions
of this Section 15(c) shall not prevent the Executive from acquiring
securities representing not more than 5% of the outstanding voting
securities of any publicly held corporation.
(d) Without limiting the right of the Company to pursue all other
legal and equitable remedies available for violation by the Executive of
the covenants contained in this Section 15, it is expressly agreed by the
Executive and the Company that such other remedies cannot fully compensate
the Company for any such violation and that the Company shall be entitled
to injunctive relief, without the necessity of proving actual monetary
loss, to prevent any such violation or any continuing violation thereof.
Each party intends and agrees that if in any action before any court or
agency legally empowered to enforce the covenants contained in this Section
15, any term, restriction, covenant or promise contained herein is found to
be unreasonable and accordingly
12
<PAGE>
unenforceable, then such term, restriction, covenant or promise shall be
deemed modified to the extent necessary to make it enforceable by such
court or agency. The covenants contained in Section 15 shall survive the
conclusion of the Executive's employment by the Company.
16. Prohibition on Parachute Payments.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement, any
payment or benefit received or to be received by the Executive in
connection with a Change in Control of the Company or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company, any person
whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (all such payments and benefits, including,
without limitation, base salary and bonus payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part), by
the Company, an affiliate or any Person making such payment or providing
such benefit as a result of section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), then, to the extent necessary to make such
portion of the Total Payments deductible (and after taking into account any
reduction in the Total Payments provided by reason of section 280G of the
Code in such other plan, arrangement or agreement), (A) such cash payments
shall first be reduced (if necessary, to zero), and (B) all other non-cash
payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation (i) no portion o the
Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the Date of Termination shall be
taken into account, (ii) no portion of the Total Payments shall be taken
into account which in the opinion of tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Executive does not
constitute a "parachute payment" within the meaning of section 280G(b)(2)
of the Code, including by reason of section 280G(b)(4)(A) of the Code,
(iii) such payments shall be reduced only to the extent necessary so that
the Total Payments (other than those referred to in clauses (i) or (ii)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4)(B) o the Code or are
otherwise not subject to disallowance as deductions, in the opinion of the
tax counsel referred to in clause (ii); and (iv) the value of any non-cash
benefit or any deferred payment or benefit included in the Total Payments
shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of this
Section 16, the aggregate "parachute payments" paid to or for the
Executive's benefit are in an amount that would result in any portion of
such "parachute payments" not being deductible by reason of section 280G of
the Code, then the Executive shall have an obligation to pay the Company
upon demand an amount equal to the sum of (i) the excess of the aggregate
"parachute payments" paid to or for the Executive's benefit over the
aggregate "parachute payments" that could have been paid to or for the
Executive's benefit without any portion
13
<PAGE>
of such "parachute payments" not being deductible by reason of section 280G
of the Code; and (ii) interest on the amount set forth in clause (i) of
this sentence at the rate provided in section 1274(b)(2)(B) of the Code
from the date of the Executive's receipt of such excess until the date of
such payment.
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification. Waiver. No provision of this Agreement may
-------------------------
be amended or waived unless such amendment or waiver is agreed to in writing,
signed by the Executive and by a duly authorized officer of the Company. No
waiver by any party hereto of any breach by another party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Notices. Any notice to be given hereunder shall be in writing and
-------
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Executive at: Dennis G. Johnston
17321 Earthwind Drive
Dallas, Texas 75248
To the Company at: Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
20. Severability. If any provision of this Agreement or the application of
------------
any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.
14
<PAGE>
21. Survivorship. The respective rights and obligations of the parties
------------
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
22. Governing Law: Attorney's Fees.
------------------------------
(a) This Agreement will be governed by and construed in accordance
with the laws of the State of Georgia, without regard to its conflicts of
laws principles .
(b) The prevailing party in any dispute arising out of this Agreement
shall be entitled to be paid its reasonable attorney's fees incurred in
connection with such dispute from the other party to such dispute.
23. Dispute Resolution. The Executive and the Company shall not initiate
------------------
legal proceedings relating in any way to this Agreement or to the Executive's
employment or termination from employment with the Company until thirty (30)
days after the party against whom the claim is made ("respondent") receives
written notice from the claiming party of the specific nature of any purported
claims and the amount of any purported damages attributable to each such claim.
The Executive and the Company further agree that if respondent submits the
claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty (30) day period, the claiming
party may not institute arbitration or other legal proceedings against
respondent until the earlier of: (a) the completion of good-faith mediation
efforts or (b) 90 days after the date on which the respondent received written
notice of the claimant's claim(s); provided, however, that nothing in this
Section 23 shall prohibit the Company from pursuing injunctive or other
equitable relief against the Executive prior to, contemporaneous with, or
subsequent to invoking or participating in these dispute resolution processes.
The Company shall pay the cost of the mediator.
24. Headings. All descriptive headings of sections and paragraphs in this
--------
Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
25. Withholdings. All payments to the Executive under this Agreement shall
------------
be reduced by all applicable withholding required by federal, state or local tax
laws.
26. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
27. Release of Prior Employment Agreement. The Executive hereby releases
-------------------------------------
the Company and any predecessor company (including GranCare, Inc. and Living
Centers of America, Inc.) from all obligations under the employment agreement
entered into by the Executive and GranCare, Inc. dated February 12, 1997,
including any obligation to pay severance or other post-termination benefits,
which shall be upon the execution hereof terminated and of no further force or
effect; provided, however, that in no event shall this release
15
<PAGE>
affect the Executive's rights under any grant or award under any stock option or
stock award plans of the Company and any predecessor company (including
GranCare, Inc. and Living Centers of America, Inc.).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
BY: /s/ Susan Thomas Whittle
--------------------------------------
NAME: Susan Thomas Whittle
TITLE: Senior Vice President
and General Counsel
EXECUTIVE
/s/ Dennis G. Johnston
---------------------------------------
Dennis G. Johnston
16
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
Employment Agreement dated as of November 4, 1997 between David W. Budke
(the "executive") and Paragon Health Network, Inc., a Delaware corporation (the
"Company").
WHEREAS, the Company desires to employ the Executive as Senior Vice
President, Home Health Division and the Executive desires to accept such
employment, for the term and upon the other conditions hereinafter set forth;
and
WHEREAS, as a condition of entering into this Agreement, the Executive
agrees to waive the Executive's rights, if any, against the Company and any
predecessor company (including GranCare, Inc.) under (i) any employment
agreement and (ii) any other plan, arrangement or agreement of any kind that
provides any form of severance payments; and
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company;
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term. This Agreement shall commence on the date hereof (the "Effective
----
Date") and continue for the two-year period (the "Term") terminating on the
second anniversary of the Effective Date, or upon the Executive's earlier death,
disability or other termination of employment pursuant to Section 11; provided,
however, that commencing on the second anniversary of the Effective Date and on
each anniversary thereafter, the Term shall automatically be extended for one
additional year unless, not later than 90 days prior to any such anniversary,
either party hereto shall have notified the other party hereto in writing that
such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as Senior Vice
--------
President, Home Health Division of the Company or in such other executive
position in the Company as the Executive shall approve.
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee. The Executive shall also perform such other executive and
administrative duties (not inconsistent with the position of Senior Vice
President, Home Health Division) as the Executive may reasonably be expected to
be capable of performing on behalf of the Company, as may from time to time be
authorized or directed by the Board. The Executive
<PAGE>
agrees to be employed by the Company in all such capacities for the Term,
subject to all the covenants and conditions hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at the Company's offices in Houston, Texas, except for
required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder shall be
-----------
$200,000 a year, payable monthly and prorated for any partial year of
employment. The Board shall review such base salary at least annually and
make such adjustment from time to time as it may deem advisable, but the
base salary shall not at any time be less than $200,000 a year.
(b) Annual Bonus. The Company shall provide the Executive with an
------------
opportunity to earn upon achievement of target performance, an annual bonus
equal to fifty percent (50%) of his base salary (the "Target Bonus"), with
a minimum bonus of between fifty percent (50%) of Target Bonus upon
achievement of threshold performance and an opportunity to earn up to one
hundred fifty percent (150%) of the Target Bonus for performance in excess
of the targets.
(c) Execution Bonus. On the Effective Date, the Company shall pay to
---------------
the Executive $275,000 (subject to any applicable payroll or other taxes
required to be withheld).
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its senior vice presidents.
8. Business Expenses. The Executive shall be reimbursed for all ordinary
-----------------
and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive shall be
----------------------------
eligible to participate fully in all health benefits, insurance programs,
pension and retirement plans and other employee benefit and compensation
arrangements available to vice presidents of the Company generally.
10. Stock Options The Company, pursuant to the terms of its stock option
-------------
plan, may grant to the Executive, stock options to purchase a number of shares
of common stock.
2
<PAGE>
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be terminated
-------
without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall automatically
terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any eighteen (18) month period, and no
reasonable accommodation can be made that will allow Executive to perform
his essential functions, the Company may terminate the Executive's
employment hereunder for any such incapacity (a "Disability").
(c) Termination by the Company. The Company may terminate the
--------------------------
Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal
by the Executive to perform his duties hereunder (other than any such
failure resulting from the Executive's incapacity due to physical or mental
illness), which has not ceased within ten (10) days after a written demand
for substantial performance is delivered to the Executive by the Company,
which demand identifies the manner in which the Company believes that the
Executive has not performed such duties, (ii) the engaging by the Executive
in willful misconduct or an act of moral turpitude which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct which violates Section 15 hereof) or (iii) the
conviction of the Executive of, or the entering of a plea of nolo
contendere by, the Executive with respect to, a felony.
(d) Termination by the Executive. The Executive shall be entitled to
----------------------------
terminate his employment hereunder (A) for Good Reason, (B) if his health
should become impaired to an extent that makes his continued performance of
his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) without the
Executive's express written consent, any failure by the Company to comply
with any material provision of this Agreement, which failure has not been
cured within ten (10) days after notice of such noncompliance has been
given by the Executive to the Company. For purposes of this Agreement,
"Good Reason" shall mean the occurrence following a Change in Control
during the term of this Agreement, of any one of the following acts by the
Company, or failures by the Company to act, unless, in the case of any act
or failure to act described
3
<PAGE>
below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect
thereof:
(i) any material diminution in the Executive's authorities or
responsibilities (including reporting responsibilities) which were in
effect immediately prior to the Change in Control or from his status,
title, position or responsibilities (including reporting
responsibilities) which were in effect following a Change in Control
pursuant to the Executive's consent to accept any such change; the
assignment to him of any duties or work responsibilities which are
inconsistent with such status, title, position or work
responsibilities; or any removal of the Executive from, or failure to
reappoint or reelect him to any of such positions, except if any such
changes are because of Disability, retirement, death or Cause;
(ii) a reduction by the Company in the Executive's base salary
or Target Bonus as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company
and all senior executives of any Person (as defined in Section
11(h)(i) below) in control of the Company provided in no event shall
any such reduction reduce the Executive's base salary below $200,000;
(iii) the relocation of the Executive's office at which he is to
perform his duties, to a location more than fifty (50) miles from the
location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's
business to an extent substantially consistent with his business
travel obligations prior to the Change in Control;
(iv) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's
current compensation;
(v) the failure by the Company to continue to provide the
Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any
of the Company's pension, life insurance, medical, health and
accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control, unless the Executive
participates after the Change in Control in other comparable benefit
plans generally available to senior executives of the Company and
senior executives of any Person in control of the Company;
(vi) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 11(f) below; for purposes of this
Agreement, no such purported termination shall be effective.
4
<PAGE>
The Executive's continued employment for 6 months following any act or failure
to act constituting Good Reason hereunder without the delivery of a Notice of
Termination shall constitute consent to, and a waiver of rights with respect to,
such act or failure to act.
(e) Voluntary Resignation. Should the Executive wish to resign from
---------------------
his position with the Company or terminate his employment for other than
Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company ("Notice Period"), setting forth the reasons
and specifying the date as of which his resignation is to become effective.
During the Notice Period, the Executive shall cooperate fully with the
Company in achieving a smooth transition of the Executive's duties and
responsibilities to such person(s) as may be designated by the Company. The
Company reserves the right to accelerate the Date of Termination by giving
the Executive notice and payment of amounts due to the Executive under
Section 6(a) and, to the extent applicable, Section 6(b) for the balance of
the Notice Period. The Company's obligation to continue to employ the
Executive or to continue payment of the amounts described in the preceding
sentence shall cease immediately if: (1) the Executive has not satisfied
his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause. If the Executive terminates his employment for other than Good
Reason within twelve (12) months from the Effective Date, the Executive
shall be obligated to refund the amount that was received under Section
6(c) of this Agreement.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 19. "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i) if the
-------------------
Executive's employment is terminated because of death, the date of the
Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the
Executive's employment is terminated pursuant to Subsection (c), (d) or (e)
hereof or for any other reason (other than death or Disability), the date
specified in the Notice of Termination which shall not be less than sixty
(60) days from the date such Notice of Termination is given.
(h) Change in Control. For purposes of this Agreement, a Change in
-----------------
Control of the Company shall have occurred if
(i) any "Person" (as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") as modified and
used in Sections 13(d) and 14(d) of the Exchange Act (other than (1)
the Company or any of its subsidiaries, (2) any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries, (3) an
5
<PAGE>
underwriter temporarily holding securities pursuant to an offering of
such securities, (4) any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions
as their ownership of the Company's common stock or (5) Apollo
Management, LP, any of its affiliates and any investments funds
managed by it (collectively, "Apollo"))), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more
than 50% of the combined voting power of the Company's then
outstanding voting securities;
(ii) during any period of not more than two (2) consecutive
years, not including any period prior to the date of this Agreement,
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person
(other than Apollo) who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii), or (iv) of
this Section 1l(h)) whose election by the Board or nomination for
election by the Company's stockholders was (A) made pursuant to the
Stockholders Agreement affecting the Company dated November 4, 1997 or
(B) approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority
thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
both (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or parent entity)
50% or more of the combined voting power of the voting securities of
the Company or such surviving or parent entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation in
which no person acquires 50% or more of the combined voting power of
the Company's then outstanding securities;
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or
any transaction having a similar effect) other than such a sale or
disposition to Apollo; or
(v) the approval of a sale, spin off, merger, liquidation or
other transaction which results in a disposition of or transfer of
substantially all the assets of the Home Health Division (the
"Division") or one or more subsidiaries which hold substantially all
of the Division's assets.
(i) Return of Property. When the Executive ceases to be employed by
------------------
the Company, the Executive will promptly surrender to the Company all
Company property, including without limitation, all records and other
documents obtained by him or
6
<PAGE>
entrusted to him during the course of his employment with the Company
provided, however, that the Executive may retain copies of such documents
as necessary for the Executive's personal records for federal income tax
purposes.
12. Compensation During Disability; Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his base
salary at the rate then in effect for such period until his employment is
terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so
made to the Executive during the Disability Period shall be reduced by the
sum of the amounts, if any, payable to the Executive with respect to such
period under disability benefit plans of the Company or under the Social
Security disability insurance program, and which amounts were not
previously applied to reduce any such payment.
(b) If the Executive's employment is terminated by his death or
Disability, the Company shall pay (i) any base salary due to the Executive
under Section 6(a) through the date of such termination and (ii) an amount
equal to the Target Bonus he would have received for the fiscal year that
ends on or immediately after the Date of Termination, assuming the Company
achieved the lowest target level for which a bonus is paid under the plan
described in Section 6(b), prorated for the period beginning on the first
day of the fiscal year in which occurs the Date of Termination through the
Date of Termination. In addition, if the Executive's employment is
terminated by his death, the Company shall continue to pay to his estate
his salary for an additional six months at the rate then in effect.
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay
the Executive his base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, and the Company shall
have no further obligations to the Executive under this Agreement.
(d) If following a Change in Control (A) the Company terminates the
Executive's employment without Cause, or (B) the Executive terminates his
employment for Good Reason, then
(i) the Company shall pay the Executive his base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any,
to which the Executive is entitled as of the Date of Termination under
any compensation plan or program of the Company, at the time such
payments are due;
(ii) in lieu of any further salary payments to the Executive
for periods subsequent to the Date of Termination, the Company shall
pay as liquidated damages to the Executive an aggregate amount equal
to the product of (A) the
7
<PAGE>
sum of (1) the Executive's base salary at the rate in effect of the
Date of Termination and (2) the average of the annual bonuses actually
paid to the Executive by the Company with respect to the two (2)
fiscal years which immediately precede the year of the Term which the
Date of Termination occurs provided if there was bonus or bonuses paid
--------
to the Executive with respect only to one fiscal year that immediately
precedes the year within the Term in which the Date of Termination
occurs, then such single year's bonus or bonuses shall be utilized in
the calculation pursuant to this clause (2), provided, further, that
-------- -------
for purposes of this Agreement, if the Date of Termination occurs
before the end of the first fiscal year that ends after the Effective
Date, the amount of the bonus paid by the Company to the Executive
shall be deemed to be the Target Bonus and (B) the number two (2);
(iii) the Company shall pay the Executive an amount equal to the
prorated Target Bonus that would have been paid for the period
beginning on the first day of the fiscal year in which the Date of
Termination occurs;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active Employee, under the Company's life insurance, medical,
health and similar welfare benefit plans (other then group disability
benefits) for a period of twenty-four (24) months. Benefits otherwise
receivable by the Executive pursuant to this Section 12(d)(iv) shall
be reduced to the extent comparable benefits are actually received by
the Executive from a subsequent employer during the period during
which the Company is required to provide such benefits, and the
Executive shall report any such benefits actually received by him to
the Company; and
(v) the payments provided for in this Section 12(d) (other than
Section 12(d)(iv)) shall be made not later than the thirtieth (30th)
day following the Date of Termination, provided, however, that if the
amounts of such payments, and the limitation on such payments set
forth in Section 16 hereof, cannot be finally determined on or before
such day, the Company shall pay to the Executive on such day an
estimate, as determined in good faith by the Company, of the minimum
amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code (as defined in
Section 16)) as soon as the amount thereof can be determined but in no
event later than the sixtieth (60th) day after the Date of
Termination. In the event that the amount of the estimated payments
exceeds the amount determined by the Company within six (6) months
after payment to have been due, such excess shall constitute a loan by
the Company to the Executive, payable no later than the thirtieth
(30th) business day after demand by the Company (together with
interest at the rate provided in section 1274(b)(2)(B) of the Code).
At the time that payments are made under this Section 12(d), the
Company shall provide the Executive with a written statement setting
forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or
other advice the
8
<PAGE>
Company has received from outside counsel, auditors or consultants
(and any such opinions or advice which are in writing shall be
attached to the statement).
(vi) If the Executive continues to be employed by the Company
for one (1) year after a Change of Control and has not by such time
given Notice of Termination for Good Reason, the Executive will have
waived his right to exercise his rights under Section 12(d) hereof
with respect to any act or failure to act which constitutes Good
Reason.
(e) If the Executive terminates his employment under clause (C) of
Section 11(d) hereof or, prior to any Change of Control, the Company
terminates the Executive's employment without Cause, then
(i) the Company shall pay the Executive his base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any,
to which the Executive is entitled as of the Date of Termination under
any compensation plan or program of the Company, at the time such
payments are due;
(ii) the Company shall pay to the Executive the greater of
either (A) the remaining amount of base salary owed for the Term; or
(B) an aggregate amount equal to the sum of (1) nine (9) months of the
Executive's base salary at the rate in effect as of the Date of
Termination plus (2) one (1) additional month of the Executive's base
salary at such rate for each full year of service beyond the first
anniversary of this Agreement, not to exceed eighteen (18) months of
base salary payments; such amount to be paid in substantially equal
monthly installments during the period commencing with the month
immediately following the month in which the Date of Termination
occurs or in a lump sum payment, as decided by the Company;
(iii) the Company shall pay the Executive his Target Bonus
prorated for the period beginning on the first day of the fiscal year
in which occurs the Date of Termination through the Date of
Termination;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active employee, under the Company's life insurance, medical,
health, and similar welfare benefit plans (other then group
disability) for a period not to exceed the number of months the
Executive will be paid under Section 12(e)(ii) beginning on the Date
of Termination;
(v) benefits otherwise receivable by the Executive pursuant to
clause (iv) of this Section 12(e) shall be reduced to the extent
comparable benefits are actually received by the Executive from a
subsequent employer during the period which the Company is required to
provide such benefits, and the Executive shall report any such
benefits actually received by him to the Company;
9
<PAGE>
(vi) the payments made to the Executive under Section 12(e)
hereof will be reduced by the amount of payments provided for by any
subsequent employer of the executive for a position obtained after the
Date of Termination.
(f) If the Executive experiences a termination under Section 12(d) or
12(e) hereof, until the Executive finds another full-time position or for 6
months, whichever is earlier, the Company shall provide the Executive with
professional outplacement services of the Executive's choosing and shall
reimburse the Executive documented incidental outplacement expenses
directly related to the Executive's job search such as resume mailing,
interview trips, and clerical support, subject to a maximum cost of $10,000
for such outplacement services and incidental expenses. The Executive's
choice of professional outplacement services is subject to the Company's
reasonable prior approval. If the Company has not approved or disapproved
of the Executive's choice within ten (10) business days of receiving notice
of such choice, the Company will be deemed to have given is approval. Any
approval by the Company will be in writing and will state the basis for
such disapproval. The Executive will not be entitled to receive cash or
lieu of the professional outplacement services provided pursuant to this
Section.
(g) If the Executive shall terminate his employment under clause (B)
of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his
base salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, and the Company shall have no further
obligations to the Executive under this Agreement.
(h) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, and, except as provided in Sections 12(e) hereof, the amount of
any payment or benefit provided for in this Section 12 shall not be reduced
by any compensation earned by the Executive as the result of employment by
another employer or by retirement benefits.
(i) Release. Prior to making any payment pursuant to Sections
-------
12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is
applicable, the Company shall have the right to require the Executive to
sign, and the Executive hereby agrees to sign, an agreement to be bound by
the terms of Section 15 of this Agreement and a waiver of all claims the
Executive may have (including any claims under the Age Discrimination in
Employment Act), and the Company may withhold payment of such amount until
the period during which the Executive may revoke such waiver (normally
seven days) has elapsed.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid
and binding agreement of the Company enforceable against it in accordance
with its terms.
10
<PAGE>
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement. The Executive agrees
and covenants that he will obtain, and submit to, such physical
examinations as may be necessary to facilitate the Company obtaining an
insurance policy for its benefit insuring the life of the Executive.
14. Successors: Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
(b) This Agreement is a personal contract and the rights and
interests of the Executive hereunder may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him, except as otherwise
expressly permitted by the provisions of this Agreement. This Agreement
shall inure to the benefit of and be enforceable by the Executive and his
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Executive should die
while any amount would still be payable to him hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his
devisee, legatee or other designee or, if there is no such designee, to his
estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that he will not at any time
during or at any time after the end of the Term, directly or indirectly,
use for his own account, or disclose to any person, firm or corporation,
other than authorized officers, directors and employees of the Company or
its subsidiaries, Confidential Information (as hereinafter defined) that is
treated as trade secrets by the Company and will not at any time during or
for a period equal to the number of payments which are being made under
Section 12(e) hereof directly or indirectly, use for his own account, or
disclose to any person, firm or corporation, other than authorized
officers, directors and employees of the Company or its subsidiaries, any
other Confidential Information. As used herein, "Confidential Information"
of the Company means information of any kind, nature or description which
is disclosed to or otherwise known to the Executive as a direct or indirect
consequence of his association with the Company, which information is not
generally known to the public or in the business in which the Company is
engaged or which information relates to specific investment opportunities
within the scope of the Company's business which were considered by the
Executive or the Company during the term of this Agreement. Confidential
Information that is treated as confidential trade secrets by the Company
shall include, but not be limited to, strategic operating plans and
budgets, policy and procedure manuals, computer programs, financial forms
and information, patient or resident lists and accounts, supplier
information, accounting forms and procedures, personnel policies,
11
<PAGE>
information pertaining to the salaries, positions and performance reviews
of the Company's employees, information on the methods of the Company's
operations, research and data developed by or for the benefit of the
Company and information relating to revenues, costs, profits and the
financial condition of the Company. During the Term and for a period of two
years following the termination of the Executive's employment, the
Executive shall not induce any employee of the Company or its subsidiaries
to terminate his or her employment by the Company or its subsidiaries in
order to obtain employment by any person, firm or corporation affiliated
with the Executive.
(b) The Executive covenants and agrees that any information,
materials, ideas, discoveries, techniques or programs developed or
discovered by the Executive in connection with the performance of his
duties hereunder shall remain the sole and exclusive property of the
Company and, to the extent it constitutes Confidential Information, shall
be subject to the covenants contained in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term and, if
the Executive's employment is terminated by the Executive for other than
Good Reason, for a period of two (2) years following the termination of the
Executive's employment, the Executive shall not, directly or indirectly,
own an interest in, operate, join, control, or participate as a partner,
director, principal, officer, or agent of, enter into the employment of, or
act as a consultant to, in any case in which he has control or supervision
over a significant portion of any entity of which either (A) (i) the
principal business is the operation of one or more skilled nursing
facilities or (ii) which operates a skilled nursing business that is
material in relation to the Company's comparable business and (iii) derives
at least 10% of its skilled nursing facility revenue from facilities which
are located within 35 miles of centers or facilities operated by the
Company or (B) (i) whose principal business is operating or managing home
health or hospice facilities or (ii) which operates a home health or
hospice facility that is material in relation to the Company's or its
subsidiaries' comparable business and (iii) derives at least 10% of its
home health or hospice facility revenue from facilities which are located
within 35 miles of centers or facilities operated by the Company or its
subsidiaries. Notwithstanding anything herein to the contrary, the
foregoing provisions of this Section 15(c) shall not prevent the Executive
from acquiring securities representing not more than 5% of the outstanding
voting securities of any publicly held corporation.
(d) Without limiting the right of the Company to pursue all other
legal and equitable remedies available for violation by the Executive of
the covenants contained in this Section 15, it is expressly agreed by the
Executive and the Company that such other remedies cannot fully compensate
the Company for any such violation and that the Company shall be entitled
to injunctive relief, without the necessity of proving actual monetary
loss, to prevent any such violation or any continuing violation thereof.
Each party intends and agrees that if in any action before any court or
agency legally empowered to enforce the covenants contained in this Section
15, any term, restriction, covenant or promise contained herein is found to
be unreasonable and accordingly unenforceable, then such term, restriction,
covenant or promise shall be deemed modified
12
<PAGE>
to the extent necessary to make it enforceable by such court or agency. The
covenants contained in Section 15 shall survive the conclusion of the
Executive's employment by the Company.
16. Prohibition on Parachute Payments.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement, any
payment or benefit received or to be received by the Executive in
connection with a Change in Control of the Company or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company, any person
whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (all such payments and benefits, including,
without limitation, base salary and bonus payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part), by
the Company, an affiliate or any Person making such payment or providing
such benefit as a result of section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), then, to the extent necessary to make such
portion of the Total Payments deductible (and after taking into account any
reduction in the Total Payments provided by reason of section 280G of the
Code in such other plan, arrangement or agreement), (A) such cash payments
shall first be reduced (if necessary, to zero), and (B) all other non-cash
payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation (i) no portion o the
Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the Date of Termination shall be
taken into account, (ii) no portion of the Total Payments shall be taken
into account which in the opinion of tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Executive does not
constitute a "parachute payment" within the meaning of section 280G(b)(2)
of the Code, including by reason of section 280G(b)(4)(A) of the Code,
(iii) such payments shall be reduced only to the extent necessary so that
the Total Payments (other than those referred to in clauses (i) or (ii)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4)(B) o the Code or are
otherwise not subject to disallowance as deductions, in the opinion of the
tax counsel referred to in clause (ii); and (iv) the value of any non-cash
benefit or any deferred payment or benefit included in the Total Payments
shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of this
Section 16, the aggregate "parachute payments" paid to or for the
Executive's benefit are in an amount that would result in any portion of
such "parachute payments" not being deductible by reason of section 280G of
the Code, then the Executive shall have an obligation to pay the Company
upon demand an amount equal to the sum of (i) the excess of the aggregate
"parachute payments" paid to or for the Executive's benefit over the
aggregate "parachute payments" that could have been paid to or for the
Executive's benefit without any portion of such "parachute payments" not
being deductible by reason of section 280G of the
13
<PAGE>
Code; and (ii) interest on the amount set forth in clause (i) of this
sentence at the rate provided in section 1274(b)(2)(B) of the Code from the
date of the Executive's receipt of such excess until the date of such
payment.
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification. Waiver. No provision of this Agreement may
---------------------------------
be amended or waived unless such amendment or waiver is agreed to in writing,
signed by the Executive and by a duly authorized officer of the Company. No
waiver by any party hereto of any breach by another party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Notices. Any notice to be given hereunder shall be in writing and
-------
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Executive at: David W. Budke
___________________________
___________________________
___________________________
To the Company at: Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
20. Severability. If any provision of this Agreement or the application of
------------
any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.
14
<PAGE>
21. Survivorship. The respective rights and obligations of the parties
------------
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
22. Governing Law: Attorney's Fees.
------------------------------
(a) This Agreement will be governed by and construed in accordance
with the laws of the State of Georgia, without regard to its conflicts of
laws principles.
(b) The prevailing party in any dispute arising out of this Agreement
shall be entitled to be paid its reasonable attorney's fees incurred in
connection with such dispute from the other party to such dispute.
23. Dispute Resolution. The Executive and the Company shall not initiate
------------------
legal proceedings relating in any way to this Agreement or to the Executive's
employment or termination from employment with the Company until thirty (30)
days after the party against whom the claim is made ("respondent") receives
written notice from the claiming party of the specific nature of any purported
claims and the amount of any purported damages attributable to each such claim.
The Executive and the Company further agree that if respondent submits the
claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty (30) day period, the claiming
party may not institute arbitration or other legal proceedings against
respondent until the earlier of: (a) the completion of good-faith mediation
efforts or (b) 90 days after the date on which the respondent received written
notice of the claimant's claim(s); provided, however, that nothing in this
Section 23 shall prohibit the Company from pursuing injunctive or other
equitable relief against the Executive prior to, contemporaneous with, or
subsequent to invoking or participating in these dispute resolution processes.
The Company shall pay the cost of the mediator.
24. Headings. All descriptive headings of sections and paragraphs in this
--------
Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
25. Withholdings. All payments to the Executive under this Agreement shall
------------
be reduced by all applicable withholding required by federal, state or local tax
laws.
26. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
27. Release of Prior Employment Agreement. The Executive hereby releases
-------------------------------------
the Company and any predecessor company (including GranCare, Inc. and Living
Centers of America, Inc.) from all obligations under any employment agreement
entered into by the Executive and Living Centers of America, Inc., including any
obligation to pay severance or other post-termination benefits, which shall be
upon the execution hereof terminated and of no further force or effect;
provided, however, that in no event shall this release affect the
15
<PAGE>
Executive's rights under any grant or award under any stock option or stock
award plans of the Company and any predecessor company (including GranCare, Inc.
and Living Centers of America, Inc.).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
BY: /s/ Susan Thomas Whittle
------------------------------------
NAME: Susan Thomas Whittle
TITLE: Senior Vice President
and General Counsel
EXECUTIVE
/s/ David W. Budke
-----------------------------------
David W. Budke
16
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
Employment Agreement dated as of ____________, 1997 between David Ward (the
"Executive") and Paragon Health Network, Inc., a Delaware corporation (the
"Company").
WHEREAS, the Company desires to employ the Executive as President,
Rehabilitation Services Division, and the Executive desires to accept such
employment, for the term and upon the other conditions hereinafter set forth;
and
WHEREAS, as a condition of entering into this Agreement, the Executive
agrees to waive the Executive's rights, if any, against the Company and any
predecessor company (including GranCare, Inc.) under (i) any employment
agreement and (ii) any other plan, arrangement or agreement of any kind that
provides any form of severance payments; and
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company;
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term. This Agreement shall commence on the date hereof (the "Effective
----
Date") and continue for the two-year period (the "Term") terminating on the
second anniversary of the Effective Date, or upon the Executive's earlier death,
disability or other termination of employment pursuant to Section 11; provided,
however, that commencing on the second anniversary of the Effective Date and on
each anniversary thereafter, the Term shall automatically be extended for one
additional year unless, not later than 90 days prior to any such anniversary,
either party hereto shall have notified the other party hereto in writing that
such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as President,
--------
Rehabilitation Services Division of the Company or in such other executive
position in the Company as the Executive shall approve.
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee. The Executive shall also perform such other executive and
administrative duties (not inconsistent with the position of President,
Rehabilitation Services Division) as the Executive may reasonably be expected to
be capable of performing on behalf of the Company, as may from time to time be
authorized or directed by the Board. The Executive
<PAGE>
agrees to be employed by the Company in all such capacities for the Term,
subject to all the covenants and conditions hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at the offices of the Company located in Nashville,
Tennessee, except for required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder shall be
-----------
$250,000 a year, payable monthly and prorated for any partial year of
employment. The Board shall review such base salary at least annually and
make such adjustment from time to time as it may deem advisable, but the
base salary shall not at any time be less than $250,000 a year.
(b) Annual Bonus. The Company shall provide the Executive with an
------------
opportunity to earn upon achievement of target performance, an annual bonus
equal to fifty percent (50%) of his base salary (the "Target Bonus"), with
a minimum bonus of between fifty percent (50%) of Target Bonus upon
achievement of threshold performance and an opportunity to earn up to one
hundred fifty percent (150%) of the Target Bonus for performance in excess
of the targets.
(c) Additional Bonus. If the Executive has, on the first anniversary
----------------
of the date of this Agreement, met certain performance goals established by
the Company, the Company shall pay to the Executive an additional amount of
$200,000 (subject to any applicable payroll or other taxes, required to be
withheld).
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its senior vice presidents.
8. Business Expenses. The Executive shall be reimbursed for all ordinary
-----------------
and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive shall be
----------------------------
eligible to participate fully in all health benefits, insurance programs,
pension and retirement plans and other employee benefit and compensation
arrangements available to vice presidents of the Company generally.
10. Stock Options The Company, pursuant to the terms of its stock option
-------------
plan, may grant to the Executive, stock options to purchase a number of shares
of common stock.
2
<PAGE>
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be terminated
-------
without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall automatically
terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any eighteen (18) month period,
and no reasonable accommodation can be made that will allow Executive
to perform his essential functions, the Company may terminate the
Executive's employment hereunder for any such incapacity (a
"Disability").
(c) Termination by the Company. The Company may terminate the
--------------------------
Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal
by the Executive to perform his duties hereunder (other than any such
failure resulting from the Executive's incapacity due to physical or mental
illness), which has not ceased within ten (10) days after a written demand
for substantial performance is delivered to the Executive by the Company,
which demand identifies the manner in which the Company believes that the
Executive has not performed such duties, (ii) the engaging by the Executive
in willful misconduct or an act of moral turpitude which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct which violates Section 15 hereof) or (iii) the
conviction of the Executive of, or the entering of a plea of nolo
contendere by, the Executive with respect to, a felony.
(d) Termination by the Executive. The Executive shall be entitled to
----------------------------
terminate his employment hereunder (A) for Good Reason, (B) if his health
should become impaired to an extent that makes his continued performance of
his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) without the
Executive's express written consent, any failure by the Company to comply
with any material provision of this Agreement, which failure has not been
cured within ten (10) days after notice of such noncompliance has been
given by the Executive to the Company. For purposes of this Agreement,
"Good Reason" shall mean the occurrence following a Change in Control
during the term of this Agreement, of any one of the following acts by the
Company, or failures by the Company to act, unless, in the case of any act
or failure to act described
3
<PAGE>
below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect
thereof:
(i) any material diminution in the Executive's authorities or
responsibilities (including reporting responsibilities) which were in
effect immediately prior to the Change in Control or from his status,
title, position or responsibilities (including reporting
responsibilities) which were in effect following a Change in Control
pursuant to the Executive's consent to accept any such change; the
assignment to him of any duties or work responsibilities which are
inconsistent with such status, title, position or work
responsibilities; or any removal of the Executive from, or failure to
reappoint or reelect him to any of such positions, except if any such
changes are because of Disability, retirement, death or Cause;
(ii) a reduction by the Company in the Executive's base salary
or Target Bonus as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company
and all senior executives of any Person (as defined in Section
11(h)(i) below) in control of the Company provided in no event shall
any such reduction reduce the Executive's base salary below $250,000;
(iii) the relocation of the Executive's office at which he is to
perform his duties, to a location more than fifty (50) miles from the
location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's
business to an extent substantially consistent with his business
travel obligations prior to the Change in Control;
(iv) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's
current compensation;
(v) the failure by the Company to continue to provide the
Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any
of the Company's pension, life insurance, medical, health and
accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control, unless the Executive
participates after the Change in Control in other comparable benefit
plans generally available to senior executives of the Company and
senior executives of any Person in control of the Company;
(vi) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 11(f) below; for purposes of this
Agreement, no such purported termination shall be effective.
4
<PAGE>
The Executive's continued employment for 6 months following any act or failure
to act constituting Good Reason hereunder without the delivery of a Notice of
Termination shall constitute consent to, and a waiver of rights with respect to,
such act or failure to act.
(e) Voluntary Resignation. Should the Executive wish to resign from
---------------------
his position with the Company or terminate his employment for other than
Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company ("Notice Period"), setting forth the reasons
and specifying the date as of which his resignation is to become effective.
During the Notice Period, the Executive shall cooperate fully with the
Company in achieving a smooth transition of the Executive's duties and
responsibilities to such person(s) as may be designated by the Company. The
Company reserves the right to accelerate the Date of Termination by giving
the Executive notice and payment of amounts due to the Executive under
Section 6(a) and, to the extent applicable, Section 6(b) for the balance of
the Notice Period. The Company's obligation to continue to employ the
Executive or to continue payment of the amounts described in the preceding
sentence shall cease immediately if: (1) the Executive has not satisfied
his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause. If the Executive terminates his employment for other than Good
Reason within twelve (12) months from the Effective Date, the Executive
shall be obligated to refund the amount that was received under Section
6(c) of this Agreement.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 19. "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i) if the
-------------------
Executive's employment is terminated because of death, the date of the
Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the
Executive's employment is terminated pursuant to Subsection (c), (d) or (e)
hereof or for any other reason (other than death or Disability), the date
specified in the Notice of Termination which shall not be less than sixty
(60) days from the date such Notice of Termination is given.
(h) Change in Control. For purposes of this Agreement, a Change in
-----------------
Control of the Company shall have occurred if
(i) any "Person" (as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") as modified and
used in Sections 13(d) and 14(d) of the Exchange Act (other than (1)
the Company or any of its subsidiaries, (2) any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries, (3) an
5
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underwriter temporarily holding securities pursuant to an offering of
such securities, (4) any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions
as their ownership of the Company's common stock or (5) Apollo
Management, LP, any of its affiliates and any investments funds
managed by it (collectively, "Apollo"))), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more
than 50% of the combined voting power of the Company's then
outstanding voting securities;
(ii) during any period of not more than two (2) consecutive
years, not including any period prior to the date of this Agreement,
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person
(other than Apollo) who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii), or (iv) of
this Section 1l(h)) whose election by the Board or nomination for
election by the Company's stockholders was (A) made pursuant to the
Stockholders Agreement affecting the Company dated November 4, 1997 or
(B) approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority
thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
both (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or parent entity)
50% or more of the combined voting power of the voting securities of
the Company or such surviving or parent entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation in
which no person acquires 50% or more of the combined voting power of
the Company's then outstanding securities;
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or
any transaction having a similar effect) other than such a sale or
disposition to Apollo; or.
(v) the approval of a sale, spin off , merger, liquidation or
other transaction which results in a disposition of or transfer of
substantially all of the assets of the Rehabilitation Services
Division (the "Division") one or more subsidiaries which hold
substantially all of the Division's assets.
(i) Return of Property. When the Executive ceases to be employed by
------------------
the Company, the Executive will promptly surrender to the Company all
Company property, including without limitation, all records and other
documents obtained by him or
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entrusted to him during the course of his employment with the Company
provided, however, that the Executive may retain copies of such documents
as necessary for the Executive's personal records for federal income tax
purposes.
12. Compensation During Disability; Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his base
salary at the rate then in effect for such period until his employment is
terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so
made to the Executive during the Disability Period shall be reduced by the
sum of the amounts, if any, payable to the Executive with respect to such
period under disability benefit plans of the Company or under the Social
Security disability insurance program, and which amounts were not
previously applied to reduce any such payment.
(b) If the Executive's employment is terminated by his death or
Disability, the Company shall pay (i) any base salary due to the Executive
under Section 6(a) through the date of such termination and (ii) an amount
equal to the Target Bonus he would have received for the fiscal year that
ends on or immediately after the Date of Termination, assuming the Company
achieved the lowest target level for which a bonus is paid under the plan
described in Section 6(b), prorated for the period beginning on the first
day of the fiscal year in which occurs the Date of Termination through the
Date of Termination. In addition, if the Executive's employment is
terminated by his death, the Company shall continue to pay to his estate
his salary for an additional six months at the rate then in effect.
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay
the Executive his base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, and the Company shall
have no further obligations to the Executive under this Agreement.
(d) If following a Change in Control (A) the Company terminates the
Executive's employment without Cause, or (B) the Executive terminates his
employment for Good Reason, then
(i) the Company shall pay the Executive his base salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given and all other unpaid amounts, if any, to which
the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, at the time such payments
are due;
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay
as liquidated damages to the Executive an aggregate amount equal to
the product of (A) the
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sum of (1) the Executive's base salary at the rate in effect of the
Date of Termination and (2) the average of the annual bonuses actually
paid to the Executive by the Company with respect to the two (2)
fiscal years which immediately precede the year of the Term which the
Date of Termination occurs provided if there was bonus or bonuses paid
--------
to the Executive with respect only to one fiscal year that immediately
precedes the year within the Term in which the Date of Termination
occurs, then such single year's bonus or bonuses shall be utilized in
the calculation pursuant to this clause (2), provided, further, that
-------- -------
for purposes of this Agreement, if the Date of Termination occurs
before the end of the first fiscal year that ends after the Effective
Date, the amount of the bonus paid by the Company to the Executive
shall be deemed to be the Target Bonus and (B) the number two (2);
(iii) the Company shall pay the Executive an amount equal to the
prorated Target Bonus that would have been paid for the period
beginning on the first day of the fiscal year in which the Date of
Termination occurs;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active Employee, under the Company's life insurance, medical,
health and similar welfare benefit plans (other then group disability
benefits) for a period of twenty-four (24) months. Benefits otherwise
receivable by the Executive pursuant to this Section 12(d)(iv) shall
be reduced to the extent comparable benefits are actually received by
the Executive from a subsequent employer during the period during
which the Company is required to provide such benefits, and the
Executive shall report any such benefits actually received by him to
the Company; and
(v) the payments provided for in this Section 12(d) (other than
Section 12(d)(iv)) shall be made not later than the thirtieth (30th)
day following the Date of Termination, provided, however, that if the
amounts of such payments, and the limitation on such payments set
forth in Section 16 hereof, cannot be finally determined on or before
such day, the Company shall pay to the Executive on such day an
estimate, as determined in good faith by the Company, of the minimum
amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code (as defined in
Section 16)) as soon as the amount thereof can be determined but in no
event later than the sixtieth (60th) day after the Date of
Termination. In the event that the amount of the estimated payments
exceeds the amount determined by the Company within six (6) months
after payment to have been due, such excess shall constitute a loan by
the Company to the Executive, payable no later than the thirtieth
(30th) business day after demand by the Company (together with
interest at the rate provided in section 1274(b)(2)(B) of the Code).
At the time that payments are made under this Section 12(d), the
Company shall provide the Executive with a written statement setting
forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or
other advice the
8
<PAGE>
Company has received from outside counsel, auditors or consultants
(and any such opinions or advice which are in writing shall be
attached to the statement).
(vi) If the Executive continues to be employed by the Company
for one (1) year after a Change of Control and has not by such time
given Notice of Termination for Good Reason, the Executive will have
waived his right to exercise his rights under Section 12(d) hereof
with respect to any act or failure to act which constitutes Good
Reason.
(e) If the Executive terminates his employment under clause (C) of
Section 11(d) hereof or, prior to any Change of Control, the Company
terminates the Executive's employment without Cause, then
(i) the Company shall pay the Executive his base salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given and all other unpaid amounts, if any, to which
the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, at the time such payments
are due;
(ii) the Company shall pay to the Executive the greater of
either (A) the remaining amount of base salary owed for the Term; or
(B) an aggregate amount equal to the sum of (1) nine (9) months of the
Executive's base salary at the rate in effect as of the Date of
Termination plus (2) one (1) additional month of the Executive's base
salary at such rate for each full year of service beyond the first
anniversary of this Agreement, not to exceed eighteen (18) months of
base salary payments; such amount to be paid in substantially equal
monthly installments during the period commencing with the month
immediately following the month in which the Date of Termination
occurs or in a lump sum payment, as decided by the Company;
(iii) the Company shall pay the Executive his Target Bonus
prorated for the period beginning on the first day of the fiscal year
in which occurs the Date of Termination through the Date of
Termination;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active employee, under the Company's life insurance, medical,
health, and similar welfare benefit plans (other then group
disability) for a period not to exceed the number of months the
Executive will be paid under Section 12(e)(ii) beginning on the Date
of Termination;
(v) benefits otherwise receivable by the Executive pursuant to
clause (iv) of this Section 12(e) shall be reduced to the extent
comparable benefits are actually received by the Executive from a
subsequent employer during the period which the Company is required to
provide such benefits, and the Executive shall report any such
benefits actually received by him to the Company;
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<PAGE>
(vi) the payments made to the Executive under Section 12(e)
hereof will be reduced by the amount of payments provided for by any
subsequent employer of the executive for a position obtained after the
Date of Termination.
(f) If the Executive experiences a termination under Section 12(d) or
12(e) hereof, until the Executive finds another full-time position or for 6
months, whichever is earlier, the Company shall provide the Executive with
professional outplacement services of the Executive's choosing and shall
reimburse the Executive documented incidental outplacement expenses
directly related to the Executive's job search such as resume mailing,
interview trips, and clerical support, subject to a maximum cost of $10,000
for such outplacement services and incidental expenses. The Executive's
choice of professional outplacement services is subject to the Company's
reasonable prior approval. If the Company has not approved or disapproved
of the Executive's choice within ten (10) business days of receiving notice
of such choice, the Company will be deemed to have given is approval. Any
approval by the Company will be in writing and will state the basis for
such disapproval. The Executive will not be entitled to receive cash or
lieu of the professional outplacement services provided pursuant to this
Section.
(g) If the Executive shall terminate his employment under clause (B)
of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his
base salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, and the Company shall have no further
obligations to the Executive under this Agreement.
(h) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, and, except as provided in Sections 12(e) hereof, the amount of
any payment or benefit provided for in this Section 12 shall not be reduced
by any compensation earned by the Executive as the result of employment by
another employer or by retirement benefits.
(i) Release. Prior to making any payment pursuant to Sections
-------
12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is
applicable, the Company shall have the right to require the Executive to
sign, and the Executive hereby agrees to sign, an agreement to be bound by
the terms of Section 15 of this Agreement and a waiver of all claims the
Executive may have (including any claims under the Age Discrimination in
Employment Act), and the Company may withhold payment of such amount until
the period during which the Executive may revoke such waiver (normally
seven days) has elapsed.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid
and binding agreement of the Company enforceable against it in accordance
with its terms.
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<PAGE>
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement. The Executive agrees
and covenants that he will obtain, and submit to, such physical
examinations as may be necessary to facilitate the Company obtaining an
insurance policy for its benefit insuring the life of the Executive.
14. Successors: Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
(b) This Agreement is a personal contract and the rights and
interests of the Executive hereunder may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him, except as otherwise
expressly permitted by the provisions of this Agreement. This Agreement
shall inure to the benefit of and be enforceable by the Executive and his
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Executive should die
while any amount would still be payable to him hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his
devisee, legatee or other designee or, if there is no such designee, to his
estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that he will not at any time
during or at any time after the end of the Term, directly or indirectly,
use for his own account, or disclose to any person, firm or corporation,
other than authorized officers, directors and employees of the Company or
its subsidiaries, Confidential Information (as hereinafter defined) that is
treated as trade secrets by the Company and will not at any time during or
for a period equal to the number of payments which are being made under
Section 12(e) hereof directly or indirectly, use for his own account, or
disclose to any person, firm or corporation, other than authorized
officers, directors and employees of the Company or its subsidiaries, any
other Confidential Information. As used herein, "Confidential Information"
of the Company means information of any kind, nature or description which
is disclosed to or otherwise known to the Executive as a direct or indirect
consequence of his association with the Company, which information is not
generally known to the public or in the business in which the Company is
engaged or which information relates to specific investment opportunities
within the scope of the Company's business which were considered by the
Executive or the Company during the term of this Agreement. Confidential
Information that is treated as confidential trade secrets by the Company
shall include, but not be limited to, strategic operating plans and
budgets, policy and procedure manuals, computer programs, financial forms
and information, patient or resident lists and accounts, supplier
information, accounting forms and procedures, personnel policies,
11
<PAGE>
information pertaining to the salaries, positions and performance reviews
of the Company's employees, information on the methods of the Company's
operations, research and data developed by or for the benefit of the
Company and information relating to revenues, costs, profits and the
financial condition of the Company. During the Term and for a period of two
years following the termination of the Executive's employment, the
Executive shall not induce any employee of the Company or its subsidiaries
to terminate his or her employment by the Company or its subsidiaries in
order to obtain employment by any person, firm or corporation affiliated
with the Executive.
(b) The Executive covenants and agrees that any information,
materials, ideas, discoveries, techniques or programs developed or
discovered by the Executive in connection with the performance of his
duties hereunder shall remain the sole and exclusive property of the
Company and, to the extent it constitutes Confidential Information, shall
be subject to the covenants contained in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term and, if
the Executive's employment is terminated by the Executive for other than
Good Reason, for a period of two (2) years following the termination of the
Executive's employment, the Executive shall not, directly or indirectly,
own an interest in, operate, join, control, or participate as a partner,
director, principal, officer, or agent of, enter into the employment of, or
act as a consultant to, in any case in which he has control or supervision
over a significant portion of any entity of which either (A) (i) the
principal business which is the operation of one or more skilled nursing
facilities or (ii) which operates a skilled nursing business that is
material in relation to the Company's comparable business and (iii) in
either case, which derives at least 10% of its skilled nursing facility
revenue from facilities which are located within 35 miles of centers or
facilities operated by the Company or (B) (i) whose principal business is
operating or managing rehabilitative centers and/or providing contract
rehabilitative therapists to hospitals, nursing homes or similar facilities
or (ii) which operates a rehabilitative service business that is material
in relation to the Company's or subsidiaries' comparable business and (iii)
in either case, which derives at least 10% of its rehabilitative service
revenue from facilities which are located within 35 miles of centers or
facilities operated by the Company or its subsidiaries. Notwithstanding
anything herein to the contrary, the foregoing provisions of this Section
15(c) shall not prevent the Executive from acquiring securities
representing not more than 5% of the outstanding voting securities of any
publicly held corporation.
(d) Without limiting the right of the Company to pursue all other
legal and equitable remedies available for violation by the Executive of
the covenants contained in this Section 15, it is expressly agreed by the
Executive and the Company that such other remedies cannot fully compensate
the Company for any such violation and that the Company shall be entitled
to injunctive relief, without the necessity of proving actual monetary
loss, to prevent any such violation or any continuing violation thereof.
Each party intends and agrees that if in any action before any court or
agency legally empowered to enforce the covenants contained in this Section
15, any term, restriction,
12
<PAGE>
covenant or promise contained herein is found to be unreasonable and
accordingly unenforceable, then such term, restriction, covenant or promise
shall be deemed modified to the extent necessary to make it enforceable by
such court or agency. The covenants contained in Section 15 shall survive
the conclusion of the Executive's employment by the Company.
16. Prohibition on Parachute Payments.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement, any
payment or benefit received or to be received by the Executive in
connection with a Change in Control of the Company or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company, any person
whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (all such payments and benefits, including,
without limitation, base salary and bonus payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part), by
the Company, an affiliate or any Person making such payment or providing
such benefit as a result of section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), then, to the extent necessary to make such
portion of the Total Payments deductible (and after taking into account any
reduction in the Total Payments provided by reason of section 280G of the
Code in such other plan, arrangement or agreement), (A) such cash payments
shall first be reduced (if necessary, to zero), and (B) all other non-cash
payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation (i) no portion o the
Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the Date of Termination shall be
taken into account, (ii) no portion of the Total Payments shall be taken
into account which in the opinion of tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Executive does not
constitute a "parachute payment" within the meaning of section 280G(b)(2)
of the Code, including by reason of section 280G(b)(4)(A) of the Code,
(iii) such payments shall be reduced only to the extent necessary so that
the Total Payments (other than those referred to in clauses (i) or (ii)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4)(B) o the Code or are
otherwise not subject to disallowance as deductions, in the opinion of the
tax counsel referred to in clause (ii); and (iv) the value of any non-cash
benefit or any deferred payment or benefit included in the Total Payments
shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of this
Section 16, the aggregate "parachute payments" paid to or for the
Executive's benefit are in an amount that would result in any portion of
such "parachute payments" not being deductible by reason of section 280G of
the Code, then the Executive shall have an obligation to pay the Company
upon demand an amount equal to the sum of (i) the excess of the aggregate
"parachute payments" paid to or for the Executive's benefit over the
aggregate "parachute payments" that could have been paid to or for the
Executive's benefit without any portion of such "parachute
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payments" not being deductible by reason of section 280G of the Code; and
(ii) interest on the amount set forth in clause (i) of this sentence at the
rate provided in section 1274(b)(2)(B) of the Code from the date of the
Executive's receipt of such excess until the date of such payment.
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification. Waiver. No provision of this Agreement may
-------------------------
be amended or waived unless such amendment or waiver is agreed to in writing,
signed by the Executive and by a duly authorized officer of the Company. No
waiver by any party hereto of any breach by another party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Notices. Any notice to be given hereunder shall be in writing and
-------
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Executive at: David Ward
______________________________
______________________________
______________________________
To the Company at: Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
20. Severability. If any provision of this Agreement or the application of
------------
any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.
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21. Survivorship. The respective rights and obligations of the parties
------------
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
22. Governing Law: Attorney's Fees.
------------------------------
(a) This Agreement will be governed by and construed in accordance
with the laws of the State of Georgia, without regard to its conflicts of
laws principles.
(b) The prevailing party in any dispute arising out of this Agreement
shall be entitled to be paid its reasonable attorney's fees incurred in
connection with such dispute from the other party to such dispute.
23. Dispute Resolution. The Executive and the Company shall not initiate
------------------
legal proceedings relating in any way to this Agreement or to the Executive's
employment or termination from employment with the Company until thirty (30)
days after the party against whom the claim is made ("respondent") receives
written notice from the claiming party of the specific nature of any purported
claims and the amount of any purported damages attributable to each such claim.
The Executive and the Company further agree that if respondent submits the
claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty (30) day period, the claiming
party may not institute arbitration or other legal proceedings against
respondent until the earlier of: (a) the completion of good-faith mediation
efforts or (b) 90 days after the date on which the respondent received written
notice of the claimant's claim(s); provided, however, that nothing in this
Section 23 shall prohibit the Company from pursuing injunctive or other
equitable relief against the Executive prior to, contemporaneous with, or
subsequent to invoking or participating in these dispute resolution processes.
The Company shall pay the cost of the mediator.
24. Headings. All descriptive headings of sections and paragraphs in this
--------
Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
25. Withholdings. All payments to the Executive under this Agreement shall
------------
be reduced by all applicable withholding required by federal, state or local tax
laws.
26. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
27. Release of Prior Employment Agreement. The Executive hereby releases
-------------------------------------
the Company and any predecessor company (including GranCare, Inc. and Living
Centers of America, Inc.) from all obligations under any employment agreement
entered into by the Executive and Living Centers of America, Inc., including any
obligation to pay severance or other post-termination benefits, which shall be
upon the execution hereof terminated and of no
15
<PAGE>
further force or effect; provided, however, that in no event shall this release
affect the Executive's rights under any grant or award under any stock option or
stock award plans of the Company and any predecessor company (including
GranCare, Inc. and Living Centers of America, Inc.).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
BY:_________________________________________
NAME:_______________________________________
TITLE:______________________________________
EXECUTIVE
--------------------------------------------
David Ward
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EXHIBIT 10.8
EMPLOYMENT AGREEMENT
Employment Agreement dated as of November 4, 1997 between Charles B.
Carden (the "Executive") and Paragon Health Network, Inc., a Delaware
corporation (the "Company").
WHEREAS, the Company desires to employ the Executive as Executive Vice
President and Chief Financial Officer, and the Executive desires to accept such
employment, for the term and upon the other conditions hereinafter set forth;
and
WHEREAS, as a condition of entering into this Agreement, the Executive
agrees to waive the Executive's rights, if any, against the Company and any
predecessor company (including GranCare, Inc.) under (i) any employment
agreement and (ii) any other plan, arrangement or agreement of any kind that
provides any form of severance payments; and
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company;
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term. This Agreement shall commence on the date hereof (the
----
"Effective Date") and continue for the three-year period (the "Term")
terminating on the third anniversary of the Effective Date, or upon the
Executive's earlier death, disability or other termination of employment
pursuant to Section 11; provided, however, that commencing on the second
anniversary of the Effective Date and on each anniversary thereafter, the Term
shall automatically be extended for one additional year unless, not later than
90 days prior to any such anniversary, either party hereto shall have notified
the other party hereto in writing that such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as Executive Vice
--------
President and Chief Financial Officer of the Company or in such other executive
position in the Company as the Executive shall approve.
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee. The Executive shall also perform such other executive and
administrative duties (not inconsistent with the position of Executive Vice
President and Chief Financial Officer) as the Executive may reasonably be
expected to be capable of performing on behalf of the Company, as may from time
to time be authorized or directed by the Board. The
<PAGE>
Executive agrees to be employed by the Company in all such capacities for the
Term, subject to all the covenants and conditions hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at the principal executive offices of the Company, except
for required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder shall be
-----------
$345,000 a year, payable monthly and prorated for any partial year of
employment. The Board shall review such base salary at least annually and
make such adjustment from time to time as it may deem advisable, but the
base salary shall not at any time be less than $345,000 a year.
(b) Annual Bonus. The Company shall provide the Executive with an
------------
opportunity to earn upon achievement of target performance, an annual bonus
equal to sixty percent (60%) of his base salary (the "Target Bonus"), with
a minimum bonus of between fifty percent (50%) of Target Bonus upon
achievement of threshold performance and an opportunity to earn up to one
hundred fifty percent (150%) of the Target Bonus for performance in excess
of the targets.
(c) Execution Bonus. On the Effective Date, the Company shall pay to
---------------
the Executive $350,000 (subject to any applicable payroll or other taxes
required to be withheld).
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its executive vice presidents.
8. Business Expenses. The Executive shall be reimbursed for all ordinary
-----------------
and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive shall be
----------------------------
eligible to participate fully in all health benefits, insurance programs,
pension and retirement plans and other employee benefit and compensation
arrangements available to vice presidents of the Company generally.
10. Stock Options The Company, pursuant to the terms of its stock option
-------------
plan, may grant to the Executive, stock options to purchase a number of shares
of common stock.
2
<PAGE>
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be terminated
-------
without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall automatically
terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any eighteen (18) month period,
and no reasonable accommodation can be made that will allow Executive
to perform his essential functions, the Company may terminate the
Executive's employment hereunder for any such incapacity (a
"Disability").
(c) Termination by the Company. The Company may terminate the
--------------------------
Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal
by the Executive to perform his duties hereunder (other than any such
failure resulting from the Executive's incapacity due to physical or mental
illness), which has not ceased within ten (10) days after a written demand
for substantial performance is delivered to the Executive by the Company,
which demand identifies the manner in which the Company believes that the
Executive has not performed such duties, (ii) the engaging by the Executive
in willful misconduct or an act of moral turpitude which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct which violates Section 15 hereof) or (iii) the
conviction of the Executive of, or the entering of a plea of nolo
contendere by, the Executive with respect to, a felony.
(d) Termination by the Executive. The Executive shall be entitled to
----------------------------
terminate his employment hereunder (A) for Good Reason, (B) if his health
should become impaired to an extent that makes his continued performance of
his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) without the
Executive's express written consent, any failure by the Company to comply
with any material provision of this Agreement, which failure has not been
cured within ten (10) days after notice of such noncompliance has been
given by the Executive to the Company. For purposes of this Agreement,
"Good Reason" shall mean the occurrence following a Change in Control
during the term of this Agreement, of any one of the following acts by the
Company, or failures by the Company to act, unless, in the case of any act
or failure to act described
3
<PAGE>
below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect
thereof:
(i) any material diminution in the Executive's authorities or
responsibilities (including reporting responsibilities) which were in
effect immediately prior to the Change in Control or from his status,
title, position or responsibilities (including reporting
responsibilities) which were in effect following a Change in Control
pursuant to the Executive's consent to accept any such change; the
assignment to him of any duties or work responsibilities which are
inconsistent with such status, title, position or work
responsibilities; or any removal of the Executive from, or failure to
reappoint or reelect him to any of such positions, except if any such
changes are because of Disability, retirement, death or Cause;
(ii) a reduction by the Company in the Executive's base salary
or Target Bonus as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company
and all senior executives of any Person (as defined in Section
11(h)(i) below) in control of the Company provided in no event shall
any such reduction reduce the Executive's base salary below $345,000;
(iii) the relocation of the Executive's office at which he is to
perform his duties, to a location more than fifty (50) miles from the
location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's
business to an extent substantially consistent with his business
travel obligations prior to the Change in Control;
(iv) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's
current compensation;
(v) the failure by the Company to continue to provide the
Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any
of the Company's pension, life insurance, medical, health and
accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control, unless the Executive
participates after the Change in Control in other comparable benefit
plans generally available to senior executives of the Company and
senior executives of any Person in control of the Company;
(vi) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 11(f) below; for purposes of this
Agreement, no such purported termination shall be effective.
4
<PAGE>
The Executive's continued employment for 6 months following any act or failure
to act constituting Good Reason hereunder without the delivery of a Notice of
Termination shall constitute consent to, and a waiver of rights with respect to,
such act or failure to act.
(e) Voluntary Resignation. Should the Executive wish to resign from
---------------------
his position with the Company or terminate his employment for other than
Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company ("Notice Period"), setting forth the reasons
and specifying the date as of which his resignation is to become effective.
During the Notice Period, the Executive shall cooperate fully with the
Company in achieving a smooth transition of the Executive's duties and
responsibilities to such person(s) as may be designated by the Company. The
Company reserves the right to accelerate the Date of Termination by giving
the Executive notice and payment of amounts due to the Executive under
Section 6(a) and, to the extent applicable, Section 6(b) for the balance of
the Notice Period. The Company's obligation to continue to employ the
Executive or to continue payment of the amounts described in the preceding
sentence shall cease immediately if: (1) the Executive has not satisfied
his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause. If the Executive terminates his employment for other than Good
Reason within twelve (12) months from the Effective Date, the Executive
shall be obligated to refund the amount that was received under Section
6(c) of this Agreement.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 19. "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i) if the
-------------------
Executive's employment is terminated because of death, the date of the
Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the
Executive's employment is terminated pursuant to Subsection (c), (d) or (e)
hereof or for any other reason (other than death or Disability), the date
specified in the Notice of Termination which shall not be less than sixty
(60) days from the date such Notice of Termination is given.
(h) Change in Control. For purposes of this Agreement, a Change in
-----------------
Control of the Company shall have occurred if
(i) any "Person" (as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") as modified and
used in Sections 13(d) and 14(d) of the Exchange Act (other than (1)
the Company or any of its subsidiaries, (2) any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries, (3) an
5
<PAGE>
underwriter temporarily holding securities pursuant to an offering of
such securities, (4) any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions
as their ownership of the Company's common stock or (5) Apollo
Management, LP, any of its affiliates and any investments funds
managed by it (collectively, "Apollo"))), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more
than 50% of the combined voting power of the Company's then
outstanding voting securities;
(ii) during any period of not more than two (2) consecutive
years, not including any period prior to the date of this Agreement,
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person
(other than Apollo) who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii), or (iv) of
this Section 1l(h)) whose election by the Board or nomination for
election by the Company's stockholders was (A) made pursuant to the
Stockholders Agreement affecting the Company dated October 31, 1997 or
(B) approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority
thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
both (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or parent entity)
50% or more of the combined voting power of the voting securities of
the Company or such surviving or parent entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation in
which no person acquires 50% or more of the combined voting power of
the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or
any transaction having a similar effect) other than such a sale or
disposition to Apollo.
(i) Return of Property. When the Executive ceases to be employed by
------------------
the Company, the Executive will promptly surrender to the Company all
Company property, including without limitation, all records and other
documents obtained by him or entrusted to him during the course of his
employment with the Company provided, however, that the Executive may
retain copies of such documents as necessary for the Executive's personal
records for federal income tax purposes.
6
<PAGE>
12. Compensation During Disability; Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his base
salary at the rate then in effect for such period until his employment is
terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so
made to the Executive during the Disability Period shall be reduced by the
sum of the amounts, if any, payable to the Executive with respect to such
period under disability benefit plans of the Company or under the Social
Security disability insurance program, and which amounts were not
previously applied to reduce any such payment.
(b) If the Executive's employment is terminated by his death or
Disability, the Company shall pay (i) any base salary due to the Executive
under Section 6(a) through the date of such termination and (ii) an amount
equal to the Target Bonus he would have received for the fiscal year that
ends on or immediately after the Date of Termination, assuming the Company
achieved the lowest target level for which a bonus is paid under the plan
described in Section 6(b), prorated for the period beginning on the first
day of the fiscal year in which occurs the Date of Termination through the
Date of Termination. In addition, if the Executive's employment is
terminated by his death, the Company shall continue to pay to his estate
his salary for an additional six months at the rate then in effect.
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay
the Executive his base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, and the Company shall
have no further obligations to the Executive under this Agreement.
(d) If following a Change in Control (A) the Company terminates the
Executive's employment without Cause, or (B) the Executive terminates his
employment for Good Reason, then
(i) the Company shall pay the Executive his base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any,
to which the Executive is entitled as of the Date of Termination under
any compensation plan or program of the Company, at the time such
payments are due;
(ii) in lieu of any further salary payments to the Executive
for periods subsequent to the Date of Termination, the Company shall
pay as liquidated damages to the Executive an aggregate amount equal
to the product of (A) the sum of (1) the Executive's base salary at
the rate in effect of the Date of Termination and (2) the average of
the annual bonuses actually paid to the Executive by the Company with
respect to the two (2) fiscal years which immediately precede the year
of the Term which the Date of Termination occurs
7
<PAGE>
provided if there was bonus or bonuses paid to the Executive with
--------
respect only to one fiscal year that immediately precedes the year
within the Term in which the Date of Termination occurs, then such
single year's bonus or bonuses shall be utilized in the calculation
pursuant to this clause (2), provided, further, that for purposes of
-------- -------
this Agreement, if the Date of Termination occurs before the end of
the first fiscal year that ends after the Effective Date, the amount
of the bonus paid by the Company to the Executive shall be deemed to
be the Target Bonus and (B) the number two and one-half (2.5);
(iii) the Company shall pay the Executive an amount equal to the
prorated Target Bonus that would have been paid for the period
beginning on the first day of the fiscal year in which the Date of
Termination occurs;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active Employee, under the Company's life insurance, medical,
health and similar welfare benefit plans (other then group disability
benefits) for a period of thirty-six (36) months. Benefits otherwise
receivable by the Executive pursuant to this Section 12(d)(iv) shall
be reduced to the extent comparable benefits are actually received by
the Executive from a subsequent employer during the period during
which the Company is required to provide such benefits, and the
Executive shall report any such benefits actually received by him to
the Company; and
(v) the payments provided for in this Section 12(d) (other
than Section 12(d)(iv)) shall be made not later than the thirtieth
(30th) day following the Date of Termination, provided, however, that
if the amounts of such payments, and the limitation on such payments
set forth in Section 16 hereof, cannot be finally determined on or
before such day, the Company shall pay to the Executive on such day an
estimate, as determined in good faith by the Company, of the minimum
amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code (as defined in
Section 16)) as soon as the amount thereof can be determined but in no
event later than the sixtieth (60th) day after the Date of
Termination. In the event that the amount of the estimated payments
exceeds the amount determined by the Company within six (6) months
after payment to have been due, such excess shall constitute a loan by
the Company to the Executive, payable no later than the thirtieth
(30th) business day after demand by the Company (together with
interest at the rate provided in section 1274(b)(2)(B) of the Code).
At the time that payments are made under this Section 12(d), the
Company shall provide the Executive with a written statement setting
forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or
other advice the Company has received from outside counsel, auditors
or consultants (and any such opinions or advice which are in writing
shall be attached to the statement).
8
<PAGE>
(vi) If the Executive continues to be employed by the Company
for one (1) year after a Change of Control and has not by such time
given Notice of Termination for Good Reason, the Executive will have
waived his right to exercise his rights under Section 12(d) hereof
with respect to any act or failure to act which constitutes Good
Reason.
(e) If the Executive terminates his employment under clause (C) of
Section 11(d) hereof or, prior to any Change of Control, the Company
terminates the Executive's employment without Cause, then
(i) the Company shall pay the Executive his base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any,
to which the Executive is entitled as of the Date of Termination under
any compensation plan or program of the Company, at the time such
payments are due;
(ii) the Company shall pay to the Executive the greater of
either (A) the remaining amount of base salary owed for the Term; or
(B) an aggregate amount equal to the sum of (1) twelve (12) months of
the Executive's base salary at the rate in effect as of the Date of
Termination plus (2) one (1) additional month of the Executive's base
salary at such rate for each full year of service beyond the first
anniversary of this Agreement, not to exceed twenty-four (24) months
of base salary payments; such amount to be paid in substantially equal
monthly installments during the period commencing with the month
immediately following the month in which the Date of Termination
occurs or in a lump sum payment, as decided by the Company;
(iii) the Company shall pay the Executive his Target Bonus
prorated for the period beginning on the first day of the fiscal year
in which occurs the Date of Termination through the Date of
Termination;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active employee, under the Company's life insurance, medical,
health, and similar welfare benefit plans (other then group
disability) for a period not to exceed the number of months the
Executive will be paid under Section 12(e)(ii) beginning on the Date
of Termination;
(v) benefits otherwise receivable by the Executive pursuant to
clause (iv) of this Section 12(e) shall be reduced to the extent
comparable benefits are actually received by the Executive from a
subsequent employer during the period which the Company is required to
provide such benefits, and the Executive shall report any such
benefits actually received by him to the Company;
9
<PAGE>
(vi) the payments made to the Executive under Section 12(e)
hereof will be reduced by the amount of payments provided for by any
subsequent employer of the executive for a position obtained after the
Date of Termination.
(f) If the Executive experiences a termination under Section 12(d) or
12(e) hereof, until the Executive finds another full-time position or for 6
months, whichever is earlier, the Company shall provide the Executive with
professional outplacement services of the Executive's choosing and shall
reimburse the Executive documented incidental outplacement expenses
directly related to the Executive's job search such as resume mailing,
interview trips, and clerical support, subject to a maximum cost of $10,000
for such outplacement services and incidental expenses. The Executive's
choice of professional outplacement services is subject to the Company's
reasonable prior approval. If the Company has not approved or disapproved
of the Executive's choice within ten (10) business days of receiving notice
of such choice, the Company will be deemed to have given is approval. Any
approval by the Company will be in writing and will state the basis for
such disapproval. The Executive will not be entitled to receive cash or
lieu of the professional outplacement services provided pursuant to this
Section.
(g) If the Executive shall terminate his employment under clause (B)
of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his
base salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, and the Company shall have no further
obligations to the Executive under this Agreement.
(h) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, and, except as provided in Sections 12(e) hereof, the amount of
any payment or benefit provided for in this Section 12 shall not be reduced
by any compensation earned by the Executive as the result of employment by
another employer or by retirement benefits.
(i) Release. Prior to making any payment pursuant to Sections
-------
12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is
applicable, the Company shall have the right to require the Executive to
sign, and the Executive hereby agrees to sign, an agreement to be bound by
the terms of Section 15 of this Agreement and a waiver of all claims the
Executive may have (including any claims under the Age Discrimination in
Employment Act), and the Company may withhold payment of such amount until
the period during which the Executive may revoke such waiver (normally
seven days) has elapsed.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid
and binding agreement of the Company enforceable against it in accordance
with its terms.
10
<PAGE>
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement. The Executive agrees
and covenants that he will obtain, and submit to, such physical
examinations as may be necessary to facilitate the Company obtaining an
insurance policy for its benefit insuring the life of the Executive.
14. Successors: Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
(b) This Agreement is a personal contract and the rights and
interests of the Executive hereunder may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him, except as otherwise
expressly permitted by the provisions of this Agreement. This Agreement
shall inure to the benefit of and be enforceable by the Executive and his
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Executive should die
while any amount would still be payable to him hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his
devisee, legatee or other designee or, if there is no such designee, to his
estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that he will not at any time
during or at any time after the end of the Term, directly or indirectly,
use for his own account, or disclose to any person, firm or corporation,
other than authorized officers, directors and employees of the Company or
its subsidiaries, Confidential Information (as hereinafter defined) that is
treated as trade secrets by the Company and will not at any time during or
for a period equal to the number of payments which are being made under
Section 12(e) hereof directly or indirectly, use for his own account, or
disclose to any person, firm or corporation, other than authorized
officers, directors and employees of the Company or its subsidiaries, any
other Confidential Information. As used herein, "Confidential Information"
of the Company means information of any kind, nature or description which
is disclosed to or otherwise known to the Executive as a direct or indirect
consequence of his association with the Company, which information is not
generally known to the public or in the business in which the Company is
engaged or which information relates to specific investment opportunities
within the scope of the Company's business which were considered by the
Executive or the Company during the term of this Agreement. Confidential
Information that is treated as confidential trade secrets by the Company
shall include, but not be limited to, strategic operating plans and
budgets, policy and procedure manuals, computer programs, financial forms
and information, patient or resident lists and accounts, supplier
information, accounting forms and procedures, personnel policies,
11
<PAGE>
information pertaining to the salaries, positions and performance reviews
of the Company's employees, information on the methods of the Company's
operations, research and data developed by or for the benefit of the
Company and information relating to revenues, costs, profits and the
financial condition of the Company. During the Term and for a period of two
years following the termination of the Executive's employment, the
Executive shall not induce any employee of the Company or its subsidiaries
to terminate his or her employment by the Company or its subsidiaries in
order to obtain employment by any person, firm or corporation affiliated
with the Executive.
(b) The Executive covenants and agrees that any information,
materials, ideas, discoveries, techniques or programs developed or
discovered by the Executive in connection with the performance of his
duties hereunder shall remain the sole and exclusive property of the
Company and, to the extent it constitutes Confidential Information, shall
be subject to the covenants contained in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term and, if
the Executive's employment is terminated by the Executive for other than
Good Reason, for a period of two (2) years following the termination of the
Executive's employment, the Executive shall not, directly or indirectly,
own an interest in, operate, join, control, or participate as a partner,
director, principal, officer, or agent of, enter into the employment of, or
act as a consultant to, in any case in which he has control or supervision
over a significant portion of any entity (i) whose principal business is
the operation of one or more skilled nursing facilities or (ii) which
operates a skilled nursing business that is material in relation to the
Company's comparable business and (iii) in either case, which derives at
least 10% of its skilled nursing facility revenue from facilities which are
located within 35 miles of centers or facilities operated by the Company.
Notwithstanding anything herein to the contrary, the foregoing provisions
of this Section 15(c) shall not prevent the Executive from acquiring
securities representing not more than 5% of the outstanding voting
securities of any publicly held corporation.
(d) Without limiting the right of the Company to pursue all other
legal and equitable remedies available for violation by the Executive of
the covenants contained in this Section 15, it is expressly agreed by the
Executive and the Company that such other remedies cannot fully compensate
the Company for any such violation and that the Company shall be entitled
to injunctive relief, without the necessity of proving actual monetary
loss, to prevent any such violation or any continuing violation thereof.
Each party intends and agrees that if in any action before any court or
agency legally empowered to enforce the covenants contained in this Section
15, any term, restriction, covenant or promise contained herein is found to
be unreasonable and accordingly unenforceable, then such term, restriction,
covenant or promise shall be deemed modified to the extent necessary to
make it enforceable by such court or agency. The covenants contained in
Section 15 shall survive the conclusion of the Executive's employment by
the Company.
12
<PAGE>
16. Prohibition on Parachute Payments.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement, any
payment or benefit received or to be received by the Executive in
connection with a Change in Control of the Company or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company, any person
whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (all such payments and benefits, including,
without limitation, base salary and bonus payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part), by
the Company, an affiliate or any Person making such payment or providing
such benefit as a result of section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), then, to the extent necessary to make such
portion of the Total Payments deductible (and after taking into account any
reduction in the Total Payments provided by reason of section 280G of the
Code in such other plan, arrangement or agreement), (A) such cash payments
shall first be reduced (if necessary, to zero), and (B) all other non-cash
payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation (i) no portion o the
Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the Date of Termination shall be
taken into account, (ii) no portion of the Total Payments shall be taken
into account which in the opinion of tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Executive does not
constitute a "parachute payment" within the meaning of section 280G(b)(2)
of the Code, including by reason of section 280G(b)(4)(A) of the Code,
(iii) such payments shall be reduced only to the extent necessary so that
the Total Payments (other than those referred to in clauses (i) or (ii)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4)(B) o the Code or are
otherwise not subject to disallowance as deductions, in the opinion of the
tax counsel referred to in clause (ii); and (iv) the value of any non-cash
benefit or any deferred payment or benefit included in the Total Payments
shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of this
Section 16, the aggregate "parachute payments" paid to or for the
Executive's benefit are in an amount that would result in any portion of
such "parachute payments" not being deductible by reason of section 280G of
the Code, then the Executive shall have an obligation to pay the Company
upon demand an amount equal to the sum of (i) the excess of the aggregate
"parachute payments" paid to or for the Executive's benefit over the
aggregate "parachute payments" that could have been paid to or for the
Executive's benefit without any portion of such "parachute payments" not
being deductible by reason of section 280G of the Code; and (ii) interest
on the amount set forth in clause (i) of this sentence at the rate provided
in section 1274(b)(2)(B) of the Code from the date of the Executive's
receipt of such excess until the date of such payment.
13
<PAGE>
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification. Waiver. No provision of this Agreement may
---------------------------------
be amended or waived unless such amendment or waiver is agreed to in writing,
signed by the Executive and by a duly authorized officer of the Company. No
waiver by any party hereto of any breach by another party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Notices. Any notice to be given hereunder shall be in writing and
-------
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Executive at: Charles B. Carden
_________________________
_________________________
_________________________
To the Company at: Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
20. Severability. If any provision of this Agreement or the application
------------
of any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.
21. Survivorship. The respective rights and obligations of the parties
------------
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
14
<PAGE>
22. Governing Law: Attorney's Fees.
------------------------------
(a) This Agreement will be governed by and construed in accordance
with the laws of the State of Georgia, without regard to its conflicts of
laws principles.
(b) The prevailing party in any dispute arising out of this Agreement
shall be entitled to be paid its reasonable attorney's fees incurred in
connection with such dispute from the other party to such dispute.
23. Dispute Resolution. The Executive and the Company shall not initiate
------------------
legal proceedings relating in any way to this Agreement or to the Executive's
employment or termination from employment with the Company until thirty (30)
days after the party against whom the claim is made ("respondent") receives
written notice from the claiming party of the specific nature of any purported
claims and the amount of any purported damages attributable to each such claim.
The Executive and the Company further agree that if respondent submits the
claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty (30) day period, the claiming
party may not institute arbitration or other legal proceedings against
respondent until the earlier of: (a) the completion of good-faith mediation
efforts or (b) 90 days after the date on which the respondent received written
notice of the claimant's claim(s); provided, however, that nothing in this
Section 23 shall prohibit the Company from pursuing injunctive or other
equitable relief against the Executive prior to, contemporaneous with, or
subsequent to invoking or participating in these dispute resolution processes.
The Company shall pay the cost of the mediator.
24. Headings. All descriptive headings of sections and paragraphs in this
--------
Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
25. Withholdings. All payments to the Executive under this Agreement
------------
shall be reduced by all applicable withholding required by federal, state or
local tax laws.
26. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
27. Release of Prior Employment Agreement. The Executive hereby releases
-------------------------------------
the Company and any predecessor company (including GranCare, Inc. and Living
Centers of America, Inc.) from all obligations under any employment agreement
entered into by the Executive and Living Centers of America, Inc., including any
obligation to pay severance or other post-termination benefits, which shall be
upon the execution hereof terminated and of no further force or effect;
provided, however, that in no event shall this release affect the Executive's
rights under any grant or award under any stock option or stock award plans of
the Company and any predecessor company (including GranCare, Inc. and Living
Centers of America, Inc.).
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
BY: /s/ Susan Thomas Whittle
---------------------------------
NAME: Susan Thomas Whittle
TITLE: Senior Vice President
and General Counsel
EXECUTIVE
/s/ Charles B. Carden
-----------------------------------
Charles B. Carden
16
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
Employment Agreement dated as of ____________, 1997 between Aruna
Poddatoori (the "Executive") and Paragon Health Network, Inc., a Delaware
corporation (the "Company").
WHEREAS, the Company desires to employ the Executive as Senior Vice
President, Post-Acute Care Division, West, and the Executive desires to accept
such employment, for the term and upon the other conditions hereinafter set
forth; and
WHEREAS, as a condition of entering into this Agreement, the Executive
agrees to waive the Executive's rights, if any, against the Company and any
predecessor company (including GranCare, Inc.) under (i) any employment
agreement and (ii) any other plan, arrangement or agreement of any kind that
provides any form of severance payments; and
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company;
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term. This Agreement shall commence on the date hereof (the
----
"Effective Date") and continue for the two-year period (the "Term") terminating
on the second anniversary of the Effective Date, or upon the Executive's earlier
death, disability or other termination of employment pursuant to Section 11;
provided, however, that commencing on the second anniversary of the Effective
Date and on each anniversary thereafter, the Term shall automatically be
extended for one additional year unless, not later than 90 days prior to any
such anniversary, either party hereto shall have notified the other party hereto
in writing that such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as Senior Vice
--------
President, Post-Acute Care Division, West of the Company or in such other
executive position in the Company as the Executive shall approve.
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee. The Executive shall also perform such other executive and
administrative duties (not inconsistent with the position of Senior Vice
President, Post-Acute Care Division, West) as the Executive may reasonably be
expected to be capable of performing on behalf of the Company, as may from time
to time be authorized or directed by the Board. The
<PAGE>
Executive agrees to be employed by the Company in all such capacities for the
Term, subject to all the covenants and conditions hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at the offices of the Company located in Los Angeles,
California, except for required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder shall be
-----------
$225,000 a year, payable monthly and prorated for any partial year of
employment. The Board shall review such base salary at least annually and
make such adjustment from time to time as it may deem advisable, but the
base salary shall not at any time be less than $225,000 a year.
(b) Annual Bonus. The Company shall provide the Executive with an
------------
opportunity to earn upon achievement of target performance, an annual bonus
equal to fifty percent (50%) of his base salary (the "Target Bonus"), with
a minimum bonus of between fifty percent (50%) of Target Bonus upon
achievement of threshold performance and an opportunity to earn up to one
hundred fifty percent (150%) of the Target Bonus for performance in excess
of the targets.
(c) Execution Bonus. On the Effective Date, the Company shall pay to
---------------
the Executive $200,000 (subject to any applicable payroll or other taxes
required to be withheld).
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its senior vice presidents.
8. Business Expenses. The Executive shall be reimbursed for all ordinary
-----------------
and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive shall be
----------------------------
eligible to participate fully in all health benefits, insurance programs,
pension and retirement plans and other employee benefit and compensation
arrangements available to vice presidents of the Company generally.
10. Stock Options The Company, pursuant to the terms of its stock option
-------------
plan, may grant to the Executive, stock options to purchase a number of shares
of common stock.
2
<PAGE>
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be terminated
-------
without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall automatically
terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any eighteen (18) month period,
and no reasonable accommodation can be made that will allow Executive
to perform his essential functions, the Company may terminate the
Executive's employment hereunder for any such incapacity (a
"Disability").
(c) Termination by the Company. The Company may terminate the
--------------------------
Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal
by the Executive to perform his duties hereunder (other than any such
failure resulting from the Executive's incapacity due to physical or mental
illness), which has not ceased within ten (10) days after a written demand
for substantial performance is delivered to the Executive by the Company,
which demand identifies the manner in which the Company believes that the
Executive has not performed such duties, (ii) the engaging by the Executive
in willful misconduct or an act of moral turpitude which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct which violates Section 15 hereof) or (iii) the
conviction of the Executive of, or the entering of a plea of nolo
contendere by, the Executive with respect to, a felony.
(d) Termination by the Executive. The Executive shall be entitled to
----------------------------
terminate his employment hereunder (A) for Good Reason, (B) if his health
should become impaired to an extent that makes his continued performance of
his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) without the
Executive's express written consent, any failure by the Company to comply
with any material provision of this Agreement, which failure has not been
cured within ten (10) days after notice of such noncompliance has been
given by the Executive to the Company. For purposes of this Agreement,
"Good Reason" shall mean the occurrence following a Change in Control
during the term of this Agreement, of any one of the following acts by the
Company, or failures by the Company to act, unless, in the case of any act
or failure to act described
3
<PAGE>
below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect
thereof:
(i) any material diminution in the Executive's authorities or
responsibilities (including reporting responsibilities) which were in
effect immediately prior to the Change in Control or from his status,
title, position or responsibilities (including reporting
responsibilities) which were in effect following a Change in Control
pursuant to the Executive's consent to accept any such change; the
assignment to him of any duties or work responsibilities which are
inconsistent with such status, title, position or work
responsibilities; or any removal of the Executive from, or failure to
reappoint or reelect him to any of such positions, except if any such
changes are because of Disability, retirement, death or Cause;
(ii) a reduction by the Company in the Executive's base salary
or Target Bonus as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company
and all senior executives of any Person (as defined in Section
11(h)(i) below) in control of the Company provided in no event shall
any such reduction reduce the Executive's base salary below $225,000;
(iii) the relocation of the Executive's office at which he is to
perform his duties, to a location more than fifty (50) miles from the
location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's
business to an extent substantially consistent with his business
travel obligations prior to the Change in Control;
(iv) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's
current compensation;
(v) the failure by the Company to continue to provide the
Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any
of the Company's pension, life insurance, medical, health and
accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control, unless the Executive
participates after the Change in Control in other comparable benefit
plans generally available to senior executives of the Company and
senior executives of any Person in control of the Company;
(vi) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 11(f) below; for purposes of this
Agreement, no such purported termination shall be effective.
4
<PAGE>
The Executive's continued employment for 6 months following any act or failure
to act constituting Good Reason hereunder without the delivery of a Notice of
Termination shall constitute consent to, and a waiver of rights with respect to,
such act or failure to act.
(e) Voluntary Resignation. Should the Executive wish to resign from
---------------------
his position with the Company or terminate his employment for other than
Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company ("Notice Period"), setting forth the reasons
and specifying the date as of which his resignation is to become effective.
During the Notice Period, the Executive shall cooperate fully with the
Company in achieving a smooth transition of the Executive's duties and
responsibilities to such person(s) as may be designated by the Company. The
Company reserves the right to accelerate the Date of Termination by giving
the Executive notice and payment of amounts due to the Executive under
Section 6(a) and, to the extent applicable, Section 6(b) for the balance of
the Notice Period. The Company's obligation to continue to employ the
Executive or to continue payment of the amounts described in the preceding
sentence shall cease immediately if: (1) the Executive has not satisfied
his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause. If the Executive terminates his employment for other than Good
Reason within twelve (12) months from the Effective Date, the Executive
shall be obligated to refund the amount that was received under Section
6(c) of this Agreement.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 19. "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i) if the
-------------------
Executive's employment is terminated because of death, the date of the
Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the
Executive's employment is terminated pursuant to Subsection (c), (d) or (e)
hereof or for any other reason (other than death or Disability), the date
specified in the Notice of Termination which shall not be less than sixty
(60) days from the date such Notice of Termination is given.
(h) Change in Control. For purposes of this Agreement, a Change in
-----------------
Control of the Company shall have occurred if
(i) any "Person" (as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") as modified and
used in Sections 13(d) and 14(d) of the Exchange Act (other than (1)
the Company or any of its subsidiaries, (2) any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries, (3) an
5
<PAGE>
underwriter temporarily holding securities pursuant to an offering of
such securities, (4) any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions
as their ownership of the Company's common stock or (5) Apollo
Management, LP, any of its affiliates and any investments funds
managed by it (collectively, "Apollo"))), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more
than 50% of the combined voting power of the Company's then
outstanding voting securities;
(ii) during any period of not more than two (2) consecutive
years, not including any period prior to the date of this Agreement,
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person
(other than Apollo) who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii), or (iv) of
this Section 1l(h)) whose election by the Board or nomination for
election by the Company's stockholders was (A) made pursuant to the
Stockholders Agreement affecting the Company dated October 31,1997 or
(B) approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority
thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
both (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or parent entity)
50% or more of the combined voting power of the voting securities of
the Company or such surviving or parent entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation in
which no person acquires 50% or more of the combined voting power of
the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or
any transaction having a similar effect) other than such a sale or
disposition to Apollo.
(i) Return of Property. When the Executive ceases to be employed by
------------------
the Company, the Executive will promptly surrender to the Company all
Company property, including without limitation, all records and other
documents obtained by him or entrusted to him during the course of his
employment with the Company provided, however, that the Executive may
retain copies of such documents as necessary for the Executive's personal
records for federal income tax purposes.
6
<PAGE>
12. Compensation During Disability; Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his base
salary at the rate then in effect for such period until his employment is
terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so
made to the Executive during the Disability Period shall be reduced by the
sum of the amounts, if any, payable to the Executive with respect to such
period under disability benefit plans of the Company or under the Social
Security disability insurance program, and which amounts were not
previously applied to reduce any such payment.
(b) If the Executive's employment is terminated by his death or
Disability, the Company shall pay (i) any base salary due to the Executive
under Section 6(a) through the date of such termination and (ii) an amount
equal to the Target Bonus he would have received for the fiscal year that
ends on or immediately after the Date of Termination, assuming the Company
achieved the lowest target level for which a bonus is paid under the plan
described in Section 6(b), prorated for the period beginning on the first
day of the fiscal year in which occurs the Date of Termination through the
Date of Termination. In addition, if the Executive's employment is
terminated by his death, the Company shall continue to pay to his estate
his salary for an additional six months at the rate then in effect.
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay
the Executive his base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, and the Company shall
have no further obligations to the Executive under this Agreement.
(d) If following a Change in Control (A) the Company terminates the
Executive's employment without Cause, or (B) the Executive terminates his
employment for Good Reason, then
(i) the Company shall pay the Executive his base salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given and all other unpaid amounts, if any, to which
the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, at the time such payments
are due;
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay
as liquidated damages to the Executive an aggregate amount equal to
the product of (A) the sum of (1) the Executive's base salary at the
rate in effect of the Date of Termination and (2) the average of the
annual bonuses actually paid to the Executive by the Company with
respect to the two (2) fiscal years which immediately precede the year
of the Term which the Date of Termination occurs
7
<PAGE>
provided if there was bonus or bonuses paid to the Executive with
--------
respect only to one fiscal year that immediately precedes the year
within the Term in which the Date of Termination occurs, then such
single year's bonus or bonuses shall be utilized in the calculation
pursuant to this clause (2), provided, further, that for purposes of
-------- -------
this Agreement, if the Date of Termination occurs before the end of
the first fiscal year that ends after the Effective Date, the amount
of the bonus paid by the Company to the Executive shall be deemed to
be the Target Bonus and (B) the number two (2);
(iii) the Company shall pay the Executive an amount equal to the
prorated Target Bonus that would have been paid for the period
beginning on the first day of the fiscal year in which the Date of
Termination occurs;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active Employee, under the Company's life insurance, medical,
health and similar welfare benefit plans (other then group disability
benefits) for a period of twenty-four (24) months. Benefits otherwise
receivable by the Executive pursuant to this Section 12(d)(iv) shall
be reduced to the extent comparable benefits are actually received by
the Executive from a subsequent employer during the period during
which the Company is required to provide such benefits, and the
Executive shall report any such benefits actually received by him to
the Company; and
(v) the payments provided for in this Section 12(d) (other than
Section 12(d)(iv)) shall be made not later than the thirtieth (30th)
day following the Date of Termination, provided, however, that if the
amounts of such payments, and the limitation on such payments set
forth in Section 16 hereof, cannot be finally determined on or before
such day, the Company shall pay to the Executive on such day an
estimate, as determined in good faith by the Company, of the minimum
amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code (as defined in
Section 16)) as soon as the amount thereof can be determined but in no
event later than the sixtieth (60th) day after the Date of
Termination. In the event that the amount of the estimated payments
exceeds the amount determined by the Company within six (6) months
after payment to have been due, such excess shall constitute a loan by
the Company to the Executive, payable no later than the thirtieth
(30th) business day after demand by the Company (together with
interest at the rate provided in section 1274(b)(2)(B) of the Code).
At the time that payments are made under this Section 12(d), the
Company shall provide the Executive with a written statement setting
forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or
other advice the Company has received from outside counsel, auditors
or consultants (and any such opinions or advice which are in writing
shall be attached to the statement).
8
<PAGE>
(vi) If the Executive continues to be employed by the Company
for one (1) year after a Change of Control and has not by such time
given Notice of Termination for Good Reason, the Executive will have
waived his right to exercise his rights under Section 12(d) hereof
with respect to any act or failure to act which constitutes Good
Reason.
(e) If the Executive terminates his employment under clause (C) of
Section 11(d) hereof or, prior to any Change of Control, the Company
terminates the Executive's employment without Cause, then
(i) the Company shall pay the Executive his base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any,
to which the Executive is entitled as of the Date of Termination under
any compensation plan or program of the Company, at the time such
payments are due;
(ii) the Company shall pay to the Executive the greater of
either (A) the remaining amount of base salary owed for the Term; or
(B) an aggregate amount equal to the sum of (1) nine (9) months of the
Executive's base salary at the rate in effect as of the Date of
Termination plus (2) one (1) additional month of the Executive's base
salary at such rate for each full year of service beyond the first
anniversary of this Agreement, not to exceed eighteen (18) months of
base salary payments; such amount to be paid in substantially equal
monthly installments during the period commencing with the month
immediately following the month in which the Date of Termination
occurs or in a lump sum payment, as decided by the Company;
(iii) the Company shall pay the Executive his Target Bonus
prorated for the period beginning on the first day of the fiscal year
in which occurs the Date of Termination through the Date of
Termination;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active employee, under the Company's life insurance, medical,
health, and similar welfare benefit plans (other then group
disability) for a period not to exceed the number of months the
Executive will be paid under Section 12(e)(ii) beginning on the Date
of Termination;
(v) benefits otherwise receivable by the Executive pursuant to
clause (iv) of this Section 12(e) shall be reduced to the extent
comparable benefits are actually received by the Executive from a
subsequent employer during the period which the Company is required to
provide such benefits, and the Executive shall report any such
benefits actually received by him to the Company;
9
<PAGE>
(vi) the payments made to the Executive under Section 12(e)
hereof will be reduced by the amount of payments provided for by any
subsequent employer of the executive for a position obtained after the
Date of Termination.
(f) If the Executive experiences a termination under Section 12(d) or
12(e) hereof, until the Executive finds another full-time position or for 6
months, whichever is earlier, the Company shall provide the Executive with
professional outplacement services of the Executive's choosing and shall
reimburse the Executive documented incidental outplacement expenses
directly related to the Executive's job search such as resume mailing,
interview trips, and clerical support, subject to a maximum cost of $10,000
for such outplacement services and incidental expenses. The Executive's
choice of professional outplacement services is subject to the Company's
reasonable prior approval. If the Company has not approved or disapproved
of the Executive's choice within ten (10) business days of receiving notice
of such choice, the Company will be deemed to have given is approval. Any
approval by the Company will be in writing and will state the basis for
such disapproval. The Executive will not be entitled to receive cash or
lieu of the professional outplacement services provided pursuant to this
Section.
(g) If the Executive shall terminate his employment under clause (B)
of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his
base salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, and the Company shall have no further
obligations to the Executive under this Agreement.
(h) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, and, except as provided in Sections 12(e) hereof, the amount of
any payment or benefit provided for in this Section 12 shall not be reduced
by any compensation earned by the Executive as the result of employment by
another employer or by retirement benefits.
(i) Release. Prior to making any payment pursuant to Sections
-------
12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is
applicable, the Company shall have the right to require the Executive to
sign, and the Executive hereby agrees to sign, an agreement to be bound by
the terms of Section 15 of this Agreement and a waiver of all claims the
Executive may have (including any claims under the Age Discrimination in
Employment Act), and the Company may withhold payment of such amount until
the period during which the Executive may revoke such waiver (normally
seven days) has elapsed.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid
and binding agreement of the Company enforceable against it in accordance
with its terms.
10
<PAGE>
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement. The Executive agrees
and covenants that he will obtain, and submit to, such physical
examinations as may be necessary to facilitate the Company obtaining an
insurance policy for its benefit insuring the life of the Executive.
14. Successors: Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
(b) This Agreement is a personal contract and the rights and
interests of the Executive hereunder may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him, except as otherwise
expressly permitted by the provisions of this Agreement. This Agreement
shall inure to the benefit of and be enforceable by the Executive and his
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Executive should die
while any amount would still be payable to him hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his
devisee, legatee or other designee or, if there is no such designee, to his
estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that he will not at any time
during or at any time after the end of the Term, directly or indirectly,
use for his own account, or disclose to any person, firm or corporation,
other than authorized officers, directors and employees of the Company or
its subsidiaries, Confidential Information (as hereinafter defined) that is
treated as trade secrets by the Company and will not at any time during or
for a period equal to the number of payments which are being made under
Section 12(e) hereof directly or indirectly, use for his own account, or
disclose to any person, firm or corporation, other than authorized
officers, directors and employees of the Company or its subsidiaries, any
other Confidential Information. As used herein, "Confidential Information"
of the Company means information of any kind, nature or description which
is disclosed to or otherwise known to the Executive as a direct or indirect
consequence of his association with the Company, which information is not
generally known to the public or in the business in which the Company is
engaged or which information relates to specific investment opportunities
within the scope of the Company's business which were considered by the
Executive or the Company during the term of this Agreement. Confidential
Information that is treated as confidential trade secrets by the Company
shall include, but not be limited to, strategic operating plans and
budgets, policy and procedure manuals, computer programs, financial forms
and information, patient or resident lists and accounts, supplier
information, accounting forms and procedures, personnel policies,
11
<PAGE>
information pertaining to the salaries, positions and performance reviews
of the Company's employees, information on the methods of the Company's
operations, research and data developed by or for the benefit of the
Company and information relating to revenues, costs, profits and the
financial condition of the Company. During the Term and for a period of two
years following the termination of the Executive's employment, the
Executive shall not induce any employee of the Company or its subsidiaries
to terminate his or her employment by the Company or its subsidiaries in
order to obtain employment by any person, firm or corporation affiliated
with the Executive.
(b) The Executive covenants and agrees that any information,
materials, ideas, discoveries, techniques or programs developed or
discovered by the Executive in connection with the performance of his
duties hereunder shall remain the sole and exclusive property of the
Company and, to the extent it constitutes Confidential Information, shall
be subject to the covenants contained in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term and, if
the Executive's employment is terminated by the Executive for other than
Good Reason, for a period of two (2) years following the termination of the
Executive's employment, the Executive shall not, directly or indirectly,
own an interest in, operate, join, control, or participate as a partner,
director, principal, officer, or agent of, enter into the employment of, or
act as a consultant to, in any case in which he has control or supervision
over a significant portion of any entity (i) whose principal business is
the operation of one or more skilled nursing facilities or (ii) which
operates a skilled nursing business that is material in relation to the
Company's comparable business and (iii) in either case, which derives at
least 10% of its skilled nursing facility revenue from facilities which are
located within 35 miles of centers or facilities operated by the Company.
Notwithstanding anything herein to the contrary, the foregoing provisions
of this Section 15(c) shall not prevent the Executive from acquiring
securities representing not more than 5% of the outstanding voting
securities of any publicly held corporation.
(d) Without limiting the right of the Company to pursue all other
legal and equitable remedies available for violation by the Executive of
the covenants contained in this Section 15, it is expressly agreed by the
Executive and the Company that such other remedies cannot fully compensate
the Company for any such violation and that the Company shall be entitled
to injunctive relief, without the necessity of proving actual monetary
loss, to prevent any such violation or any continuing violation thereof.
Each party intends and agrees that if in any action before any court or
agency legally empowered to enforce the covenants contained in this Section
15, any term, restriction, covenant or promise contained herein is found to
be unreasonable and accordingly unenforceable, then such term, restriction,
covenant or promise shall be deemed modified to the extent necessary to
make it enforceable by such court or agency. The covenants contained in
Section 15 shall survive the conclusion of the Executive's employment by
the Company.
12
<PAGE>
16. Prohibition on Parachute Payments.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement, any
payment or benefit received or to be received by the Executive in
connection with a Change in Control of the Company or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company, any person
whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (all such payments and benefits, including,
without limitation, base salary and bonus payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part), by
the Company, an affiliate or any Person making such payment or providing
such benefit as a result of section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), then, to the extent necessary to make such
portion of the Total Payments deductible (and after taking into account any
reduction in the Total Payments provided by reason of section 280G of the
Code in such other plan, arrangement or agreement), (A) such cash payments
shall first be reduced (if necessary, to zero), and (B) all other non-cash
payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation (i) no portion o the
Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the Date of Termination shall be
taken into account, (ii) no portion of the Total Payments shall be taken
into account which in the opinion of tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Executive does not
constitute a "parachute payment" within the meaning of section 280G(b)(2)
of the Code, including by reason of section 280G(b)(4)(A) of the Code,
(iii) such payments shall be reduced only to the extent necessary so that
the Total Payments (other than those referred to in clauses (i) or (ii)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4)(B) o the Code or are
otherwise not subject to disallowance as deductions, in the opinion of the
tax counsel referred to in clause (ii); and (iv) the value of any non-cash
benefit or any deferred payment or benefit included in the Total Payments
shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of this
Section 16, the aggregate "parachute payments" paid to or for the
Executive's benefit are in an amount that would result in any portion of
such "parachute payments" not being deductible by reason of section 280G of
the Code, then the Executive shall have an obligation to pay the Company
upon demand an amount equal to the sum of (i) the excess of the aggregate
"parachute payments" paid to or for the Executive's benefit over the
aggregate "parachute payments" that could have been paid to or for the
Executive's benefit without any portion of such "parachute payments" not
being deductible by reason of section 280G of the Code; and (ii) interest
on the amount set forth in clause (i) of this sentence at the rate provided
in section 1274(b)(2)(B) of the Code from the date of the Executive's
receipt of such excess until the date of such payment.
13
<PAGE>
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification. Waiver. No provision of this Agreement may
---------------------------------
be amended or waived unless such amendment or waiver is agreed to in writing,
signed by the Executive and by a duly authorized officer of the Company. No
waiver by any party hereto of any breach by another party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Notices. Any notice to be given hereunder shall be in writing and
-------
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Executive at: Aruna Poddatoori
28126 Peacock Ridge
Rancho Palos Verdes, California 90274
To the Company at: Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
20. Severability. If any provision of this Agreement or the application
------------
of any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.
21. Survivorship. The respective rights and obligations of the parties
------------
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
14
<PAGE>
22. Governing Law: Attorney's Fees.
------------------------------
(a) This Agreement will be governed by and construed in accordance
with the laws of the State of Georgia, without regard to its conflicts of
laws principles.
(b) The prevailing party in any dispute arising out of this Agreement
shall be entitled to be paid its reasonable attorney's fees incurred in
connection with such dispute from the other party to such dispute.
23. Dispute Resolution. The Executive and the Company shall not initiate
------------------
legal proceedings relating in any way to this Agreement or to the Executive's
employment or termination from employment with the Company until thirty (30)
days after the party against whom the claim is made ("respondent") receives
written notice from the claiming party of the specific nature of any purported
claims and the amount of any purported damages attributable to each such claim.
The Executive and the Company further agree that if respondent submits the
claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty (30) day period, the claiming
party may not institute arbitration or other legal proceedings against
respondent until the earlier of: (a) the completion of good-faith mediation
efforts or (b) 90 days after the date on which the respondent received written
notice of the claimant's claim(s); provided, however, that nothing in this
Section 23 shall prohibit the Company from pursuing injunctive or other
equitable relief against the Executive prior to, contemporaneous with, or
subsequent to invoking or participating in these dispute resolution processes.
The Company shall pay the cost of the mediator.
24. Headings. All descriptive headings of sections and paragraphs in this
--------
Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
25. Withholdings. All payments to the Executive under this Agreement
------------
shall be reduced by all applicable withholding required by federal, state or
local tax laws.
26. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
27. Release of Prior Employment Agreement. The Executive hereby releases
-------------------------------------
the Company and any predecessor company (including GranCare, Inc. and Living
Centers of America, Inc.) from all obligations under the employment agreement
entered into by the Executive and GranCare, Inc. dated February 12, 1997,
including any obligation to pay severance or other post-termination benefits,
which shall be upon the execution hereof terminated and of no further force or
effect; provided, however, that in no event shall this release affect the
Executive's rights under any grant or award under any stock option or stock
award plans of the Company and any predecessor company (including GranCare, Inc.
and Living Centers of America, Inc.).
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
BY:__________________________________
NAME:________________________________
TITLE:_______________________________
EXECUTIVE
-------------------------------------
Aruna Poddatoori
16
<PAGE>
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
Employment Agreement dated as of November 4, 1997 between Leroy D.
Williams (the "Executive") and Paragon Health Network, Inc., a Delaware
corporation (the "Company").
WHEREAS, the Company desires to employ the Executive as President, Post-
Acute Care Division, and the Executive desires to accept such employment, for
the term and upon the other conditions hereinafter set forth; and
WHEREAS, as a condition of entering into this Agreement, the Executive
agrees to waive the Executive's rights, if any, against the Company and any
predecessor company (including GranCare, Inc.) under (i) any employment
agreement and (ii) any other plan, arrangement or agreement of any kind that
provides any form of severance payments; and
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company;
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term. This Agreement shall commence on the date hereof (the
----
"Effective Date") and continue for the three-year period (the "Term")
terminating on the third anniversary of the Effective Date, or upon the
Executive's earlier death, disability or other termination of employment
pursuant to Section 11; provided, however, that commencing on the second
anniversary of the Effective Date and on each anniversary thereafter, the Term
shall automatically be extended for one additional year unless, not later than
90 days prior to any such anniversary, either party hereto shall have notified
the other party hereto in writing that such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as President,
--------
Post-Acute Care Division of the Company or in such other executive position in
the Company as the Executive shall approve.
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee. The Executive shall also perform such other executive and
administrative duties (not inconsistent with the position of President, Post-
Acute Care Division as the Executive may reasonably be expected to be capable of
performing on behalf of the Company, as may from time to time be authorized or
directed by the Board. The Executive
<PAGE>
agrees to be employed by the Company in all such capacities for the Term,
subject to all the covenants and conditions hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at the offices of the Company located in Houston, Texas,
except for required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder shall be
-----------
$450,000 a year, payable monthly and prorated for any partial year of
employment. The Board shall review such base salary at least annually and
make such adjustment from time to time as it may deem advisable, but the
base salary shall not at any time be less than $450,000 a year.
(b) Annual Bonus. The Company shall provide the Executive with an
------------
opportunity to earn upon achievement of target performance, an annual bonus
equal to sixty percent (60%) of his base salary (the "Target Bonus"), with
a minimum bonus of between fifty percent (50%) of Target Bonus upon
achievement of threshold performance and an opportunity to earn up to one
hundred fifty percent (150%) of the Target Bonus for performance in excess
of the targets.
(c) Execution Bonus. On the Effective Date, the Company will honor
---------------
the direction of the Board of Directors of Living Centers of America, Inc.
and shall pay to the Executive in recognition for past services to Living
Centers of America, Inc. an amount of $500,000 (subject to any applicable
payroll or other taxes required to be withheld) and, if the Executive is
still employed by the Company on the third month after the date of this
Agreement, the Company shall pay to the Executive an additional amount of
$250,000 (subject to any applicable payroll or other taxes, required to be
withheld) and, if the Executive is still employed by the Company on the
sixth month after the date of this Agreement, the Company shall pay to the
Executive an additional amount of $250,000 (subject to any applicable
payroll or other taxes, required to be withheld).
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its executive vice presidents.
8. Business Expenses. The Executive shall be reimbursed for all ordinary
-----------------
and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive shall be
----------------------------
eligible to participate fully in all health benefits, insurance programs,
pension and retirement plans and other employee benefit and compensation
arrangements available to vice presidents of the Company generally.
2
<PAGE>
10. Stock Options The Company, pursuant to the terms of its stock option
-------------
plan, may grant to the Executive, stock options to purchase a number of shares
of common stock.
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be terminated
-------
without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall automatically
terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any eighteen (18) month period,
and no reasonable accommodation can be made that will allow Executive
to perform his essential functions, the Company may terminate the
Executive's employment hereunder for any such incapacity (a
"Disability").
(c) Termination by the Company. The Company may terminate the
--------------------------
Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal
by the Executive to perform his duties hereunder (other than any such
failure resulting from the Executive's incapacity due to physical or mental
illness), which has not ceased within ten (10) days after a written demand
for substantial performance is delivered to the Executive by the Company,
which demand identifies the manner in which the Company believes that the
Executive has not performed such duties, (ii) the engaging by the Executive
in willful misconduct or an act of moral turpitude which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct which violates Section 15 hereof) or (iii) the
conviction of the Executive of, or the entering of a plea of nolo
contendere by, the Executive with respect to, a felony.
(d) Termination by the Executive. The Executive shall be entitled to
----------------------------
terminate his employment hereunder (A) for Good Reason, (B) if his health
should become impaired to an extent that makes his continued performance of
his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) without the
Executive's express written consent, any failure by the Company to comply
with any material provision of this Agreement, which failure has not been
cured within ten (10) days after notice of such noncompliance has been
given by the Executive to the Company. For purposes of this
3
<PAGE>
Agreement, "Good Reason" shall mean the occurrence following a Change in
Control during the term of this Agreement, of any one of the following acts
by the Company, or failures by the Company to act, unless, in the case of
any act or failure to act described below, such act or failure to act is
corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:
(i) any material diminution in the Executive's authorities or
responsibilities (including reporting responsibilities) which were in
effect immediately prior to the Change in Control or from his status,
title, position or responsibilities (including reporting
responsibilities) which were in effect following a Change in Control
pursuant to the Executive's consent to accept any such change; the
assignment to him of any duties or work responsibilities which are
inconsistent with such status, title, position or work
responsibilities; or any removal of the Executive from, or failure to
reappoint or reelect him to any of such positions, except if any such
changes are because of Disability, retirement, death or Cause ;
(ii) a reduction by the Company in the Executive's base salary
or Target Bonus as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company
and all senior executives of any Person (as defined in Section
11(h)(i) below) in control of the Company provided in no event shall
any such reduction reduce the Executive's base salary below $450,000;
(iii) the relocation of the Executive's office at which he is to
perform his duties, to a location more than fifty (50) miles from the
location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's
business to an extent substantially consistent with his business
travel obligations prior to the Change in Control;
(iv) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's
current compensation;
(v) the failure by the Company to continue to provide the
Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any
of the Company's pension, life insurance, medical, health and
accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control, unless the Executive
participates after the Change in Control in other comparable benefit
plans generally available to senior executives of the Company and
senior executives of any Person in control of the Company;
(vi) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 11(f) below; for purposes of this
Agreement, no such purported termination shall be effective.
4
<PAGE>
The Executive's continued employment for 6 months following any act or failure
to act constituting Good Reason hereunder without the delivery of a Notice of
Termination shall constitute consent to, and a waiver of rights with respect to,
such act or failure to act.
(e) Voluntary Resignation. Should the Executive wish to resign from
---------------------
his position with the Company or terminate his employment for other than
Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company ("Notice Period"), setting forth the reasons
and specifying the date as of which his resignation is to become effective.
During the Notice Period, the Executive shall cooperate fully with the
Company in achieving a smooth transition of the Executive's duties and
responsibilities to such person(s) as may be designated by the Company. The
Company reserves the right to accelerate the Date of Termination by giving
the Executive notice and payment of amounts due to the Executive under
Section 6(a) and, to the extent applicable, Section 6(b) for the balance of
the Notice Period. The Company's obligation to continue to employ the
Executive or to continue payment of the amounts described in the preceding
sentence shall cease immediately if: (1) the Executive has not satisfied
his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause. If the Executive terminates his employment for other than Good
Reason within twelve (12) months from the Effective Date, the Executive
shall be obligated to refund the amount that was received under Section
6(c) of this Agreement.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 19. "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i) if the
-------------------
Executive's employment is terminated because of death, the date of the
Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the
Executive's employment is terminated pursuant to Subsection (c), (d) or (e)
hereof or for any other reason (other than death or Disability), the date
specified in the Notice of Termination which shall not be less than sixty
(60) days from the date such Notice of Termination is given.
(h) Change in Control. For purposes of this Agreement, a Change in
-----------------
Control of the Company shall have occurred if
(i) any "Person" (as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") as modified and
used in Sections 13(d) and 14(d) of the Exchange Act (other than (1)
the Company or any of its subsidiaries, (2) any trustee or other
fiduciary holding securities under an
5
<PAGE>
employee benefit plan of the Company or any of its subsidiaries, (3)
an underwriter temporarily holding securities pursuant to an offering
of such securities, (4) any corporation owned, directly or indirectly,
by the stockholders of the Company in substantially the same
proportions as their ownership of the Company's common stock or (5)
Apollo Management, LP, any of its affiliates and any investments funds
managed by it (collectively, "Apollo"))), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more
than 50% of the combined voting power of the Company's then
outstanding voting securities;
(ii) during any period of not more than two (2) consecutive
years, not including any period prior to the date of this Agreement,
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person
(other than Apollo) who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii), or (iv) of
this Section 1l(h)) whose election by the Board or nomination for
election by the Company's stockholders was (A) made pursuant to the
Stockholders Agreement affecting the Company dated October 31, 1997 or
(B) approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority
thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
both (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or parent entity)
50% or more of the combined voting power of the voting securities of
the Company or such surviving or parent entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation in
which no person acquires 50% or more of the combined voting power of
the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or
any transaction having a similar effect) other than such a sale or
disposition to Apollo.
(i) Return of Property. When the Executive ceases to be employed by
------------------
the Company, the Executive will promptly surrender to the Company all
Company property, including without limitation, all records and other
documents obtained by him or entrusted to him during the course of his
employment with the Company provided, however, that the Executive may
retain copies of such documents as necessary for the Executive's personal
records for federal income tax purposes.
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<PAGE>
12. Compensation During Disability; Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his base
salary at the rate then in effect for such period until his employment is
terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so
made to the Executive during the Disability Period shall be reduced by the
sum of the amounts, if any, payable to the Executive with respect to such
period under disability benefit plans of the Company or under the Social
Security disability insurance program, and which amounts were not
previously applied to reduce any such payment.
(b) If the Executive's employment is terminated by his death or
Disability, the Company shall pay (i) any base salary due to the Executive
under Section 6(a) through the date of such termination and (ii) an amount
equal to the Target Bonus he would have received for the fiscal year that
ends on or immediately after the Date of Termination, assuming the Company
achieved the lowest target level for which a bonus is paid under the plan
described in Section 6(b), prorated for the period beginning on the first
day of the fiscal year in which occurs the Date of Termination through the
Date of Termination. In addition, if the Executive's employment is
terminated by his death, the Company shall continue to pay to his estate
his salary for an additional six months at the rate then in effect.
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay
the Executive his base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, and the Company shall
have no further obligations to the Executive under this Agreement.
(d) If following a Change in Control (A) the Company terminates the
Executive's employment without Cause, or (B) the Executive terminates his
employment for Good Reason, then
(i) the Company shall pay the Executive his base salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given and all other unpaid amounts, if any, to which
the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, at the time such payments
are due;
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay
as liquidated damages to the Executive an aggregate amount equal to
the product of (A) the sum of (1) the Executive's base salary at the
rate in effect of the Date of Termination and (2) the average of the
annual bonuses actually paid to the Executive by the Company with
respect to the two (2) fiscal years which
7
<PAGE>
immediately precede the year of the Term which the Date of Termination
occurs provided if there was bonus or bonuses paid to the Executive
--------
with respect only to one fiscal year that immediately precedes the
year within the Term in which the Date of Termination occurs, then
such single year's bonus or bonuses shall be utilized in the
calculation pursuant to this clause (2), provided, further, that for
-------- -------
purposes of this Agreement, if the Date of Termination occurs before
the end of the first fiscal year that ends after the Effective Date,
the amount of the bonus paid by the Company to the Executive shall be
deemed to be the Target Bonus and (B) the number two and one-half
(2.5);
(iii) the Company shall pay the Executive an amount equal to the
prorated Target Bonus that would have been paid for the period
beginning on the first day of the fiscal year in which the Date of
Termination occurs;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active Employee, under the Company's life insurance, medical,
health and similar welfare benefit plans (other then group disability
benefits) for a period of thirty-six (36) months. Benefits otherwise
receivable by the Executive pursuant to this Section 12(d)(iv) shall
be reduced to the extent comparable benefits are actually received by
the Executive from a subsequent employer during the period during
which the Company is required to provide such benefits, and the
Executive shall report any such benefits actually received by him to
the Company; and
(v) the payments provided for in this Section 12(d) (other than
Section 12(d)(iv)) shall be made not later than the thirtieth (30th)
day following the Date of Termination, provided, however, that if the
amounts of such payments, and the limitation on such payments set
forth in Section 16 hereof, cannot be finally determined on or before
such day, the Company shall pay to the Executive on such day an
estimate, as determined in good faith by the Company, of the minimum
amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code (as defined in
Section 16)) as soon as the amount thereof can be determined but in no
event later than the sixtieth (60th) day after the Date of
Termination. In the event that the amount of the estimated payments
exceeds the amount determined by the Company within six (6) months
after payment to have been due, such excess shall constitute a loan by
the Company to the Executive, payable no later than the thirtieth
(30th) business day after demand by the Company (together with
interest at the rate provided in section 1274(b)(2)(B) of the Code).
At the time that payments are made under this Section 12(d), the
Company shall provide the Executive with a written statement setting
forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or
other advice the Company has received from outside counsel, auditors
or consultants (and any such opinions or advice which are in writing
shall be attached to the statement).
8
<PAGE>
(vi) If the Executive continues to be employed by the Company
for one (1) year after a Change of Control and has not by such time
given Notice of Termination for Good Reason, the Executive will have
waived his right to exercise his rights under Section 12(d) hereof
with respect to any act or failure to act which constitutes Good
Reason.
(e) If the Executive terminates his employment under clause (C) of
Section 11(d) hereof or, prior to any Change of Control, the Company
terminates the Executive's employment without Cause, then
(i) the Company shall pay the Executive his base salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given and all other unpaid amounts, if any, to which
the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, at the time such payments
are due;
(ii) the Company shall pay to the Executive the greater of
either (A) the remaining amount of base salary owed for the Term; or
(B) an aggregate amount equal to the sum of (1) twelve (12) months of
the Executive's base salary at the rate in effect as of the Date of
Termination plus (2) one (1) additional month of the Executive's base
salary at such rate for each full year of service beyond the first
anniversary of this Agreement, not to exceed twenty-four (24) months
of base salary payments; such amount to be paid in substantially equal
monthly installments during the period commencing with the month
immediately following the month in which the Date of Termination
occurs or in a lump sum payment, as decided by the Company;
(iii) the Company shall pay the Executive his Target Bonus
prorated for the period beginning on the first day of the fiscal year
in which occurs the Date of Termination through the Date of
Termination;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active employee, under the Company's life insurance, medical,
health, and similar welfare benefit plans (other then group
disability) for a period not to exceed the number of months the
Executive will be paid under Section 12(e)(ii) beginning on the Date
of Termination;
(v) benefits otherwise receivable by the Executive pursuant to
clause (iv) of this Section 12(e) shall be reduced to the extent
comparable benefits are actually received by the Executive from a
subsequent employer during the period which the Company is required to
provide such benefits, and the Executive shall report any such
benefits actually received by him to the Company;
9
<PAGE>
(vi) the payments made to the Executive under Section 12(e)
hereof will be reduced by the amount of payments provided for by any
subsequent employer of the executive for a position obtained after the
Date of Termination.
(f) If the Executive experiences a termination under Section 12(d) or
12(e) hereof, until the Executive finds another full-time position or for 6
months, whichever is earlier, the Company shall provide the Executive with
professional outplacement services of the Executive's choosing and shall
reimburse the Executive documented incidental outplacement expenses
directly related to the Executive's job search such as resume mailing,
interview trips, and clerical support, subject to a maximum cost of $10,000
for such outplacement services and incidental expenses. The Executive's
choice of professional outplacement services is subject to the Company's
reasonable prior approval. If the Company has not approved or disapproved
of the Executive's choice within ten (10) business days of receiving notice
of such choice, the Company will be deemed to have given is approval. Any
approval by the Company will be in writing and will state the basis for
such disapproval. The Executive will not be entitled to receive cash or
lieu of the professional outplacement services provided pursuant to this
Section.
(g) If the Executive shall terminate his employment under clause (B)
of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his
base salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, and the Company shall have no further
obligations to the Executive under this Agreement.
(h) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, and, except as provided in Sections 12(e) hereof, the amount of
any payment or benefit provided for in this Section 12 shall not be reduced
by any compensation earned by the Executive as the result of employment by
another employer or by retirement benefits.
(i) Release. Prior to making any payment pursuant to Sections
-------
12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is
applicable, the Company shall have the right to require the Executive to
sign, and the Executive hereby agrees to sign, an agreement to be bound by
the terms of Section 15 of this Agreement and a waiver of all claims the
Executive may have (including any claims under the Age Discrimination in
Employment Act), and the Company may withhold payment of such amount until
the period during which the Executive may revoke such waiver (normally
seven days) has elapsed.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid
and binding agreement of the Company enforceable against it in accordance
with its terms.
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<PAGE>
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement. The Executive agrees
and covenants that he will obtain, and submit to, such physical
examinations as may be necessary to facilitate the Company obtaining an
insurance policy for its benefit insuring the life of the Executive.
14. Successors: Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
(b) This Agreement is a personal contract and the rights and
interests of the Executive hereunder may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him, except as otherwise
expressly permitted by the provisions of this Agreement. This Agreement
shall inure to the benefit of and be enforceable by the Executive and his
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Executive should die
while any amount would still be payable to him hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his
devisee, legatee or other designee or, if there is no such designee, to his
estate.
15. Confidentiality and Non-Competition Covenants. In exchange for
---------------------------------------------
payment of $1,100,000 by the Company and other valuable consideration:
(a) The Executive covenants and agrees that he will not at any time
during or at any time after the end of the Term, directly or indirectly,
use for his own account, or disclose to any person, firm or corporation,
other than authorized officers, directors and employees of the Company or
its subsidiaries, Confidential Information (as hereinafter defined) that is
treated as trade secrets by the Company and will not at any time during or
for a period equal to the number of payments which are being made under
Section 12(e) hereof directly or indirectly, use for his own account, or
disclose to any person, firm or corporation, other than authorized
officers, directors and employees of the Company or its subsidiaries, any
other Confidential Information. As used herein, "Confidential Information"
of the Company means information of any kind, nature or description which
is disclosed to or otherwise known to the Executive as a direct or indirect
consequence of his association with the Company, which information is not
generally known to the public or in the business in which the Company is
engaged or which information relates to specific investment opportunities
within the scope of the Company's business which were considered by the
Executive or the Company during the term of this Agreement. Confidential
Information that is treated as confidential trade secrets by the Company
shall include, but not be limited to, strategic operating plans and
budgets, policy and procedure manuals, computer programs, financial forms
and information, patient or resident lists
11
<PAGE>
and accounts, supplier information, accounting forms and procedures,
personnel policies, information pertaining to the salaries, positions and
performance reviews of the Company's employees, information on the methods
of the Company's operations, research and data developed by or for the
benefit of the Company and information relating to revenues, costs, profits
and the financial condition of the Company. During the Term and for a
period of two years following the termination of the Executive's
employment, the Executive shall not induce any employee of the Company or
its subsidiaries to terminate his or her employment by the Company or its
subsidiaries in order to obtain employment by any person, firm or
corporation affiliated with the Executive.
(b) The Executive covenants and agrees that any information,
materials, ideas, discoveries, techniques or programs developed or
discovered by the Executive in connection with the performance of his
duties hereunder shall remain the sole and exclusive property of the
Company and, to the extent it constitutes Confidential Information, shall
be subject to the covenants contained in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term and, if
the Executive's employment is terminated by the Executive for other than
Good Reason, for a period of two (2) years following the termination of the
Executive's employment, the Executive shall not, directly or indirectly,
own an interest in, operate, join, control, or participate as a partner,
director, principal, officer, or agent of, enter into the employment of, or
act as a consultant to, in any case in which he has control or supervision
over a significant portion of any entity (i) whose principal business is
the operation of one or more skilled nursing facilities or (ii) which
operates a skilled nursing business that is material in relation to the
Company's comparable business and (iii) in either case, which derives at
least 10% of its skilled nursing facility revenue from facilities which are
located within 35 miles of centers or facilities operated by the Company.
Notwithstanding anything herein to the contrary, the foregoing provisions
of this Section 15(c) shall not prevent the Executive from acquiring
securities representing not more than 5% of the outstanding voting
securities of any publicly held corporation.
(d) If the Executive violates any covenant contained in Section 15,
the Executive agrees to repay any sums paid under Section 15 as
consideration for such covenants. In addition, without limiting the right
of the Company to pursue all other legal and equitable remedies available
for violation by the Executive of the covenants contained in this Section
15, it is expressly agreed by the Executive and the Company that such other
remedies cannot fully compensate the Company for any such violation and
that the Company shall be entitled to injunctive relief, without the
necessity of proving actual monetary loss, to prevent any such violation or
any continuing violation thereof. Each party intends and agrees that if in
any action before any court or agency legally empowered to enforce the
covenants contained in this Section 15, any term, restriction, covenant or
promise contained herein is found to be unreasonable and accordingly
unenforceable, then such term, restriction, covenant or promise shall be
deemed modified to the extent necessary to make it enforceable by such
court or agency.
12
<PAGE>
The covenants contained in Section 15 shall survive the conclusion of the
Executive's employment by the Company.
16. Prohibition on Parachute Payments.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement, any
payment or benefit received or to be received by the Executive in
connection with a Change in Control of the Company or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company, any person
whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (all such payments and benefits, including,
without limitation, base salary and bonus payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part), by
the Company, an affiliate or any Person making such payment or providing
such benefit as a result of section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), then, to the extent necessary to make such
portion of the Total Payments deductible (and after taking into account any
reduction in the Total Payments provided by reason of section 280G of the
Code in such other plan, arrangement or agreement), (A) such cash payments
shall first be reduced (if necessary, to zero), and (B) all other non-cash
payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation (i) no portion o the
Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the Date of Termination shall be
taken into account, (ii) no portion of the Total Payments shall be taken
into account which in the opinion of tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Executive does not
constitute a "parachute payment" within the meaning of section 280G(b)(2)
of the Code, including by reason of section 280G(b)(4)(A) of the Code,
(iii) such payments shall be reduced only to the extent necessary so that
the Total Payments (other than those referred to in clauses (i) or (ii)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4)(B) o the Code or are
otherwise not subject to disallowance as deductions, in the opinion of the
tax counsel referred to in clause (ii); and (iv) the value of any non-cash
benefit or any deferred payment or benefit included in the Total Payments
shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of this
Section 16, the aggregate "parachute payments" paid to or for the
Executive's benefit are in an amount that would result in any portion of
such "parachute payments" not being deductible by reason of section 280G of
the Code, then the Executive shall have an obligation to pay the Company
upon demand an amount equal to the sum of (i) the excess of the aggregate
"parachute payments" paid to or for the Executive's benefit over the
aggregate "parachute payments" that could have been paid to or for the
Executive's benefit without any portion of such "parachute payments" not
being deductible by reason of section 280G of the Code; and (ii) interest
on the amount set forth in clause (i) of this sentence at the rate
13
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provided in section 1274(b)(2)(B) of the Code from the date of the
Executive's receipt of such excess until the date of such payment.
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification. Waiver. No provision of this Agreement may
---------------------------------
be amended or waived unless such amendment or waiver is agreed to in writing,
signed by the Executive and by a duly authorized officer of the Company. No
waiver by any party hereto of any breach by another party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Notices. Any notice to be given hereunder shall be in writing and
-------
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Executive at: Leroy D. Williams
___________________________
___________________________
___________________________
To the Company at: Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
20. Severability. If any provision of this Agreement or the application of
------------
any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.
14
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21. Survivorship. The respective rights and obligations of the parties
------------
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
22. Governing Law: Attorney's Fees.
------------------------------
(a) This Agreement will be governed by and construed in accordance
with the laws of the State of Georgia, without regard to its conflicts of
laws principles.
(b) The prevailing party in any dispute arising out of this Agreement
shall be entitled to be paid its reasonable attorney's fees incurred in
connection with such dispute from the other party to such dispute.
23. Dispute Resolution. The Executive and the Company shall not initiate
------------------
legal proceedings relating in any way to this Agreement or to the Executive's
employment or termination from employment with the Company until thirty (30)
days after the party against whom the claim is made ("respondent") receives
written notice from the claiming party of the specific nature of any purported
claims and the amount of any purported damages attributable to each such claim.
The Executive and the Company further agree that if respondent submits the
claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty (30) day period, the claiming
party may not institute arbitration or other legal proceedings against
respondent until the earlier of: (a) the completion of good-faith mediation
efforts or (b) 90 days after the date on which the respondent received written
notice of the claimant's claim(s); provided, however, that nothing in this
Section 23 shall prohibit the Company from pursuing injunctive or other
equitable relief against the Executive prior to, contemporaneous with, or
subsequent to invoking or participating in these dispute resolution processes.
The Company shall pay the cost of the mediator.
24. Headings. All descriptive headings of sections and paragraphs in this
--------
Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
25. Withholdings. All payments to the Executive under this Agreement
------------
shall be reduced by all applicable withholding required by federal, state or
local tax laws.
26. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
27. Release of Prior Employment Agreement. The Executive hereby releases
-------------------------------------
the Company and any predecessor company (including GranCare, Inc. and Living
Centers of America, Inc.) from all obligations under any employment agreement
entered into by the Executive and Living Centers of America, Inc., including any
obligation to pay severance or
15
<PAGE>
other post-termination benefits, which shall be upon the execution hereof
terminated and of no further force or effect; provided, however, that in no
event shall this release affect the Executive's rights under any grant or award
under any stock option or stock award plans of the Company and any predecessor
company (including GranCare, Inc. and Living Centers of America, Inc.).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
BY: /s/ Susan Thomas Whittle
-----------------------------------
NAME: Susan Thomas Whittle
TITLE: Senior Vice President
and General Counsel
EXECUTIVE
/s/ Leroy D. Williams
-----------------------------------
Leroy D. Williams
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<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
Employment Agreement dated as of November 19, 1997 between R. Jeffrey
Taylor (the "Executive") and Paragon Health Network, Inc., a Delaware
corporation (the "Company").
WHEREAS, the Company desires to employ the Executive as Senior Vice
President, Development, Mergers and Acquisitions, and the Executive desires to
accept such employment, for the term and upon the other conditions hereinafter
set forth; and
WHEREAS, as a condition of entering into this Agreement, the Executive
agrees to waive the Executive's rights, if any, against the Company and any
predecessor company (including GranCare, Inc.) under (i) any employment
agreement and (ii) any other plan, arrangement or agreement of any kind that
provides any form of severance payments; and
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company;
NOW, THEREFORE, the parties agree as follows:
1. Employment The Company hereby employs the Executive, and the Executive
----------
hereby accepts employment with the Company, upon the terms and subject to the
conditions set forth herein.
2. Term This Agreement shall commence on the date hereof (the "Effective
----
Date") and continue for the two-year period (the "Term") terminating on the
second anniversary of the Effective Date, or upon the Executive's earlier death,
disability or other termination of employment pursuant to Section 11; provided,
however, that commencing on the second anniversary of the Effective Date and on
each anniversary thereafter, the Term shall automatically be extended for one
additional year unless, not later than 90 days prior to any such anniversary,
either party hereto shall have notified the other party hereto in writing that
such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as Senior Vice
--------
President, Development, Mergers and Acquisitions of the Company or in such other
executive position in the Company as the Executive shall approve.
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee. The Executive shall also perform such other executive and
administrative duties (not inconsistent with the position of Senior Vice
President, Development, Merger and Acquisitions) as the Executive may reasonably
be expected to be capable of performing on behalf of the Company, as may from
time to time be authorized or directed by the
<PAGE>
Board. The Executive agrees to be employed by the Company in all such capacities
for the Term, subject to all the covenants and conditions hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at corporate offices located in Los Angeles, California
except for required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder shall be
-----------
$290,000 a year, payable monthly and prorated for any partial year of
employment. The Board shall review such base salary at least annually and
make such adjustment from time to time as it may deem advisable, but the
base salary shall not at any time be less than $290,000 a year.
(b) Annual Bonus. The Company shall provide the Executive with an
------------
opportunity to earn upon achievement of target performance, an annual bonus
equal to fifty percent (50%) of his base salary (the "Target Bonus"), with
a minimum bonus of between fifty percent (50%) of Target Bonus upon
achievement of threshold performance and an opportunity to earn up to one
hundred fifty percent (150%) of the Target Bonus for performance in excess
of the targets.
(c) Execution Bonus. On the Effective Date, the Company shall pay to
---------------
the Executive $250,000 (subject to any applicable payroll or other taxes
required to be withheld).
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its senior vice presidents.
8. Business Expenses. The Executive shall be reimbursed for all ordinary
-----------------
and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive shall be
----------------------------
eligible to participate fully in all health benefits, insurance programs,
pension and retirement plans and other employee benefit and compensation
arrangements available to vice presidents of the Company generally.
10. Stock Options The Company, pursuant to the terms of its stock option
-------------
plan, may grant to the Executive, stock options to purchase a number of shares
of common stock.
2
<PAGE>
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be terminated
-------
without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall automatically
terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any eighteen (18) month period,
and no reasonable accommodation can be made that will allow Executive
to perform his essential functions, the Company may terminate the
Executive's employment hereunder for any such incapacity (a
"Disability").
(c) Termination by the Company. The Company may terminate the
--------------------------
Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal
by the Executive to perform his duties hereunder (other than any such
failure resulting from the Executive's incapacity due to physical or mental
illness), which has not ceased within ten (10) days after a written demand
for substantial performance is delivered to the Executive by the Company,
which demand identifies the manner in which the Company believes that the
Executive has not performed such duties, (ii) the engaging by the Executive
in willful misconduct or an act of moral turpitude which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct which violates Section 15 hereof) or (iii) the
conviction of the Executive of, or the entering of a plea of nolo
contendere by, the Executive with respect to, a felony.
(d) Termination by the Executive. The Executive shall be entitled to
----------------------------
terminate his employment hereunder (A) for Good Reason, (B) if his health
should become impaired to an extent that makes his continued performance of
his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) without the
Executive's express written consent, any failure by the Company to comply
with any material provision of this Agreement, which failure has not been
cured within ten (10) days after notice of such noncompliance has been
given by the Executive to the Company. For purposes of this Agreement,
"Good Reason" shall mean the occurrence following a Change in Control
during the term of this Agreement, of any one of the following acts by the
Company, or failures by the Company to act, unless, in the case of any act
or failure to act described
3
<PAGE>
below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect
thereof:
(i) any material diminution in the Executive's authorities or
responsibilities (including reporting responsibilities) which were in
effect immediately prior to the Change in Control or from his status,
title, position or responsibilities (including reporting
responsibilities) which were in effect following a Change in Control
pursuant to the Executive's consent to accept any such change; the
assignment to him of any duties or work responsibilities which are
inconsistent with such status, title, position or work
responsibilities; or any removal of the Executive from, or failure to
reappoint or reelect him to any of such positions, except if any such
changes are because of Disability, retirement, death or Cause ;
(ii) a reduction by the Company in the Executive's base salary
or Target Bonus as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company
and all senior executives of any Person (as defined in Section
11(h)(i) below) in control of the Company provided in no event shall
any such reduction reduce the Executive's base salary below $290,000.
(iii) the relocation of the Executive's office at which he is to
perform his duties, to a location more than fifty (50) miles from the
location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's
business to an extent substantially consistent with his business
travel obligations prior to the Change in Control;
(iv) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's
current compensation;
(v) the failure by the Company to continue to provide the
Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any
of the Company's pension, life insurance, medical, health and
accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control, unless the Executive
participates after the Change in Control in other comparable benefit
plans generally available to senior executives of the Company and
senior executives of any Person in control of the Company;
(vi) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 11(f) below; for purposes of this
Agreement, no such purported termination shall be effective.
4
<PAGE>
The Executive's continued employment for 6 months following any act or failure
to act constituting Good Reason hereunder without the delivery of a Notice of
Termination shall constitute consent to, and a waiver of rights with respect to,
such act or failure to act.
(e) Voluntary Resignation. Should the Executive wish to resign from
---------------------
his position with the Company or terminate his employment for other than
Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company ("Notice Period"), setting forth the reasons
and specifying the date as of which his resignation is to become effective.
During the Notice Period, the Executive shall cooperate fully with the
Company in achieving a smooth transition of the Executive's duties and
responsibilities to such person(s) as may be designated by the Company. The
Company reserves the right to accelerate the Date of Termination by giving
the Executive notice and payment of amounts due to the Executive under
Section 6(a) and, to the extent applicable, Section 6(b) for the balance of
the Notice Period. The Company's obligation to continue to employ the
Executive or to continue payment of the amounts described in the preceding
sentence shall cease immediately if: (1) the Executive has not satisfied
his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause. If the Executive terminates his employment for other than Good
Reason within twelve (12) months from the Effective Date, the Executive
shall be obligated to refund the amount that was received under Section
6(c) of this Agreement.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 19. "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i) if the
-------------------
Executive's employment is terminated because of death, the date of the
Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the
Executive's employment is terminated pursuant to Subsection (c), (d) or (e)
hereof or for any other reason (other than death or Disability), the date
specified in the Notice of Termination which shall not be less than sixty
(60) days from the date such Notice of Termination is given.
(h) Change in Control. For purposes of this Agreement, a Change in
-----------------
Control of the Company shall have occurred if
(i) any "Person" (as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") as modified and
used in Sections 13(d) and 14(d) of the Exchange Act (other than (1)
the Company or any of its subsidiaries, (2) any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries, (3) an
5
<PAGE>
underwriter temporarily holding securities pursuant to an offering of
such securities, (4) any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions
as their ownership of the Company's common stock or (5) Apollo
Management, LP, any of its affiliates and any investments funds
managed by it (collectively, "Apollo"))), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more
than 50% of the combined voting power of the Company's then
outstanding voting securities;
(ii) during any period of not more than two (2) consecutive
years, not including any period prior to the date of this Agreement,
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person
(other than Apollo) who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii), or (iv) of
this Section 1l(h)) whose election by the Board or nomination for
election by the Company's stockholders was (A) made pursuant to the
Stockholders Agreement affecting the Company dated November 5, 1997 or
(B) approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority
thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
both (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or parent entity)
50% or more of the combined voting power of the voting securities of
the Company or such surviving or parent entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation in
which no person acquires 50% or more of the combined voting power of
the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or
any transaction having a similar effect) other than such a sale or
disposition to Apollo.
(i) Return of Property. When the Executive ceases to be employed by
------------------
the Company, the Executive will promptly surrender to the Company all
Company property, including without limitation, all records and other
documents obtained by him or entrusted to him during the course of his
employment with the Company provided, however, that the Executive may
retain copies of such documents as necessary for the Executive's personal
records for federal income tax purposes.
6
<PAGE>
12. Compensation During Disability; Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his base
salary at the rate then in effect for such period until his employment is
terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so
made to the Executive during the Disability Period shall be reduced by the
sum of the amounts, if any, payable to the Executive with respect to such
period under disability benefit plans of the Company or under the Social
Security disability insurance program, and which amounts were not
previously applied to reduce any such payment.
(b) If the Executive's employment is terminated by his death or
Disability, the Company shall pay (i) any base salary due to the Executive
under Section 6(a) through the date of such termination and (ii) an amount
equal to the Target Bonus he would have received for the fiscal year that
ends on or immediately after the Date of Termination, assuming the Company
achieved the lowest target level for which a bonus is paid under the plan
described in Section 6(b), prorated for the period beginning on the first
day of the fiscal year in which occurs the Date of Termination through the
Date of Termination. In addition, if the Executive's employment is
terminated by his death, the Company shall continue to pay to his estate
his salary for an additional six months at the rate then in effect.
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay
the Executive his base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, and the Company shall
have no further obligations to the Executive under this Agreement.
(d) If following a Change in Control (A) the Company terminates the
Executive's employment without Cause, or (B) the Executive terminates his
employment for Good Reason, then
(i) the Company shall pay the Executive his base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any,
to which the Executive is entitled as of the Date of Termination under
any compensation plan or program of the Company, at the time such
payments are due;
(ii) in lieu of any further salary payments to the Executive
for periods subsequent to the Date of Termination, the Company shall
pay as liquidated damages to the Executive an aggregate amount equal
to the product of (A) the sum of (1) the Executive's base salary at
the rate in effect of the Date of Termination and (2) the average of
the annual bonuses actually paid to the Executive by the Company with
respect to the two (2) fiscal years which immediately precede the year
of the Term which the Date of Termination occurs
7
<PAGE>
provided if there was bonus or bonuses paid to the Executive with
--------
respect only to one fiscal year that immediately precedes the year
within the Term in which the Date of Termination occurs, then such
single year's bonus or bonuses shall be utilized in the calculation
pursuant to this clause (2), provided, further, that for purposes of
-------- -------
this Agreement, if the Date of Termination occurs before the end of
the first fiscal year that ends after the Effective Date, the amount
of the bonus paid by the Company to the Executive shall be deemed to
be the Target Bonus and (B) the number two (2);
(iii) the Company shall pay the Executive an amount equal to the
prorated Target Bonus that would have been paid for the period
beginning on the first day of the fiscal year in which the Date of
Termination occurs;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active Employee, under the Company's life insurance, medical,
health and similar welfare benefit plans (other then group disability
benefits) for a period of twenty-four (24) months. Benefits otherwise
receivable by the Executive pursuant to this Section 12(d)(iv) shall
be reduced to the extent comparable benefits are actually received by
the Executive from a subsequent employer during the period during
which the Company is required to provide such benefits, and the
Executive shall report any such benefits actually received by him to
the Company; and
(v) the payments provided for in this Section 12(d) (other
than Section 12(d)(iv)) shall be made not later than the thirtieth
(30th) day following the Date of Termination, provided, however, that
if the amounts of such payments, and the limitation on such payments
set forth in Section 16 hereof, cannot be finally determined on or
before such day, the Company shall pay to the Executive on such day an
estimate, as determined in good faith by the Company, of the minimum
amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code (as defined in
Section 16)) as soon as the amount thereof can be determined but in no
event later than the sixtieth (60th) day after the Date of
Termination. In the event that the amount of the estimated payments
exceeds the amount determined by the Company within six (6) months
after payment to have been due, such excess shall constitute a loan by
the Company to the Executive, payable no later than the thirtieth
(30th) business day after demand by the Company (together with
interest at the rate provided in section 1274(b)(2)(B) of the Code).
At the time that payments are made under this Section 12(d), the
Company shall provide the Executive with a written statement setting
forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or
other advice the Company has received from outside counsel, auditors
or consultants (and any such opinions or advice which are in writing
shall be attached to the statement).
8
<PAGE>
(vi) If the Executive continues to be employed by the Company
for one (1) year after a Change of Control and has not by such time
given Notice of Termination for Good Reason, the Executive will have
waived his right to exercise his rights under Section 12(d) hereof
with respect to any act or failure to act which constitutes Good
Reason.
(e) If the Executive terminates his employment under clause (C) of
Section 11(d) hereof or, prior to any Change of Control, the Company
terminates the Executive's employment without Cause, then
(i) the Company shall pay the Executive his base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any,
to which the Executive is entitled as of the Date of Termination under
any compensation plan or program of the Company, at the time such
payments are due;
(ii) the Company shall pay to the Executive the greater of
either (A) the remaining amount of base salary owed for the Term; or
(B) an aggregate amount equal to the sum of (1) nine (9) months of the
Executive's base salary at the rate in effect as of the Date of
Termination plus (2) one (1) additional month of the Executive's base
salary at such rate for each full year of service beyond the first
anniversary of this Agreement, not to exceed eighteen (18) months of
base salary payments; such amount to be paid in substantially equal
monthly installments during the period commencing with the month
immediately following the month in which the Date of Termination
occurs or in a lump sum payment, as decided by the Company;
(iii) the Company shall pay the Executive his Target Bonus
prorated for the period beginning on the first day of the fiscal year
in which occurs the Date of Termination through the Date of
Termination;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active employee, under the Company's life insurance, medical,
health, and similar welfare benefit plans (other then group
disability) for a period not to exceed the number of months the
Executive will be paid under Section 12(e)(ii) beginning on the Date
of Termination;
(v) benefits otherwise receivable by the Executive pursuant to
clause (iv) of this Section 12(e) shall be reduced to the extent
comparable benefits are actually received by the Executive from a
subsequent employer during the period which the Company is required to
provide such benefits, and the Executive shall report any such
benefits actually received by him to the Company;
9
<PAGE>
(vi) the payments made to the Executive under Section 12(e)
hereof will be reduced by the amount of payments provided for by any
subsequent employer of the executive for a position obtained after the
Date of Termination.
(f) If the Executive experiences a termination under Section 12(d) or
12(e) hereof, until the Executive finds another full-time position or for 6
months, whichever is earlier, the Company shall provide the Executive with
professional outplacement services of the Executive's choosing and shall
reimburse the Executive documented incidental outplacement expenses
directly related to the Executive's job search such as resume mailing,
interview trips, and clerical support, subject to a maximum cost of $10,000
for such outplacement services and incidental expenses. The Executive's
choice of professional outplacement services is subject to the Company's
reasonable prior approval. If the Company has not approved or disapproved
of the Executive's choice within ten (10) business days of receiving notice
of such choice, the Company will be deemed to have given is approval. Any
approval by the Company will be in writing and will state the basis for
such disapproval. The Executive will not be entitled to receive cash or
lieu of the professional outplacement services provided pursuant to this
Section.
(g) If the Executive shall terminate his employment under clause (B)
of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his
base salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, and the Company shall have no further
obligations to the Executive under this Agreement.
(h) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, and, except as provided in Sections 12(e) hereof, the amount of
any payment or benefit provided for in this Section 12 shall not be reduced
by any compensation earned by the Executive as the result of employment by
another employer or by retirement benefits.
(i) Release. Prior to making any payment pursuant to Sections
-------
12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is
applicable, the Company shall have the right to require the Executive to
sign, and the Executive hereby agrees to sign, an agreement to be bound by
the terms of Section 15 of this Agreement and a waiver of all claims the
Executive may have (including any claims under the Age Discrimination in
Employment Act), and the Company may withhold payment of such amount until
the period during which the Executive may revoke such waiver (normally
seven days) has elapsed.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid
and binding agreement of the Company enforceable against it in accordance
with its terms.
10
<PAGE>
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement. The Executive agrees
and covenants that he will obtain, and submit to, such physical
examinations as may be necessary to facilitate the Company obtaining an
insurance policy for its benefit insuring the life of the Executive.
14. Successors: Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
(b) This Agreement is a personal contract and the rights and
interests of the Executive hereunder may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him, except as otherwise
expressly permitted by the provisions of this Agreement. This Agreement
shall inure to the benefit of and be enforceable by the Executive and his
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Executive should die
while any amount would still be payable to him hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his
devisee, legatee or other designee or, if there is no such designee, to his
estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that he will not at any time
during or at any time after the end of the Term, directly or indirectly,
use for his own account, or disclose to any person, firm or corporation,
other than authorized officers, directors and employees of the Company or
its subsidiaries, Confidential Information (as hereinafter defined) that is
treated as trade secrets by the Company and will not at any time during or
for a period equal to the number of payments which are being made under
Section 12(e) hereof directly or indirectly, use for his own account, or
disclose to any person, firm or corporation, other than authorized
officers, directors and employees of the Company or its subsidiaries, any
other Confidential Information. As used herein, "Confidential Information"
of the Company means information of any kind, nature or description which
is disclosed to or otherwise known to the Executive as a direct or indirect
consequence of his association with the Company, which information is not
generally known to the public or in the business in which the Company is
engaged or which information relates to specific investment opportunities
within the scope of the Company's business which were considered by the
Executive or the Company during the term of this Agreement. Confidential
Information that is treated as confidential trade secrets by the Company
shall include, but not be limited to, strategic operating plans and
budgets, policy and procedure manuals, computer programs, financial forms
and information, patient or resident lists and accounts, supplier
information, accounting forms and procedures, personnel policies,
11
<PAGE>
information pertaining to the salaries, positions and performance reviews
of the Company's employees, information on the methods of the Company's
operations, research and data developed by or for the benefit of the
Company and information relating to revenues, costs, profits and the
financial condition of the Company. During the Term and for a period of two
years following the termination of the Executive's employment, the
Executive shall not induce any employee of the Company or its subsidiaries
to terminate his or her employment by the Company or its subsidiaries in
order to obtain employment by any person, firm or corporation affiliated
with the Executive.
(b) The Executive covenants and agrees that any information,
materials, ideas, discoveries, techniques or programs developed or
discovered by the Executive in connection with the performance of his
duties hereunder shall remain the sole and exclusive property of the
Company and, to the extent it constitutes Confidential Information, shall
be subject to the covenants contained in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term and, if
the Executive's employment is terminated by the Executive for other than
Good Reason, for a period of two (2) years following the termination of the
Executive's employment, the Executive shall not, directly or indirectly,
own an interest in, operate, join, control, or participate as a partner,
director, principal, officer, or agent of, enter into the employment of, or
act as a consultant to, in any case in which he has control or supervision
over a significant portion of any entity (i) whose principal business is
the operation of one or more skilled nursing facilities or (ii) which
operates a skilled nursing business that is material in relation to the
Company's comparable business and (iii) in either case, which derives at
least 10% of its skilled nursing facility revenue from facilities which are
located within 35 miles of centers or facilities operated by the Company.
Notwithstanding anything herein to the contrary, the foregoing provisions
of this Section 15(c) shall not prevent the Executive from acquiring
securities representing not more than 5% of the outstanding voting
securities of any publicly held corporation.
(d) Without limiting the right of the Company to pursue all other
legal and equitable remedies available for violation by the Executive of
the covenants contained in this Section 15, it is expressly agreed by the
Executive and the Company that such other remedies cannot fully compensate
the Company for any such violation and that the Company shall be entitled
to injunctive relief, without the necessity of proving actual monetary
loss, to prevent any such violation or any continuing violation thereof.
Each party intends and agrees that if in any action before any court or
agency legally empowered to enforce the covenants contained in this Section
15, any term, restriction, covenant or promise contained herein is found to
be unreasonable and accordingly unenforceable, then such term, restriction,
covenant or promise shall be deemed modified to the extent necessary to
make it enforceable by such court or agency. The covenants contained in
Section 15 shall survive the conclusion of the Executive's employment by
the Company.
12
<PAGE>
16. Prohibition on Parachute Payments.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement, any
payment or benefit received or to be received by the Executive in
connection with a Change in Control of the Company or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company, any person
whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (all such payments and benefits, including,
without limitation, base salary and bonus payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part), by
the Company, an affiliate or any Person making such payment or providing
such benefit as a result of section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), then, to the extent necessary to make such
portion of the Total Payments deductible (and after taking into account any
reduction in the Total Payments provided by reason of section 280G of the
Code in such other plan, arrangement or agreement), (A) such cash payments
shall first be reduced (if necessary, to zero), and (B) all other non-cash
payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation (i) no portion of the
Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the Date of Termination shall be
taken into account, (ii) no portion of the Total Payments shall be taken
into account which in the opinion of tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Executive does not
constitute a "parachute payment" within the meaning of section 280G(b)(2)
of the Code, including by reason of section 280G(b)(4)(A) of the Code,
(iii) such payments shall be reduced only to the extent necessary so that
the Total Payments (other than those referred to in clauses (i) or (ii)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4)(B) of the Code or are
otherwise not subject to disallowance as deductions, in the opinion of the
tax counsel referred to in clause (ii); and (iv) the value of any non-cash
benefit or any deferred payment or benefit included in the Total Payments
shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of this
Section 16, the aggregate "parachute payments" paid to or for the
Executive's benefit are in an amount that would result in any portion of
such "parachute payments" not being deductible by reason of section 280G of
the Code, then the Executive shall have an obligation to pay the Company
upon demand an amount equal to the sum of (i) the excess of the aggregate
"parachute payments" paid to or for the Executive's benefit over the
aggregate "parachute payments" that could have been paid to or for the
Executive's benefit without any portion of such "parachute payments" not
being deductible by reason of section 280G of the Code; and (ii) interest
on the amount set forth in clause (i) of this sentence at the rate provided
in section 1274(b)(2)(B) of the Code from the date of the Executive's
receipt of such excess until the date of such payment.
13
<PAGE>
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein,
and on the Effective Date shall supersede all undertakings and agreements,
whether oral or in writing, previously entered into by them with respect
thereto. The Executive represents that, in executing this Agreement, he
does not rely and has not relied upon any representation or statement not
set forth herein made by the Company with regard to the subject matter,
bases or effect of this Agreement or otherwise.
18. Amendment or Modification. Waiver. No provision of this Agreement
---------------------------------
may be amended or waived unless such amendment or waiver is agreed to in
writing, signed by the Executive and by a duly authorized officer of the
Company. No waiver by any party hereto of any breach by another party
hereto of any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of a similar or dissimilar
condition or provision at the same time, any prior time or any subsequent
time.
19. Notices. Any notice to be given hereunder shall be in writing and
-------
shall be deemed given when delivered personally, sent by courier or
telecopy or registered or certified mail, postage prepaid, return receipt
requested, addressed to the party concerned at the address indicated below
or to such other address as such party may subsequently give notice of
hereunder in writing:
To Executive at: R. Jeffrey Taylor
877 South Bundy
Los Angeles, California 90049
To the Company at: Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Any notice delivered personally or by courier under this Section
19 shall be deemed given on the date delivered and any notice sent by
telecopy or registered or certified mail, postage prepaid, return receipt
requested, shall be deemed given on the date telecopied or mailed.
20. Severability. If any provision of this Agreement or the
------------
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the
application of such provision to such person or circumstances other than
those to which it is so determined to be invalid and unenforceable, shall
not be affected thereby, and each provision hereof shall be validated and
shall be enforced to the fullest extent permitted by law.
21. Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of this Agreement to the
extent necessary to the intended preservation of such rights and
obligations.
14
<PAGE>
22. Governing Law: Attorney's Fees.
------------------------------
(a) This Agreement will be governed by and construed in
accordance with the laws of the State of Georgia, without regard to
its conflicts of laws principles.
(b) The prevailing party in any dispute arising out of this
Agreement shall be entitled to be paid its reasonable attorney's fees
incurred in connection with such dispute from the other party to such
dispute.
23. Dispute Resolution. The Executive and the Company shall not
------------------
initiate legal proceedings relating in any way to this Agreement or to the
Executive's employment or termination from employment with the Company
until thirty (30) days after the party against whom the claim is made
("respondent") receives written notice from the claiming party of the
specific nature of any purported claims and the amount of any purported
damages attributable to each such claim. The Executive and the Company
further agree that if respondent submits the claiming party's claim to the
CPR Institute for Dispute Resolution, JAMS/Endispute, or other local
dispute resolution service for nonbinding mediation prior to the expiration
of such thirty (30) day period, the claiming party may not institute
arbitration or other legal proceedings against respondent until the earlier
of: (a) the completion of good-faith mediation efforts or (b) 90 days after
the date on which the respondent received written notice of the claimant's
claim(s); provided, however, that nothing in this Section 23 shall prohibit
the Company from pursuing injunctive or other equitable relief against the
Executive prior to, contemporaneous with, or subsequent to invoking or
participating in these dispute resolution processes. The Company shall pay
the cost of the mediator.
24. Headings. All descriptive headings of sections and paragraphs in
--------
this Agreement are intended solely for convenience, and no provision of
this Agreement is to be construed by reference to the heading of any
section or paragraph.
25. Withholdings. All payments to the Executive under this Agreement
------------
shall be reduced by all applicable withholding required by federal, state
or local tax laws.
26. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
27. Release of Prior Employment Agreement. The Executive hereby
-------------------------------------
releases the Company and any predecessor company (including GranCare, Inc.
and Living Centers of America, Inc.) from all obligations under the
employment agreements entered into by the Executive and GranCare, Inc.
dated February 12, 1997, including any obligation to pay severance or other
post-termination benefits, which shall be upon the execution hereof
terminated and of no further force or effect; provided, however, that in no
event shall this release affect the Executive's rights under any grant or
award under any stock option or stock award plans of the Company and any
predecessor company (including GranCare, Inc. and Living Centers of
America, Inc.).
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
BY: /s/ Susan Thomas Whittle
-----------------------------------
NAME: Susan Thomas Whittle
TITLE: Senior Vice President
and General Counsel
EXECUTIVE
/s/ R. Jeffrey Taylor
-------------------------------------
R. Jeffrey Taylor
16
<PAGE>
EXHIBIT 10.12
[VICE PRESIDENT FORM]
EMPLOYMENT AGREEMENT
Employment Agreement dated as of ____________, 19__ between __________ (the
"Executive") and Paragon Health Network, Inc., a Delaware corporation (the
"Company").
WHEREAS, the Company desires to employ the Executive as a [VICE PRESIDENT],
and the Executive desires to accept such employment, for the term and upon the
other conditions hereinafter set forth; and
WHEREAS, as a condition of entering into this Agreement, the Executive
agrees to waive the Executive's rights, if any, against the Company and any
predecessor company (including GranCare, Inc.) under (i) any employment
agreement and (ii) any other plan, arrangement or agreement of any kind that
provides any form of severance payments; and
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company;
NOW, THEREFORE, the parties agree as follows:
1. Employment The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term This Agreement shall commence on the date hereof (the "Effective
----
Date") and continue for the two-year period (the "Term") terminating on the
second anniversary of the Effective Date, or upon the Executive's earlier death,
disability or other termination of employment pursuant to Section 11; provided,
however, that commencing on the second anniversary of the Effective Date and on
each anniversary thereafter, the Term shall automatically be extended for one
additional year unless, not later than 90 days prior to any such anniversary,
either party hereto shall have notified the other party hereto in writing that
such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as [VICE
--------
PRESIDENT] of the Company or in such other executive position in the Company as
the Executive shall approve.
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee. The Executive shall also perform such other executive and
administrative duties (not inconsistent with the position of [VICE PRESIDENT])
as the Executive may reasonably be expected to be capable of performing on
behalf of the Company, as may from time to time be authorized or directed by the
Board. The Executive agrees to be employed by the
<PAGE>
Company in all such capacities for the Term, subject to all the covenants and
conditions hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at [THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY] OR
[SPECIFY OTHER LOCATION], except for required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder shall be
[$_______] a year, payable monthly and prorated for any partial year of
employment. The Board shall review such base salary at least annually and
make such adjustment from time to time as it may deem advisable, but the
base salary shall not at any time be less than [$__________] a year.
(b) Annual Bonus. The Company shall provide the Executive with an
------------
opportunity to earn upon achievement of target performance, an annual bonus
equal to forty percent (40%) of his base salary (the "Target Bonus"), with
a minimum bonus of between fifty percent (50%) of Target Bonus upon
achievement of threshold performance and an opportunity to earn up to one
hundred fifty percent (150%) of the Target Bonus for performance in excess
of the targets.
(c) Execution Bonus. On the Effective Date, the Company shall pay to
the Executive [$______] (subject to any applicable payroll or other taxes
required to be withheld) [AND, IF THE EXECUTIVE IS STILL EMPLOYED BY THE
COMPANY ON THE THIRD ANNIVERSARY OF THE DATE OF THIS AGREEMENT, THE COMPANY
SHALL PAY TO THE EXECUTIVE AN ADDITIONAL AMOUNT OF [$______] (SUBJECT TO
ANY APPLICABLE PAYROLL OR OTHER TAXES, REQUIRED TO BE WITHHELD)].
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its senior vice presidents.
8. Business Expenses. The Executive shall be reimbursed for all
-----------------
ordinary and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive shall be
----------------------------
eligible to participate fully in all health benefits, insurance programs,
pension and retirement plans and other employee benefit and compensation
arrangements available to vice presidents of the Company generally.
10. Stock Options The Company, pursuant to the terms of its stock option
-------------
plan, may grant to the Executive, stock options to purchase a number of shares
of common stock.
2
<PAGE>
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be terminated
-------
without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall automatically
terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any eighteen (18) month period,
and no reasonable accommodation can be made that will allow Executive
to perform his essential functions, the Company may terminate the
Executive's employment hereunder for any such incapacity (a
"Disability").
(c) Termination by the Company. The Company may terminate the
--------------------------
Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal
by the Executive to perform his duties hereunder (other than any such
failure resulting from the Executive's incapacity due to physical or mental
illness), which has not ceased within ten (10) days after a written demand
for substantial performance is delivered to the Executive by the Company,
which demand identifies the manner in which the Company believes that the
Executive has not performed such duties, (ii) the engaging by the Executive
in willful misconduct or an act of moral turpitude which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct which violates Section 15 hereof) or (iii) the
conviction of the Executive of, or the entering of a plea of nolo
contendere by, the Executive with respect to, a felony.
(d) Termination by the Executive. The Executive shall be entitled to
----------------------------
terminate his employment hereunder (A) for Good Reason, (B) if his health
should become impaired to an extent that makes his continued performance of
his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) without the
Executive's express written consent, any failure by the Company to comply
with any material provision of this Agreement, which failure has not been
cured within ten (10) days after notice of such noncompliance has been
given by the Executive to the Company. For purposes of this Agreement,
"Good Reason" shall mean the occurrence following a Change in Control
during the term of this Agreement, of any one of the following acts by the
Company, or failures by the Company to act, unless, in the case of any act
or failure to act described
3
<PAGE>
below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect
thereof:
(i) any material diminution in the Executive's authorities or
responsibilities (including reporting responsibilities) which were in
effect immediately prior to the Change in Control or from his status,
title, position or responsibilities (including reporting
responsibilities) which were in effect following a Change in Control
pursuant to the Executive's consent to accept any such change; the
assignment to him of any duties or work responsibilities which are
inconsistent with such status, title, position or work
responsibilities; or any removal of the Executive from, or failure to
reappoint or reelect him to any of such positions, except if any such
changes are because of Disability, retirement, death or Cause;
(ii) a reduction by the Company in the Executive's base salary
or Target Bonus as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the Company
and all senior executives of any Person (as defined in Section
11(h)(i) below) in control of the Company provided in no event shall
any such reduction reduce the Executive's base salary below
[$_________] ;
(iii) the relocation of the Executive's office at which he is to
perform his duties, to a location more than fifty (50) miles from the
location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's
business to an extent substantially consistent with his business
travel obligations prior to the Change in Control;
(iv) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's
current compensation;
(v) the failure by the Company to continue to provide the
Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any
of the Company's pension, life insurance, medical, health and
accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control, unless the Executive
participates after the Change in Control in other comparable benefit
plans generally available to senior executives of the Company and
senior executives of any Person in control of the Company;
(vi) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 11(f) below; for purposes of this
Agreement, no such purported termination shall be effective.
4
<PAGE>
The Executive's continued employment for 6 months following any act or failure
to act constituting Good Reason hereunder without the delivery of a Notice of
Termination shall constitute consent to, and a waiver of rights with respect to,
such act or failure to act.
(e) Voluntary Resignation. Should the Executive wish to resign from
---------------------
his position with the Company or terminate his employment for other than
Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company ("Notice Period"), setting forth the reasons
and specifying the date as of which his resignation is to become effective.
During the Notice Period, the Executive shall cooperate fully with the
Company in achieving a smooth transition of the Executive's duties and
responsibilities to such person(s) as may be designated by the Company. The
Company reserves the right to accelerate the Date of Termination by giving
the Executive notice and payment of amounts due to the Executive under
Section 6(a) and, to the extent applicable, Section 6(b) for the balance of
the Notice Period. The Company's obligation to continue to employ the
Executive or to continue payment of the amounts described in the preceding
sentence shall cease immediately if: (1) the Executive has not satisfied
his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause. If the Executive terminates his employment for other than Good
Reason within twelve (12) months from the Effective Date, the Executive
shall be obligated to refund the amount that was received under Section
6(c) of this Agreement.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 19. "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i) if the
-------------------
Executive's employment is terminated because of death, the date of the
Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the
Executive's employment is terminated pursuant to Subsection (c), (d) or (e)
hereof or for any other reason (other than death or Disability), the date
specified in the Notice of Termination which shall not be less than sixty
(60) days from the date such Notice of Termination is given.
(h) Change in Control. For purposes of this Agreement, a Change in
-----------------
Control of the Company shall have occurred if
(i) any "Person" (as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") as modified and
used in Sections 13(d) and 14(d) of the Exchange Act (other than (1)
the Company or any of its subsidiaries, (2) any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries, (3) an
5
<PAGE>
underwriter temporarily holding securities pursuant to an offering of
such securities, (4) any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions
as their ownership of the Company's common stock or (5) Apollo
Management, LP, any of its affiliates and any investments funds
managed by it (collectively, "Apollo"))), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more
than 50% of the combined voting power of the Company's then
outstanding voting securities;
(ii) during any period of not more than two (2) consecutive
years, not including any period prior to the date of this Agreement,
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person
(other than Apollo) who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii), or (iv) of
this Section 1l(h)) whose election by the Board or nomination for
election by the Company's stockholders was (A) made pursuant to the
Stockholders Agreement affecting the Company dated [__FILL IN DATE___]
or (B) approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election
was previously so approved, cease for any reason to constitute at
least a majority thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
both (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or parent entity)
50% or more of the combined voting power of the voting securities of
the Company or such surviving or parent entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation in
which no person acquires 50% or more of the combined voting power of
the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or
any transaction having a similar effect) other than such a sale or
disposition to Apollo.
(i) Return of Property. When the Executive ceases to be employed by
------------------
the Company, the Executive will promptly surrender to the Company all
Company property, including without limitation, all records and other
documents obtained by him or entrusted to him during the course of his
employment with the Company provided, however, that the Executive may
retain copies of such documents as necessary for the Executive's personal
records for federal income tax purposes.
6
<PAGE>
12. Compensation During Disability; Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his base
salary at the rate then in effect for such period until his employment is
terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so
made to the Executive during the Disability Period shall be reduced by the
sum of the amounts, if any, payable to the Executive with respect to such
period under disability benefit plans of the Company or under the Social
Security disability insurance program, and which amounts were not
previously applied to reduce any such payment.
(b) If the Executive's employment is terminated by his death or
Disability, the Company shall pay (i) any base salary due to the Executive
under Section 6(a) through the date of such termination and (ii) an amount
equal to the Target Bonus he would have received for the fiscal year that
ends on or immediately after the Date of Termination, assuming the Company
achieved the lowest target level for which a bonus is paid under the plan
described in Section 6(b), prorated for the period beginning on the first
day of the fiscal year in which occurs the Date of Termination through the
Date of Termination. In addition, if the Executive's employment is
terminated by his death, the Company shall continue to pay to his estate
his salary for an additional six months at the rate then in effect.
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay
the Executive his base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, and the Company shall
have no further obligations to the Executive under this Agreement.
(d) If following a Change in Control (A) the Company terminates the
Executive's employment without Cause, or (B) the Executive terminates his
employment for Good Reason, then
(i) the Company shall pay the Executive his base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any,
to which the Executive is entitled as of the Date of Termination under
any compensation plan or program of the Company, at the time such
payments are due;
(ii) in lieu of any further salary payments to the Executive
for periods subsequent to the Date of Termination, the Company shall
pay as liquidated damages to the Executive an aggregate amount equal
to the product of (A) the sum of (1) the Executive's base salary at
the rate in effect of the Date of Termination and (2) the average of
the annual bonuses actually paid to the Executive by the Company with
respect to the two (2) fiscal years which immediately precede the year
of the Term which the Date of Termination occurs
7
<PAGE>
provided if there was bonus or bonuses paid to the Executive with
--------
respect only to one fiscal year that immediately precedes the year
within the Term in which the Date of Termination occurs, then such
single year's bonus or bonuses shall be utilized in the calculation
pursuant to this clause (2), provided, further, that for purposes of
-------- -------
this Agreement, if the Date of Termination occurs before the end of
the first fiscal year that ends after the Effective Date, the amount
of the bonus paid by the Company to the Executive shall be deemed to
be the Target Bonus and (B) the number one and one-half (1.5);
(iii) the Company shall pay the Executive an amount equal to the
prorated Target Bonus that would have been paid for the period
beginning on the first day of the fiscal year in which the Date of
Termination occurs;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active Employee, under the Company's life insurance, medical,
health and similar welfare benefit plans (other then group disability
benefits) for a period of eighteen (18) months. Benefits otherwise
receivable by the Executive pursuant to this Section 12(d)(iv) shall
be reduced to the extent comparable benefits are actually received by
the Executive from a subsequent employer during the period during
which the Company is required to provide such benefits, and the
Executive shall report any such benefits actually received by him to
the Company; and
(v) the payments provided for in this Section 12(d) (other
than Section 12(d)(iv)) shall be made not later than the thirtieth
(30th) day following the Date of Termination, provided, however, that
if the amounts of such payments, and the limitation on such payments
set forth in Section 16 hereof, cannot be finally determined on or
before such day, the Company shall pay to the Executive on such day an
estimate, as determined in good faith by the Company, of the minimum
amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code (as defined in
Section 16)) as soon as the amount thereof can be determined but in no
event later than the sixtieth (60th) day after the Date of
Termination. In the event that the amount of the estimated payments
exceeds the amount determined by the Company within six (6) months
after payment to have been due, such excess shall constitute a loan by
the Company to the Executive, payable no later than the thirtieth
(30th) business day after demand by the Company (together with
interest at the rate provided in section 1274(b)(2)(B) of the Code).
At the time that payments are made under this Section 12(d), the
Company shall provide the Executive with a written statement setting
forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or
other advice the Company has received from outside counsel, auditors
or consultants (and any such opinions or advice which are in writing
shall be attached to the statement).
8
<PAGE>
(vi) If the Executive continues to be employed by the Company
for one (1) year after a Change of Control and has not by such time
given Notice of Termination for Good Reason, the Executive will have
waived his right to exercise his rights under Section 12(d) hereof
with respect to any act or failure to act which constitutes Good
Reason.
(e) If the Executive terminates his employment under clause (C) of
Section 11(d) hereof or, prior to any Change of Control, the Company
terminates the Executive's employment without Cause, then
(i) the Company shall pay the Executive his base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any,
to which the Executive is entitled as of the Date of Termination under
any compensation plan or program of the Company, at the time such
payments are due;
(ii) the Company shall pay to the Executive the greater of
either (A) the remaining amount of base salary owed for the Term; or
(B) an aggregate amount equal to the sum of (1) six (6) months of the
Executive's base salary at the rate in effect as of the Date of
Termination plus (2) one (1) additional month of the Executive's base
salary at such rate for each full year of service beyond the first
anniversary of this Agreement, not to exceed twelve (12) months of
base salary payments; such amount to be paid in substantially equal
monthly installments during the period commencing with the month
immediately following the month in which the Date of Termination
occurs or in a lump sum payment, as decided by the Company;
(iii) the Company shall pay the Executive his Target Bonus
prorated for the period beginning on the first day of the fiscal year
in which occurs the Date of Termination through the Date of
Termination;
(iv) the Company shall continue coverage for the Executive, on
the same terms and conditions as would be applicable if the Executive
were an active employee, under the Company's life insurance, medical,
health, and similar welfare benefit plans (other then group
disability) for a period not to exceed the number of months the
Executive will be paid under Section 12(e)(ii) beginning on the Date
of Termination;
(v) benefits otherwise receivable by the Executive pursuant to
clause (iv) of this Section 12(e) shall be reduced to the extent
comparable benefits are actually received by the Executive from a
subsequent employer during the period which the Company is required to
provide such benefits, and the Executive shall report any such
benefits actually received by him to the Company;
9
<PAGE>
(vi) the payments made to the Executive under Section 12(e)
hereof will be reduced by the amount of payments provided for by any
subsequent employer of the executive for a position obtained after the
Date of Termination.
(f) If the Executive experiences a termination under Section 12(d) or
12(e) hereof, until the Executive finds another full-time position or for 6
months, whichever is earlier, the Company shall provide the Executive with
professional outplacement services of the Executive's choosing and shall
reimburse the Executive documented incidental outplacement expenses
directly related to the Executive's job search such as resume mailing,
interview trips, and clerical support, subject to a maximum cost of $10,000
for such outplacement services and incidental expenses. The Executive's
choice of professional outplacement services is subject to the Company's
reasonable prior approval. If the Company has not approved or disapproved
of the Executive's choice within ten (10) business days of receiving notice
of such choice, the Company will be deemed to have given is approval. Any
approval by the Company will be in writing and will state the basis for
such disapproval. The Executive will not be entitled to receive cash or
lieu of the professional outplacement services provided pursuant to this
Section.
(g) If the Executive shall terminate his employment under clause (B)
of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his
base salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, and the Company shall have no further
obligations to the Executive under this Agreement.
(h) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, and, except as provided in Sections 12(e) hereof, the amount of
any payment or benefit provided for in this Section 12 shall not be reduced
by any compensation earned by the Executive as the result of employment by
another employer or by retirement benefits.
(i) Release. Prior to making any payment pursuant to Sections
-------
12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is
applicable, the Company shall have the right to require the Executive to
sign, and the Executive hereby agrees to sign, an agreement to be bound by
the terms of Section 15 of this Agreement and a waiver of all claims the
Executive may have (including any claims under the Age Discrimination in
Employment Act), and the Company may withhold payment of such amount until
the period during which the Executive may revoke such waiver (normally
seven days) has elapsed.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid
and binding agreement of the Company enforceable against it in accordance
with its terms.
10
<PAGE>
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement. The Executive agrees
and covenants that he will obtain, and submit to, such physical
examinations as may be necessary to facilitate the Company obtaining an
insurance policy for its benefit insuring the life of the Executive.
14. Successors: Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
(b) This Agreement is a personal contract and the rights and
interests of the Executive hereunder may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him, except as otherwise
expressly permitted by the provisions of this Agreement. This Agreement
shall inure to the benefit of and be enforceable by the Executive and his
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Executive should die
while any amount would still be payable to him hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his
devisee, legatee or other designee or, if there is no such designee, to his
estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that he will not at any time
during or at any time after the end of the Term, directly or indirectly,
use for his own account, or disclose to any person, firm or corporation,
other than authorized officers, directors and employees of the Company or
its subsidiaries, Confidential Information (as hereinafter defined) that is
treated as trade secrets by the Company and will not at any time during or
for a period equal to the number of payments which are being made under
Section 12(e) hereof directly or indirectly, use for his own account, or
disclose to any person, firm or corporation, other than authorized
officers, directors and employees of the Company or its subsidiaries, any
other Confidential Information. As used herein, "Confidential Information"
of the Company means information of any kind, nature or description which
is disclosed to or otherwise known to the Executive as a direct or indirect
consequence of his association with the Company, which information is not
generally known to the public or in the business in which the Company is
engaged or which information relates to specific investment opportunities
within the scope of the Company's business which were considered by the
Executive or the Company during the term of this Agreement. Confidential
Information that is treated as confidential trade secrets by the Company
shall include, but not be limited to, strategic operating plans and
budgets, policy and procedure manuals, computer programs, financial forms
and information, patient or resident lists and accounts, supplier
information, accounting forms and procedures, personnel policies,
11
<PAGE>
information pertaining to the salaries, positions and performance reviews
of the Company's employees, information on the methods of the Company's
operations, research and data developed by or for the benefit of the
Company and information relating to revenues, costs, profits and the
financial condition of the Company. During the Term and for a period of two
years following the termination of the Executive's employment, the
Executive shall not induce any employee of the Company or its subsidiaries
to terminate his or her employment by the Company or its subsidiaries in
order to obtain employment by any person, firm or corporation affiliated
with the Executive.
(b) The Executive covenants and agrees that any information,
materials, ideas, discoveries, techniques or programs developed or
discovered by the Executive in connection with the performance of his
duties hereunder shall remain the sole and exclusive property of the
Company and, to the extent it constitutes Confidential Information, shall
be subject to the covenants contained in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term and, if
the Executive's employment is terminated by the Executive for other than
Good Reason, for a period of two (2) years following the termination of the
Executive's employment, the Executive shall not, directly or indirectly,
own an interest in, operate, join, control, or participate as a partner,
director, principal, officer, or agent of, enter into the employment of, or
act as a consultant to, in any case in which he has control or supervision
over a significant portion of any entity (i) whose principal business is
the operation of one or more skilled nursing facilities or (ii) which
operates a skilled nursing business that is material in relation to the
Company's comparable business and (iii) in either case, which derives at
least 10% of its skilled nursing facility revenue from facilities which are
located within 35 miles of centers or facilities operated by the Company.
Notwithstanding anything herein to the contrary, the foregoing provisions
of this Section 15(c) shall not prevent the Executive from acquiring
securities representing not more than 5% of the outstanding voting
securities of any publicly held corporation.
(d) Without limiting the right of the Company to pursue all other
legal and equitable remedies available for violation by the Executive of
the covenants contained in this Section 15, it is expressly agreed by the
Executive and the Company that such other remedies cannot fully compensate
the Company for any such violation and that the Company shall be entitled
to injunctive relief, without the necessity of proving actual monetary
loss, to prevent any such violation or any continuing violation thereof.
Each party intends and agrees that if in any action before any court or
agency legally empowered to enforce the covenants contained in this Section
15, any term, restriction, covenant or promise contained herein is found to
be unreasonable and accordingly unenforceable, then such term, restriction,
covenant or promise shall be deemed modified to the extent necessary to
make it enforceable by such court or agency. The covenants contained in
Section 15 shall survive the conclusion of the Executive's employment by
the Company.
12
<PAGE>
16. Prohibition on Parachute Payments.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement, any
payment or benefit received or to be received by the Executive in
connection with a Change in Control of the Company or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company, any person
whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (all such payments and benefits, including,
without limitation, base salary and bonus payments, being hereinafter
called "Total Payments") would not be deductible (in whole or in part), by
the Company, an affiliate or any Person making such payment or providing
such benefit as a result of section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), then, to the extent necessary to make such
portion of the Total Payments deductible (and after taking into account any
reduction in the Total Payments provided by reason of section 280G of the
Code in such other plan, arrangement or agreement), (A) such cash payments
shall first be reduced (if necessary, to zero), and (B) all other non-cash
payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation (i) no portion of the
Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the Date of Termination shall be
taken into account, (ii) no portion of the Total Payments shall be taken
into account which in the opinion of tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Executive does not
constitute a "parachute payment" within the meaning of section 280G(b)(2)
of the Code, including by reason of section 280G(b)(4)(A) of the Code,
(iii) such payments shall be reduced only to the extent necessary so that
the Total Payments (other than those referred to in clauses (i) or (ii)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4)(B) of the Code or are
otherwise not subject to disallowance as deductions, in the opinion of the
tax counsel referred to in clause (ii); and (iv) the value of any non-cash
benefit or any deferred payment or benefit included in the Total Payments
shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of this
Section 16, the aggregate "parachute payments" paid to or for the
Executive's benefit are in an amount that would result in any portion of
such "parachute payments" not being deductible by reason of section 280G of
the Code, then the Executive shall have an obligation to pay the Company
upon demand an amount equal to the sum of (i) the excess of the aggregate
"parachute payments" paid to or for the Executive's benefit over the
aggregate "parachute payments" that could have been paid to or for the
Executive's benefit without any portion of such "parachute payments" not
being deductible by reason of section 280G of the Code; and (ii) interest
on the amount set forth in clause (i) of this sentence at the rate provided
in section 1274(b)(2)(B) of the Code from the date of the Executive's
receipt of such excess until the date of such payment.
13
<PAGE>
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification. Waiver. No provision of this Agreement may
---------------------------------
be amended or waived unless such amendment or waiver is agreed to in writing,
signed by the Executive and by a duly authorized officer of the Company. No
waiver by any party hereto of any breach by another party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Notices. Any notice to be given hereunder shall be in writing and
-------
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Executive at: [FILL IN ADDRESS]
To the Company at: Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
20. Severability. If any provision of this Agreement or the application of
------------
any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.
21. Survivorship. The respective rights and obligations of the parties
------------
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
14
<PAGE>
22. Governing Law: Attorney's Fees.
------------------------------
(a) This Agreement will be governed by and construed in accordance
with the laws of the State of Georgia, without regard to its conflicts of
laws principles.
(b) The prevailing party in any dispute arising out of this Agreement
shall be entitled to be paid its reasonable attorney's fees incurred in
connection with such dispute from the other party to such dispute.
23. Dispute Resolution. The Executive and the Company shall not initiate
------------------
legal proceedings relating in any way to this Agreement or to the Executive's
employment or termination from employment with the Company until thirty (30)
days after the party against whom the claim is made ("respondent") receives
written notice from the claiming party of the specific nature of any purported
claims and the amount of any purported damages attributable to each such claim.
The Executive and the Company further agree that if respondent submits the
claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty (30) day period, the claiming
party may not institute arbitration or other legal proceedings against
respondent until the earlier of: (a) the completion of good-faith mediation
efforts or (b) 90 days after the date on which the respondent received written
notice of the claimant's claim(s); provided, however, that nothing in this
Section 23 shall prohibit the Company from pursuing injunctive or other
equitable relief against the Executive prior to, contemporaneous with, or
subsequent to invoking or participating in these dispute resolution processes.
The Company shall pay the cost of the mediator.
24. Headings. All descriptive headings of sections and paragraphs in
--------
this Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
25. Withholdings. All payments to the Executive under this Agreement
------------
shall be reduced by all applicable withholding required by federal, state or
local tax laws.
26. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
27. Release of Prior Employment Agreement. The Executive hereby releases
-------------------------------------
the Company and any predecessor company (including GranCare, Inc. and Living
Centers of America, Inc.) from all obligations under the employment agreement
entered into by the Executive and [GranCare, Inc. or Living Centers of America,
Inc.] dated ___________, 19__, including any obligation to pay severance or
other post-termination benefits, which shall be upon the execution hereof
terminated and of no further force or effect; provided, however, that in no
event shall this release affect the Executive's rights under any grant or award
under any stock option or stock award plans of the Company and any predecessor
company (including GranCare, Inc. and Living Centers of America, Inc.).
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
BY:________________________________
NAME:______________________________
TITLE:_____________________________
EXECUTIVE
___________________________________
16
<PAGE>
EXHIBIT 10.17
PARAGON HEALTH NETWORK, INC.
1997 LONG-TERM INCENTIVE PLAN
I. INTRODUCTION
1.1 PURPOSES. The purposes of the Paragon Health Network, Inc. 1997
--------
Long-Term Incentive Plan (the "Plan") are (i) to align the interests of the
----
stockholders of Living Centers of America, Inc. (the "Company") and the
-------
recipients of awards under this Plan by increasing the proprietary interest of
such recipients in the Company's growth and success, (ii) to advance the
interests of the Company by attracting and retaining officers, other employees,
directors (including Non-Employee Directors), and consultants and (iii) to
motivate such persons to act in the long-term best interests of the Company and
its stockholders.
1.2 CERTAIN DEFINITIONS.
"AGREEMENT" shall mean the written agreement evidencing an award hereunder
---------
between the Company and the recipient of such award.
"BOARD" shall mean the Board of Directors of the Company.
-----
"BONUS STOCK" shall mean shares of Common Stock which are not subject to a
-----------
Restriction Period or Performance Measures.
"BONUS STOCK AWARD" shall mean an award of Bonus Stock under this Plan.
-----------------
"CHANGE IN CONTROL" shall have the meaning set forth in Section 6.8(b).
-----------------
"CAUSE" shall mean (i) the failure or refusal by the participant to perform
-----
his or her normal job duties (other than any such failure resulting from the
participant's incapacity due to physical or mental illness), which has not
ceased within ten (10) days after a written demand for substantial performance
is delivered to the participant by the Chief Executive Officer of the Company or
by the Board, which demand identifies the manner in which the Company believes
that the participant has not performed such duties, (ii) the engaging by the
participant in willful misconduct or an act of moral turpitude which is
materially injurious to the Company, monetarily or otherwise or (iii) the
conviction of the participant of, or the entering of a plea of nolo contendre
by, the participant with respect to, a felony.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
----
"COMMITTEE" shall mean the Committee designated by the Board, consisting of
---------
two or more members of the Board, each of whom shall be (i) Non-Employee
Director" within the meaning of Rule 16b-3 under the Exchange Act and (ii) an
"outside director" within the meaning of Section 162(m) of the Code.
<PAGE>
"COMMON STOCK" shall mean the common stock, $.01 par value, of the Company.
------------
"DISABILITY" shall mean the inability of the holder of an award to perform
----------
substantially such holder's duties and responsibilities for a continuous period
of at least six months, as determined solely by the Committee.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
-----
amended.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
------------
"FAIR MARKET VALUE" shall mean the closing transaction price of a share of
-----------------
Common Stock as reported in the New York Stock Exchange Composite Transactions
on the date as of which such value is being determined or, if there shall be no
reported transaction[s] for such date, on the next preceding date for which
transactions were reported; provided, however, that Fair Market Value may be
determined by the Committee by whatever means or method as the Committee, in the
good faith exercise of its discretion, shall at such time deem appropriate.
"FREE-STANDING SAR" shall mean an SAR which is not issued in tandem with,
-----------------
or by reference to, an option, which entitles the holder thereof to receive,
upon exercise, shares of Common Stock (which may be Restricted Stock), cash or a
combination thereof with an aggregate value equal to the excess of the Fair
Market Value of one share of Common Stock on the date of exercise over the base
price of such SAR, multiplied by the number of such SARs which are exercised.
"INCENTIVE STOCK OPTION" shall mean an option to purchase shares of Common
----------------------
Stock that meets the requirements of Section 422 of the Code, or any successor
provision, which is intended by the Committee to constitute an Incentive Stock
Option.
"MATURE SHARES" shall mean previously-acquired shares of Common Stock for
-------------
which the holder thereof has good title, free and clear of all liens and
encumbrances and which such holder has either (i) held for at least six months
or (ii) purchased on the open market.
"NON-EMPLOYEE DIRECTOR" shall mean any director of the Company who is not
---------------------
an officer or employee of the Company or any Subsidiary.
"NON-STATUTORY STOCK OPTION" shall mean an option to purchase shares of
--------------------------
Common Stock that is not an Incentive Stock Option.
"PERFORMANCE MEASURES" shall mean the criteria and objectives, established
--------------------
by the Committee, which shall be satisfied or met (i) as a condition to the
exercisability of all or a portion of an option or SAR, (ii) as a condition to
the grant of a Stock Award or (iii) during the applicable Restriction Period or
Performance Period as a condition to the holder's receipt, in the case of a
Restricted Stock Award, of the shares of Common Stock subject to such award, or,
in the case of a Performance Share Award, of the shares of Common Stock subject
to such award
<PAGE>
and/or of payment with respect to such award. The Committee may amend or adjust
the Performance Measures or other terms and conditions of an outstanding award
in recognition of unusual or nonrecurring events affecting the Company or its
financial statements or changes in law or accounting, but only to the extent
such adjustment would not cause any portion of the award, upon payment, or the
option, upon exercise, to be nondeductible pursuant to section 162(m) of the
Code. Such criteria and objectives may include one or more of the following: the
attainment by a share of Common Stock of a specified Fair Market Value for a
specified period of time, earnings per share, return to stockholders (including
dividends), return on equity, earnings of the Company, revenues, EBITDA,
EBITDAR, operating income; net income; return on assets; economic value added;
cash flows market share, census, payor mix cash flow or cost reduction goals, or
any combination of the foregoing. If the Committee desires that compensation
payable pursuant to any award subject to Performance Measures be "qualified
performance-based compensation" within the meaning of Section 162(m) of the
Code, the Performance Measures (i) shall be established by the Committee no
later than the end of the first quarter of the Performance Period or Restriction
Period, as applicable (or such other time designated by the Internal Revenue
Service) and (ii) shall satisfy all other applicable requirements imposed under
Treasury Regulations promulgated under Section 162(m) of the Code, including the
requirement that such Performance Measures be stated in terms of an objective
formula or standard. Before any cash or shares of Common Stock are paid to any
holder of an award subject to Performance Measures under this Plan, the
Committee shall certify in writing that the applicable Performance Measures were
in fact satisfied.
"PERFORMANCE PERIOD" shall mean any period designated by the Committee
------------------
during which the Performance Measures applicable to a Performance Share Award
shall be measured.
"PERFORMANCE SHARE" shall mean a right, contingent upon the attainment of
-----------------
specified Performance Measures within a specified Performance Period, to receive
one share of Common Stock, which may be Restricted Stock, or in lieu of all or a
portion thereof, the Fair Market Value of such Performance Share in cash.
"PERFORMANCE SHARE AWARD" shall mean an award of Performance Shares under
-----------------------
this Plan.
"PERMANENT AND TOTAL DISABILITY" shall have the meaning set forth in
------------------------------
Section 22(e)(3) of the Code or any successor thereto.
"RESTRICTED STOCK" shall mean shares of Common Stock which are subject to a
----------------
Restriction Period and shall include Directors Restricted Stock.
"RESTRICTION PERIOD" shall mean any period designated by the Committee
------------------
during which the Common Stock subject to a Restricted Stock Award may not be
sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or
disposed of, except as provided in this Plan or the Agreement relating to such
award.
"SAR" shall mean a stock appreciation right which may be a Free-Standing
---
SAR or a Tandem SAR.
<PAGE>
"STOCK AWARD" shall mean an award of Restricted Stock or a Bonus Stock.
-----------
"SUBSIDIARY" shall have the meaning set forth in Section 1.4.
----------
"TANDEM SAR" shall mean an SAR which is granted in tandem with, or by
----------
reference to, an option (including a Non-Statutory Stock Option granted prior to
the date of grant of the SAR), which entitles the holder thereof to receive,
upon exercise of such SAR and surrender for cancellation of all or a portion of
such option, shares of Common Stock (which may be Restricted Stock), cash or a
combination thereof with an aggregate value equal to the excess of the Fair
Market Value of one share of Common Stock on the date of exercise over the base
price of such SAR, multiplied by the number of shares of Common Stock subject to
such option, or portion thereof, which is surrendered.
1.3 ADMINISTRATION. This Plan shall be administered by the Committee. The
--------------
Committee shall have the authority to determine eligibility for awards hereunder
and to determine the form, amount and timing of each award to such persons and,
if applicable, the number of shares of Common Stock, the number of SARs and the
number of Performance Shares subject to such an award, the exercise price or
base price associated with the award, the time and conditions of exercise or
settlement of the award and all other terms and conditions of the award,
including, without limitation, the form of the Agreement evidencing the award.
The Committee may, in its sole discretion and for any reason at any time,
subject to the requirements imposed under Section 162(m) of the Code and
regulations promulgated thereunder in the case of an award intended to be
qualified performance-based compensation, take action such that (i) any or all
outstanding options and SARs shall become exercisable in part or in full, (ii)
all or a portion of the Restriction Period applicable to any outstanding
Restricted Stock Award shall lapse, (iii) all or a portion of the Performance
Period applicable to any outstanding Performance Share Award shall lapse, and
(iv) the Performance Measures applicable to any outstanding Restricted Stock
Award (if any) and to any outstanding Performance Share Award shall be deemed to
be satisfied at the maximum or any other level.
The Committee shall, subject to the terms of this Plan, interpret this Plan
and the application thereof, establish rules and regulations it deems necessary
or desirable for the administration of this Plan and may impose, incidental to
the grant of an award, conditions with respect to the award, such as limiting
competitive employment or other activities. All such interpretations, rules,
regulations and conditions shall be final, binding and conclusive.
The Committee shall keep minutes of its meetings and of action taken by it
without a meeting. A majority of the Committee shall constitute a quorum. The
acts of the Committee shall be either (i) acts of a majority of the members of
the Committee present at any meeting at which a quorum is present or (ii) acts
approved in writing by all of the members of the Committee without a meeting.
1.4 ELIGIBILITY. Participants in this Plan shall consist of such
-----------
directors (including Non-Employee Directors), officers, other employees or
persons expected to become employees, and consultants of the Company or its
subsidiaries from time to time (individually a "Subsidiary"
----------
<PAGE>
and collectively the "Subsidiaries") as the Committee in its sole discretion may
------------
select from time to time. For purposes of this Plan, references to employment
shall also mean an agency or independent contractor relationship and references
to employment by the Company shall also mean employment by a Subsidiary. Non-
Employee Directors of the Company shall be eligible to participate in this Plan
in accordance with Section V.
1.5 SHARES AVAILABLE. Subject to adjustment as provided in Section 6.7,
----------------
2,000,000 shares of Common Stock shall be available under this Plan, reduced by
the sum of the aggregate number of shares of Common Stock which become subject
to outstanding options, including Directors Options, outstanding Free-Standing
SARs, outstanding Stock Awards and outstanding Performance Shares. To the
extent that shares of Common Stock subject to an outstanding option (except to
the extent shares of Common Stock are issued or delivered by the Company in
connection with the exercise of a Tandem SAR), Free-Standing SAR, Stock Award or
Performance Share are not issued or delivered by reason of the expiration,
termination, cancellation or forfeiture of such award or by reason of the
delivery or withholding of shares of Common Stock to pay all or a portion of the
exercise price of an award, if any, or to satisfy all or a portion of the tax
withholding obligations relating to an award, then such shares of Common Stock
shall again be available under this Plan.
To the extent necessary to qualify an award hereunder as "qualified
performance-based compensation" under Section 162(m) of the Code and the rules
and regulations thereunder, the maximum number of shares of Common Stock with
respect to which options or SARs, Stock Awards or Performance Share Awards or a
combination thereof may be granted during any calendar year to any person shall
be 1,000,000, subject to adjustment as provided in Section 6.7. Grants of
options, SARs, Stock Awards or Performance Share Awards under this Plan that are
canceled shall count toward the maximum stated in the preceding sentence.
II. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
2.1 STOCK OPTIONS. The Committee may, in its discretion, grant Incentive
-------------
Stock Options or Non-Statutory Stock Options. An Incentive Stock Option may not
be granted to any person who is not an employee of the Company or any parent or
subsidiary (as defined in Section 424 of the Code). Each Incentive Stock Option
shall be granted within ten years of the date this Plan was adopted by the
Board. To the extent that the aggregate Fair Market Value (determined as of the
date of grant) of shares of Common Stock with respect to which options
designated as Incentive Stock Options are exercisable for the first time by a
participant during any calendar year (under this Plan or any other plan of the
Company, or any parent or subsidiary as defined in Section 424 of the Code)
exceeds the amount ($100,000 as of the date hereof) established by the Code,
such options shall constitute Non-Statutory Stock Options.
Options shall be subject to the following terms and conditions and shall
contain such additional terms and conditions, not inconsistent with the terms of
this Plan, as the Committee shall deem advisable:
(a) Number of Shares and Purchase Price. The number of shares of Common
-----------------------------------
Stock subject to an option and the purchase price per share of Common Stock
purchasable upon
<PAGE>
exercise of the option shall be determined by the Committee; provided, however,
that the purchase price per share of Common Stock purchasable upon exercise of
an Incentive Stock Option shall not be less than 100% of the Fair Market Value
of a share of Common Stock on the date of grant of such option; provided
further, that if an Incentive Stock Option shall be granted to any person who,
at the time such option is granted, owns capital stock possessing more than ten
percent of the total combined voting power of all classes of capital stock of
the Company (or of any parent or subsidiary as defined in Section 424 of the
Code) (a "Ten Percent Holder"), the purchase price per share of Common Stock
------------------
shall be the price (currently 110% of Fair Market Value) required by the Code in
order to constitute an Incentive Stock Option.
(b) Option Period and Exercisability. The period during which an option
--------------------------------
may be exercised shall be determined by the Committee; provided, however, that
no Incentive Stock Option shall be exercised later than ten years after its date
of grant; provided further, that if an Incentive Stock Option shall be granted
to a Ten Percent Holder, such option shall not be exercised later than five
years after its date of grant. The Committee may, in its discretion, establish
Performance Measures which shall be satisfied or met as a condition to the grant
of an option or to the exercisability of all or a portion of an option. The
Committee shall determine whether an option shall become exercisable in full at
the time of grant or be subject to a vesting schedule determined by the
Committee. An exercisable option, or portion thereof, may be exercised only with
respect to whole shares of Common Stock.
(c) Method of Exercise. An option may be exercised (i) by giving written
------------------
notice to the Company specifying the number of whole shares of Common Stock to
be purchased and accompanied by payment therefor in full (or arrangement made
for such payment to the Company's satisfaction) either (A) in cash, (B) by
delivery (either actual delivery or by attestation procedures established by the
Company) of Mature Shares having an aggregate Fair Market Value, determined as
of the date of exercise, equal to the aggregate purchase price payable by reason
of such exercise, (C) by authorizing the Company to withhold whole shares of
Common Stock which would otherwise be delivered upon exercise of the option
having an aggregate Fair Market Value, determined as of the date of exercise,
equal to the purchase price (D) in cash by a broker-dealer acceptable to the
Company to whom the optionee has submitted an irrevocable notice of exercise or
(E) a combination of (A) and (B), in each case to the extent set forth in the
Agreement relating to the option, (ii) if applicable, by surrendering to the
Company any Tandem SARs which are cancelled by reason of the exercise of the
option and (iii) by executing such documents as the Company may reasonably
request. The Company shall have sole discretion to disapprove of an election
pursuant to any of clauses (B)-(E) in subsection (i) hereof. Any fraction of a
share of Common Stock which would be required to pay such purchase price shall
be disregarded and the remaining amount due shall be paid in cash by the
optionee. No certificate representing Common Stock shall be delivered until the
full purchase price therefor has been paid (or arrangement made for such payment
to the Company's satisfaction).
2.2 STOCK APPRECIATION RIGHTS. The Committee may, in its discretion,
-------------------------
grant SARs to such eligible persons as may be selected by the Committee. The
Agreement relating to an SAR shall specify whether the SAR is a Tandem SAR or a
Free-Standing SAR.
<PAGE>
SARs shall be subject to the following terms and conditions and shall contain
such additional terms and conditions, not inconsistent with the terms of this
Plan, as the Committee shall deem advisable:
(a) Number of SARs and Base Price. The number of SARs subject to an award
-----------------------------
shall be determined by the Committee. Any Tandem SAR related to an Incentive
Stock Option shall be granted at the same time that such Incentive Stock Option
is granted. The base price of a Tandem SAR shall be the purchase price per share
of Common Stock of the related option. The base price of a Free-Standing SAR
shall be determined by the Committee; provided, however, that such base price
shall not be less than 100% of the Fair Market Value of a share of Common Stock
on the date of grant of such SAR.
(b) Exercise Period and Exercisability. The Agreement relating to an award
----------------------------------
of SARs shall specify whether such award may be settled in shares of Common
Stock (including shares of Restricted Stock) or cash or a combination thereof.
The period for the exercise of an SAR shall be determined by the Committee;
provided, however, that no Tandem SAR shall be exercised later than the
expiration, cancellation, forfeiture or other termination of the related option.
The Committee may, in its discretion, establish Performance Measures which shall
be satisfied or met as a condition to the grant of an SAR or to the
exercisability of all or a portion of an SAR. The Committee shall determine
whether an SAR may be exercised in full at the time of grant or be subject to a
vesting schedule determined by the Committee. An exercisable SAR, or portion
thereof, may be exercised, in the case of a Tandem SAR, only with respect to
whole shares of Common Stock and, in the case of a Free-Standing SAR, only with
respect to a whole number of SARs. If an SAR is exercised for shares of
Restricted Stock, a certificate or certificates representing such Restricted
Stock shall be issued in accordance with Section 3.2(c) and the holder of such
Restricted Stock shall have such rights of a stockholder of the Company as
determined pursuant to Section 3.2(d). Prior to the exercise of an SAR for
shares of Common Stock, including Restricted Stock, the holder of such SAR shall
have no rights as a stockholder of the Company with respect to the shares of
Common Stock subject to such SAR and shall have rights as a stockholder of the
Company in accordance with Section 6.10.
(c) Method of Exercise. A Tandem SAR may be exercised (i) by giving
------------------
written notice to the Company specifying the number of whole SARs which are
being exercised, (ii) by surrendering to the Company any options which are
canceled by reason of the exercise of the Tandem SAR and (iii) by executing such
documents as the Company may reasonably request. A Free-Standing SAR may be
exercised (i) by giving written notice to the Company specifying the whole
number of SARs which are being exercised and (ii) by executing such documents as
the Company may reasonably request.
2.3 TERMINATION OF EMPLOYMENT OR SERVICE. (a) Non-Statutory Stock Options
------------------------------------ ---------------------------
and SARs. All of the terms relating to the exercise, cancellation or other
- --------
disposition of a Non-Statutory Stock Option or SAR upon a termination of
employment with or service to the Company of the holder of such Non-Statutory
Stock Option or SAR, as the case may be, whether by reason of Disability,
retirement, death, Cause or other termination, shall be determined by the
Committee. Such determination shall be made at the time of the grant of such
Non-Statutory
<PAGE>
Stock Option or SAR, as the case may be, and shall be specified in the Agreement
relating to such Non-Statutory Stock Option or SAR.
(a) Termination of Employment - Incentive Stock Options. Unless otherwise
---------------------------------------------------
specified in the Agreement evidencing an option, but subject to Section 2.1(b),
if the employment with the Company of a holder of an Incentive Stock Option
terminates by reason of Permanent and Total Disability or death, each Incentive
Stock Option held by such optionee shall be exercisable only to the extent that
such option was exercisable on the effective date of such optionee's termination
of employment by reason of Permanent and Total Disability and may thereafter be
exercised by such optionee (or such optionee's legal representative or similar
person) until the date which is one year after the effective date of such
optionee's termination of employment by reason of Permanent and Total
Disability.
If the employment of a holder of an Incentive Stock Option is terminated by
the Company for Cause, each Incentive Stock Option held by such optionee shall
terminate automatically on the effective date of such optionee's termination of
employment. Unless otherwise specified in the Agreement evidencing an option,
but subject to Section 2.1(b), if the employment with the Company of a holder of
an Incentive Stock Option terminates for any reason other than Permanent and
Total Disability or death, or Cause, each Incentive Stock Option held by such
optionee shall be excisable only to the extent such option was exercisable on
the effective date of such optionee's termination of employment, and may
thereafter be exercised by such holder (or such holder's legal representative or
similar person) until the date which is three months after the effective date of
such optionee's termination of employment.
If the holder of an Incentive Stock Option dies during the period set forth
in the first paragraph of this Subsection (b) following termination of
employment by reason of Permanent and Total Disability, each Incentive Stock
Option held by such optionee shall be exercisable only to the extent such option
was exercisable on the date of the optionee's death and may thereafter be
exercised by the optionee's executor, administrator, legal representative,
beneficiary or similar person until the date which is one (1) year after the
date of death.
III. STOCK AWARDS
3.1 STOCK AWARDS. The Agreement relating to a Stock Award shall specify
------------
whether the Stock Award is an award of Restricted Stock or Bonus Stock.
3.2 TERMS OF STOCK AWARDS. Stock Awards shall be subject to the following
---------------------
terms and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as the Committee shall deem advisable.
(a) Number of Shares and Other Terms. The number of shares of Common Stock
--------------------------------
subject to a Restricted Stock Award or Bonus Stock Award and the Performance
Measures (if any) and Restriction Period applicable to a Restricted Stock Award
shall be determined by the Committee.
<PAGE>
(b) Vesting and Forfeiture. The Agreement relating to a Restricted Stock
----------------------
Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of this Plan, for the vesting of the
shares of Common Stock subject to such award (i) if specified Performance
Measures are satisfied or met during the specified Restriction Period or (ii) if
the holder of such award remains continuously in the employment of or service to
the Company during the specified Restriction Period and for the forfeiture of
the shares of Common Stock subject to such award (x) if specified Performance
Measures are not satisfied or met during the specified Restriction Period or (y)
if the holder of such award does not remain continuously in the employment of or
service to the Company during the specified Restriction Period.
Bonus Stock Awards shall not be subject to any Performance Measures or
Restriction Periods.
(c) Share Certificates. During the Restriction Period, a certificate or
------------------
certificates representing a Restricted Stock Award may be registered in the
holder's name and may bear a legend, in addition to any legend which may be
required pursuant to Section 6.6, indicating that the ownership of the shares of
Common Stock represented by such certificate is subject to the restrictions,
terms and conditions of this Plan and the Agreement relating to the Restricted
Stock Award. All such certificates shall be deposited with the Company, together
with stock powers or other instruments of assignment (including a power of
attorney), each endorsed in blank with a guarantee of signature if deemed
necessary or appropriate by the Company, which would permit transfer to the
Company of all or a portion of the shares of Common Stock subject to the
Restricted Stock Award in the event such award is forfeited in whole or in part.
Upon termination of any applicable Restriction Period (and the satisfaction or
attainment of applicable Performance Measures), or upon the grant of a Bonus
Stock Award, in each case subject to the Company's right to require payment of
any taxes in accordance with Section 6.5, a certificate or certificates
evidencing ownership of the requisite number of shares of Common Stock shall be
delivered to the holder of such award.
(d) Rights with Respect to Restricted Stock Awards. Unless otherwise set
----------------------------------------------
forth in the Agreement relating to a Restricted Stock Award, and subject to the
terms and conditions of a Restricted Stock Award, the holder of such award shall
have all rights as a stockholder of the Company, including, but not limited to,
voting rights, the right to receive dividends and the right to participate in
any capital adjustment applicable to all holders of Common Stock; provided,
however, that a distribution with respect to shares of Common Stock, other than
a regular cash dividend, shall be deposited with the Company and shall be
subject to the same restrictions as the shares of Common Stock with respect to
which such distribution was made.
3.3 TERMINATION OF EMPLOYMENT OR SERVICE. All of the terms relating to
------------------------------------
the satisfaction of Performance Measures and the termination of the Restriction
Period relating to a Restricted Stock Award, or any cancellation or forfeiture
of such Restricted Stock Award upon a termination of employment with or service
to the Company of the holder of such Restricted Stock Award, whether by reason
of Disability, retirement, death, Cause or other termination, shall be set forth
in the Agreement relating to such Restricted Stock Award.
<PAGE>
IV. PERFORMANCE SHARE AWARDS
4.1 PERFORMANCE SHARE AWARDS. The Committee may, in its discretion, grant
------------------------
Performance Share Awards to such eligible persons as may be selected by the
Committee.
4.2 TERMS OF PERFORMANCE SHARE AWARDS. Performance Share Awards shall be
---------------------------------
subject to the following terms and conditions and shall contain such additional
terms and conditions, not inconsistent with the terms of this Plan, as the
Committee shall deem advisable.
(a) Number of Performance Shares and Performance Measures. The number of
-----------------------------------------------------
Performance Shares subject to any award and the Performance Measures and
Performance Period applicable to such award shall be determined by the
Committee.
(b) Vesting and Forfeiture. The Agreement relating to a Performance Share
----------------------
Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of this Plan, for the vesting of such
award, if specified Performance Measures are to be satisfied or met during the
specified Performance Period, and for the forfeiture of such award if specified
Performance Measures are not satisfied or met during the specified Performance
Period.
(c) Settlement of Vested Performance Share Awards. The Agreement relating
---------------------------------------------
to a Performance Share Award (i) shall specify whether such award may be settled
in shares of Common Stock (including shares of Restricted Stock) or cash or a
combination thereof and (ii) may specify whether the holder thereof shall be
entitled to receive, on a current or deferred basis, dividend equivalents, and,
if determined by the Committee, interest on or the deemed reinvestment of any
deferred dividend equivalents, with respect to the number of shares of Common
Stock subject to such award. If a Performance Share Award is settled in shares
of Restricted Stock, a certificate or certificates representing such Restricted
Stock shall be issued in accordance with Section 3.2(c) and the holder of such
Restricted Stock shall have such rights of a stockholder of the Company as
determined pursuant to Section 3.2(d). Prior to the settlement of a Performance
Share Award in shares of Common Stock, including Restricted Stock, the holder of
such award shall have no rights as a stockholder of the Company with respect to
the shares of Common Stock subject to such award and shall have rights as a
stockholder of the Company in accordance with Section 6.10.
4.3 TERMINATION OF EMPLOYMENT. All of the terms relating to the
-------------------------
satisfaction of Performance Measures and the termination of the Performance
Period relating to a Performance Share Award, or any cancellation or forfeiture
of such Performance Share Award upon a termination of employment with the
Company of the holder of such Performance Share Award, whether by reason of
Disability, retirement, death or other termination, shall be determined by the
Committee in its sole discretion and set forth in the Agreement relating to such
Performance Share Award.
<PAGE>
V. PROVISIONS RELATING TO NON-EMPLOYEE DIRECTORS
5.1 ELIGIBILITY. Each Non-Employee Director shall be granted options to
-----------
purchase shares of Common Stock in accordance with this Article V. All options
granted under this Article V shall constitute Non-Statutory Stock Options.
5.2 GRANTS OF STOCK OPTIONS. Each Non-Employee Director shall be granted
-----------------------
Non-Statutory Stock Options as follows:
(a) Time of Grant. As of the date on which a Non-Employee Director is
-------------
first elected to or begins to serve as a Non-Employee Director, the Non-Employee
Director shall receive an option to purchase 5,000 shares of Common Stock at a
purchase price per share equal to the Fair Market Value of a share of Common
Stock on the date of grant of such option. Thereafter, at each subsequent annual
meeting of the stockholders of the Company beginning with the 1999 annual
meeting, each Non-Employee Director stockholders (other than those who are first
elected or begin to serve at or within six (6) months of such annual meeting),
shall receive an option to purchase 2,000 shares of Common Stock at a purchase
price per share equal to the Fair Market Value of a share of Common Stock on the
date of grant of such option.
(b) Option Period and Exercisability. Except as otherwise provided herein,
--------------------------------
each option granted under this Article V shall not be fully exercisable during
the first year following its date of grant. Thereafter, such option may be
exercised: (i) on or after the first anniversary of its date of grant, for up to
one-quarter of the shares of Common Stock subject to such option on its date of
grant, (ii) on or after the second anniversary of its date of grant, for up to
an additional one-quarter (one-half on a cumulative basis) of the shares of
Common Stock subject to such option on its date of grant, (iii) on or after the
third anniversary of its date of grant, for up to an additional one-quarter
(three-fourths on a cumulative basis) of the shares of Common Stock subject to
such option on its date of grant and (iv) on or after the forth anniversary of
its date of grant, for up to the remaining one-quarter (all shares on a
cumulative basis ) of the shares of Common Stock subject to such option on its
date of grant. Each option granted under this Article V shall expire ten (10)
years after its date of grant. An exercisable option, or portion thereof, may be
exercised in whole or in part only with respect to whole shares of Common Stock.
Options granted under this Article V shall be exercisable in accordance with
Section 2.1(c).
5.3 TERMINATION OF DIRECTORSHIP. If a Non-Employee Director ceases to be
---------------------------
a director, the options granted to such Non-Employee Director under this Article
V that have become exercisable pursuant to Section 5.2(b), to the extent not
theretofore exercised, shall terminate on the date which is three (3) months
after the first date on which the Non-Employee Director is no longer a member of
the Board or the Board of Directors of a Subsidiary, but in no event after the
date the option would otherwise expire; provided, however, that if a Non-
Employee Director shall cease to serve as such a director by reason of
Disability or death, each option held by such Non-Employee Director shall be
fully exercisable and may be exercised for a period of one (1) year after the
date on which the Non-Employee Director ceased serving as such a director. If
the Non-Employee Director shall die within such period following the date on
which the Non-Employee Director ceased serving as such a director, such option,
to the extent
<PAGE>
not theretofore exercised, may be exercised at any time within the one (1) year
period following the date of death, but, in either case, not later than the date
the option would otherwise expire. Notwithstanding the foregoing if a Non-
Employee Director is reelected to the Board or again begins to serve prior to
the expiration of an option held by the Non-Employee Director, the option shall
be reinstated and exercisable in accordance with its original terms as if the
Non-Employee Director had not ceased to be a member of the Board.
VI. GENERAL
6.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan shall be submitted to the
-------------------------------
stockholders of the Company for approval and, if approved by the affirmative
vote of a majority of the shares of Common Stock present in person or
represented by proxy at the 1998 annual meeting of stockholders, shall become
effective as of the date of approval by the Board. This Plan shall terminate
when shares of Common Stock are no longer available for the grant of awards,
unless terminated earlier by the Board. Termination of this Plan shall not
affect the terms or conditions of any award granted prior to termination.
In the event that this Plan is not approved by the stockholders of the
Company at the 1998 annual meeting of stockholders, this Plan and any awards
granted hereunder shall be null and void.
6.2 AMENDMENTS. The Board may amend this Plan as it shall deem advisable,
----------
subject to any requirement of stockholder approval required by applicable law,
rule or regulation, including Section 162(m) and Section 422 of the Code;
provided, however, that no amendment shall be made without stockholder approval
if such amendment would (a) increase the maximum number of shares of Common
Stock available under this Plan (subject to Section 6.7), (b) effect any change
inconsistent with Section 422 of the Code or (c) extend the term of this Plan.
No amendment may adversely affect any material rights of a holder of an
outstanding award without the consent of such holder.
6.3 AGREEMENT. Each award under this Plan shall be evidenced by an
---------
Agreement setting forth the terms and conditions applicable to such award. No
award shall be valid until an Agreement is executed by the Company and the
recipient of such award and, upon execution by each party and delivery of the
Agreement to the Company, such award shall be effective as of the effective date
set forth in the Agreement.
6.4 NON-TRANSFERABILITY OF AWARDS. Unless otherwise specified in the
-----------------------------
Agreement relating to an award, no award shall be transferable other than by
will, the laws of descent and distribution or pursuant to beneficiary
designation procedures approved by the Company. Except to the extent permitted
by the foregoing sentence or the Agreement relating to an award, each award may
be exercised or settled during the holder's lifetime only by the holder or the
holder's legal representative or similar person. Except to the extent permitted
by the second preceding sentence or the Agreement relating to an award, no award
may be sold, transferred, assigned, pledged, hypothecated, encumbered or
otherwise disposed of (whether by operation of law or otherwise) or be subject
to execution, attachment or similar process. Upon any attempt to
<PAGE>
so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of
any such award, such award and all rights thereunder shall immediately become
null and void.
6.5 TAX WITHHOLDING. The Company shall have the right to require, prior
---------------
to the issuance or delivery of any shares of Common Stock or the payment of any
cash pursuant to an award made hereunder, payment by the holder of such award of
any Federal, state, local or other taxes which may be required to be withheld or
paid in connection with such award. An Agreement may provide that (i) the
Company shall withhold whole shares of Common Stock which would otherwise be
delivered to a holder, having an aggregate Fair Market Value determined as of
the date the obligation to withhold or pay taxes arises in connection with an
award (the "Tax Date"), or withhold an amount of cash which would otherwise be
--------
payable to a holder, in the amount necessary to satisfy any such obligation or
(ii) the holder may satisfy any such obligation by any of the following means:
(A) a cash payment to the Company, (B) delivery (either actual delivery or by
attestation procedures established by the Company) to the Company of Mature
Shares having an aggregate Fair Market Value, determined as of the Tax Date,
equal to the amount necessary to satisfy any such obligation, (C) authorizing
the Company to withhold whole shares of Common Stock which would otherwise be
delivered having an aggregate Fair Market Value, determined as of the Tax Date,
or withhold an amount of cash which would otherwise be payable to a holder,
equal to the amount necessary to satisfy any such obligation, (D) in the case of
the exercise of an option, a cash payment by a broker-dealer acceptable to the
Company to whom the optionee has submitted an irrevocable notice of exercise or
(E) any combination of (A), (B) and (C), in each case to the extent set forth in
the Agreement relating to the award; provided, however, that the Company shall
have sole discretion to disapprove of an election pursuant to any of clauses
(B)-(E). Any fraction of a share of Common Stock which would be required to
satisfy such an obligation shall be disregarded and the remaining amount due
shall be paid in cash by the holder.
6.6 RESTRICTIONS ON SHARES. Each award made hereunder shall be subject to
----------------------
the requirement that if at any time the Company determines that the listing,
registration or qualification of the shares of Common Stock subject to such
award upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the exercise or settlement
of such award or the delivery of shares thereunder, such award shall not be
exercised or settled and such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions not acceptable to the Company. The
Company may require that certificates evidencing shares of Common Stock
delivered pursuant to any award made hereunder bear a legend indicating that the
sale, transfer or other disposition thereof by the holder is prohibited except
in compliance with the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
6.7 ADJUSTMENT. In the event of any stock split, stock dividend,
----------
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Common Stock other than a regular cash
dividend, the number and class of securities available under this Plan, the
maximum number of shares which may be granted in any calendar year to any
person, the number and class of securities subject to each outstanding option
and the purchase price per
<PAGE>
security, the number and class of securities subject to each option to be
granted to Non-Employee Directors pursuant to Article V, the terms of each
outstanding SAR, the number and class of securities subject to each outstanding
Stock Award, and the terms of each outstanding Performance Share shall be
appropriately adjusted by the Committee, such adjustments to be made in the case
of outstanding options and SARs without an increase in the aggregate purchase
price or base price. The decision of the Committee regarding any such adjustment
shall be final, binding and conclusive. If any such adjustment would result in a
fractional security being (a) available under this Plan, such fractional
security shall be disregarded, or (b) subject to an award under this Plan, the
Company shall pay the holder of such award, in connection with the first
vesting, exercise or settlement of such award in whole or in part occurring
after such adjustment, an amount in cash determined by multiplying (i) the
fraction of such security (rounded to the nearest hundredth) by (ii) the excess,
if any, of (A) the Fair Market Value on the vesting, exercise or settlement date
over (B) the exercise or base price, if any, of such award.
6.8 CHANGE IN CONTROL.
-----------------
(a) Notwithstanding any provision in this Plan or any Agreement, in the
event of a Change in Control,
(i) all outstanding Incentive Stock Options, Non-Statutory Stock
Options and SARs shall vest and become immediately exercisable, all
restrictions on Restricted Stock shall be waived and such shares shall
become fully vested and all Performance Measures relating to Performance
Share Awards shall be deemed satisfied, and.
(ii) in a Change in Control involving the merger, consolidation or
share exchange involving the Company, the sale of substantially all the
Company's assets or any other similar transaction or any other Change in
Control in which, immediately after such Change in Control, the securities
underlying grants under the Plan will no longer be publicly-traded, each
outstanding award shall be surrendered to the Company by the holder
thereof, and each such award shall immediately be canceled by the Company,
and the holder shall receive, within ten days of the occurrence of a Change
in Control, a cash payment from the Company in (i)the amount set forth in
the immediately following sentence, unless the acquirer or surviving
company in the Change in Control agrees to assume each outstanding award or
substitute replacement awards with substantially identical terms. The
amount of payment upon a surrender of an award shall be equal to (A) in the
case of an option, the number of shares of Common Stock then subject to
such option, multiplied by the excess, if any, of (I) the highest per share
price received by stockholders of the Company in the transaction whereby
the Change in Control takes place or (II) the Fair Market Value of a share
of Common Stock on the date of occurrence of the Change in Control, if the
Change in Control occurs other than pursuant to an acquisition of shares of
Common Stock, over the purchase price per share of Common Stock subject to
the option, (B) in the case of aFree- Free-Standing SAR, the number of
shares of Common Stock then subject to such SAR, multiplied by the excess,
if any, of (I) the highest per share price received by stockholders of the
Company in the transaction whereby the Change in Control takes place or
(II) the Fair Market Value of a share of Common Stock on the date of
occurrence of the Change in Control, if the Change in Control occurs other
than pursuant to an acquisition of shares of Common Stock, over the base
price of the SAR, (C) in the case of a Restricted Stock Award or
Performance Share Award, the number of shares of Common Stock or the number
of Performance Shares, as the case may be, then subject to such award,
multiplied by (I) the highest per share price received by stockholders of
the Company in the transaction whereby the Change in Control takes place or
(II) the Fair Market Value of a share of Common Stock on the date of
occurrence of the Change in Control, if the Change in
<PAGE>
Control occurs other than pursuant to an acquisition of shares of Common
Stock. Each Tandem SAR shall be surrendered by the holder thereof and shall
be canceled simultaneously with the cancellation of the related option. The
Company may, but is not required to, cooperate with any person who is
subject to Section 16 of the Exchange Act to assure that any cash payment
in accordance with the foregoing to such person is made in compliance with
Section 16 and the rules and regulations thereunder.
(b) "Change in Control" shall mean:
(1) any "Person" (as defined in Section 3(a)(9) of the Exchange Act)
as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other
than (1) the Company or any of its subsidiaries, (2) any trustee or other
fiduciary holding securities under an employee benefit plan of the Company
or any of its subsidiaries, (3) an underwriter temporarily holding
securities pursuant to an offering of such securities, (4) any corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of the Company's
common stock or (5) Apollo Management, L.P., any of its affiliates and any
investments funds managed by it or any of its affiliates (collectively,
"Apollo")), is or becomes the "beneficial owner" (as defined in Rule 13d-3
------
under the Exchange Act), directly or indirectly, of securities of the
Company representing more than 50% of the combined voting power of the
Company's then outstanding voting securities;
(2) during any period of not more than two consecutive years, not
including any period prior to the effective date of this Plan, individuals
who at the beginning of such period constituted the Board, and any new
director (other than a director designated by a person (other than Apollo)
who has entered into an agreement with the Company to effect a transaction
described in clause (1), (3), or (4) of this Section 6.8(b)) whose election
by the Board or nomination for election by the Company's stockholders was
(A) made pursuant to the Stockholders Agreement dated as of November 4,
1997 or (B) approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously
so approved, cease for any reason to constitute at least a majority
thereof;
(3) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than both (A) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving or parent entity) 50% or more of the
<PAGE>
combined voting power of the voting securities of the Company or such
surviving or parent entity outstanding immediately after such merger or
consolidation or (B) a merger or consolidation in which no person acquires
50% or more of the combined voting power of the Company's then outstanding
securities; or
(4) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets (or any
transaction having a similar effect) other than such a sale or disposition
to Apollo.
(c) (1) With respect to any optionee who is subject to Section 16 of the
Exchange Act, (i) notwithstanding the exercise periods set forth in
subsections (a) and (b) of Section 2.3 and Section 5.3 or as set forth
pursuant to any Agreement to which such optionee is a party and (ii)
notwithstanding the expiration date of the term of such option, in the
event the Company is involved in a business combination which is intended
to be treated as a pooling of interests for financial accounting purposes
(a "Pooling Transaction") or pursuant to which such optionee receives a
-------------------
substitute option to purchase securities of any entity, including an entity
directly or indirectly acquiring the Company, then each option (or option
in substitution thereof) held by such optionee shall be exercisable to the
extent set forth in the Agreement evidencing such option until and
including the latest of (x) the expiration date of the term of the option
or, in the event of such optionee's termination of employment or service,
the date determined pursuant to the then applicable paragraph of Section
2.3 or 5.3, (y) the date which is six months and one day after the
consummation of such business combination and (z) the date which is ten
business days after the date of expiration of any period during which such
optionee may not dispose of a security issued in the Pooling Transaction in
order for the Pooling Transaction to be accounted for as a pooling of
interests; and
(2) With respect to any holder of an SAR (other than an SAR which may
be settled only for cash) who is subject to Section 16 of the Exchange Act,
(i) notwithstanding the exercise periods set forth in subsection (a) of
Section 2.3, or as set forth pursuant to any Agreement to which such holder
is a party and (ii) notwithstanding the expiration date of the term of such
SAR (or related option in the case of a Tandem SAR), in the event the
Company is involved in a Pooling Transaction or pursuant to which such
holder receives a substitute SAR relating to any entity, including an
entity directly or indirectly acquiring the Company, then each such SAR (or
SAR in substitution thereof) held by such holder shall be exercisable to
the extent set forth in the Agreement evidencing such SAR until and
including the latest of (x) the expiration date of the term of such SAR (or
related option in the case of a Tandem SAR), as the case may be, (y) the
date which is six months and one day after the consummation of such
business combination and (z) the date which is ten business days after the
date of expiration of any period during which such holder may not dispose
of a security issued in the Pooling Transaction in order for the Pooling
Transaction to be accounted for as a pooling of interests.
<PAGE>
6.9 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any
---------------------------------------
right to participate in this Plan. Neither this Plan nor any award made
hereunder shall confer upon any person any right to continued employment by the
Company, any Subsidiary or any affiliate of the Company or affect in any manner
the right of the Company, any Subsidiary or any affiliate of the Company to
terminate the employment of any person at any time without liability hereunder.
6.10 RIGHTS AS STOCKHOLDER. No person shall have any right as a
---------------------
stockholder of the Company with respect to any shares of Common Stock or other
equity security of the Company which is subject to an award hereunder unless and
until such person becomes a stockholder of record with respect to such shares of
Common Stock or equity security.
6.11 GOVERNING LAW. This Plan, each award hereunder and the related
-------------
Agreement, and all determinations made and actions taken pursuant thereto, to
the extent not otherwise governed by the Code or the laws of the United States,
shall be governed by the laws of the State of Delaware and construed in
accordance therewith without giving effect to principles of conflicts of laws.
PARAGON HEALTH NETWORK, INC.
By: /s/ Susan Thomas Whittle
----------------------------------
Print Name: Susan Thomas Whittle
Title: Senior Vice President
and General Counsel
<PAGE>
EXHIBIT 10.18
PARAGON HEALTH NETWORK, INC.
INCENTIVE COMPENSATION PLAN
I.INTRODUCTION
1.1. Purpose. The purpose of this Plan is to recruit and retain highly
-------
qualified executives and other employees, to provide incentives to such
individuals to attain the goals of Paragon Health Network, Inc. (the "Company")
and its Affiliates (as defined below) and to provide the employees of the
Company with incentive compensation based on the performance of the Company in
order to enhance shareholder value. The Plan is designed to ensure that the
bonuses paid hereunder to eligible participants, are deductible under Section
162(m) of the Internal Revenue Code of 1986,s amended, and the regulations and
interpretations promulgated thereunder.
1.2. Description. This Plan is the means by which the Committee shall
-----------
determine incentive bonuses and effect and implement awards for participating
employees hereunder.
II. DEFINITIONS
As used in this Plan, the following terms shall have the following
meanings:
"Affiliate" means (a) an entity that directly or through one or more
---------
intermediaries is controlled by the Company, and (b) any entity in which the
Company has a significant equity interest, as determined by the Company.
"Annual Incentive Bonus" means the bonus payable with respect to a fiscal
----------------------
year of the Company determined in accordance with Article 5 hereof.
"Base Compensation" means the base rate of salary payable to a Participant
-----------------
as most recently reflected on the books and records of the Company, exclusive of
bonus, commission, fringe benefits, employee benefits, expense allowances and
other nonrecurring forms of remuneration.
"Board" means the Board of Directors of the Company.
-----
"Cause" means (i) the failure or refusal by the Participant to perform his
-----
or her normal duties (other than any such failure resulting from the
Participant's incapacity due to physical or mental illness), which has not
ceased within (10) ten days after a written demand for substantial performance
is delivered to the participant by the Company, which demand identifies the
manner in which the Company believes that the Participant has not performed such
duties, (ii) the engaging by the Participant in willful misconduct or an act of
moral turpitude which is materially injurious to the Company, monetarily or
otherwise or (iii) the conviction of the Participant of, or the entering of a
plea of nolo contendere by, the Participant with respect to, a felony.
"Change in Control" means:
-----------------
(1) any "Person" (as defined in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act) as modified and used
in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company
or any of its subsidiaries, (2) any
<PAGE>
trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any of its subsidiaries, (3) an underwriter
temporarily holding securities pursuant to an offering of such securities,
(4) any corporation owned, directly or indirectly, by the stockholders of
the Company in substantially the same proportions as their ownership of the
Company's common stock or (5) Apollo Management, L.P., any of its
affiliates and any investments funds managed by it or any of its affiliates
(collectively, "Apollo")), is or becomes the "beneficial owner" (as defined
------
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing more than 50% of the combined voting
power of the Company's then outstanding voting securities;
(2) during any period of not more than two consecutive years, not
including any period prior to the effective date of this Plan, individuals
who at the beginning of such period constituted the Board, and any new
director (other than a director designated by a person (other than Apollo)
who has entered into an agreement with the Company to effect a transaction
described in clause (1), (3), or (4) of this definition) whose election by
the Board or nomination for election by the Company's stockholders was (A)
made pursuant to the Stockholders Agreement dated as of November 4, 1997,
or (B) approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority thereof;
(3) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than both (A) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving or parent entity) 50% or more of the combined voting power of the
voting securities of the Company or such surviving or parent entity
outstanding immediately after such merger or consolidation or (B) a merger
or consolidation in which no person acquires 50% or more of the combined
voting power of the Company's then outstanding securities; or
(4) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets (or any
transaction having a similiar effect) other than such a sale or disposition
to Apollo.
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Committee" means the Compensation Committee of the Board of Directors of
---------
the Company, which shall consist of two or more members of the Board of
Directors of the Company, each of whom shall be an "outside director" within the
meaning of Section 162(m) of the Code.
-2-
<PAGE>
"Participant" means an employee of the Company or any Affiliate meeting the
-----------
requirements of Article 2 hereof, who is selected to participate in the Plan by
the Committee.
"Performance Measures" means the criteria and objectives, established by
--------------------
the Committee. The Committee may amend or adjust the Performance Measures or
other terms and conditions of an outstanding award in recognition of unusual or
nonrecurring events affecting the Company or its financial statements or changes
in law or accounting, but only to the extent such adjustment would not cause any
portion of the award, upon payment, to be nondeductible pursuant to Section
162(m) of the Code. Such criteria and objectives may include one or more of the
following: the attainment by a share of Company common stock of a specified fair
market value for a specified period of time, earnings per share, return to
stockholders (including dividends), return on equity, earnings of the Company,
revenues, EBITDA, EBITDAR, operating income, net income, return on assets,
economic value added, cash flows market share, census, payor mix, cash flow or
cost reduction goals, or any combination of the foregoing. If the Committee
desires that compensation payable pursuant to any award subject to Performance
Measures be "qualified performance-based compensation" within the meaning of
Section 162(m) of the Code, the Performance Measures (i) shall be established by
the Committee no later than the end of the first quarter of the applicable
period (or such other time designated by the Internal Revenue Service) and (ii)
shall satisfy all other applicable requirements imposed under Treasury
Regulations promulgated under Section 162(m) of the Code, including the
requirement that such Performance Measures be stated in terms of an objective
formula or standard. Before any award is paid to any holder or an award subject
to Performance Measures under this Plan, the Committee shall certify in writing
that the applicable Performance Measures were in fact satisfied.
"Performance Period" means a period specified by the Committee during which
------------------
specified Performance Measures must be attained in order for incentive
compensation to be payable for that period. A Performance Period may be
expressed in three or more fiscal years of the Company.
"Performance Period Bonus" means the bonus payable to a participant with
------------------------
respect to a Performance Period as determined pursuant to Article 6.
"Plan" means the Paragon Health Network, Inc. Incentive Compensation Plan,
----
as in effect and as amended from time to time.
III. ADMINISTRATION
The administration and operation of the Plan shall be supervised by the
Committee with respect to all matters. The Committee may delegate responsibility
for the day-to-day administration and operation of the Plan to such employees of
the Company as it shall designate from time-to-time. The Committee shall
interpret and construe any and all provisions of the Plan and any determination
made by the Committee under the Plan shall be final and conclusive. Neither the
Board of Directors nor the Committee, nor any member of the Board of Directors,
nor any employee of the Company shall be liable for any act, omission,
interpretation, construction or determination made in connection with the Plan
(other than acts of willful misconduct) and the members of the Board of
Directors and the Committee and the employees of the Company shall be entitled
to indemnification and reimbursement by the Company to the maximum extent
permitted at law in respect of any claim, loss, damage or expense (including
counsel's fees) arising from their acts, omissions and
-3-
<PAGE>
conduct in their official capacity with respect to the Plan. The Plan shall be
interpreted in view of the intention that any grant of compensation pursuant to
the Plan is intended to qualify as performance-based compensation with the
meaning of Code Section 162(m) and the regulations and interpretations
promulgated thereunder.
IV. PARTICIPATION
Each employee of the Company holding a position of Chief Executive Officer,
Senior Vice President, Executive Vice President, Vice President, or any other
employee of the Company or its Affiliates who the Committee selects for
participation in the Plan, shall be eligible to receive awards under the Plan.
V. ANNUAL INCENTIVE PROGRAM
5.1. Establishment of Performance Goals. Within the first ninety (90) days
----------------------------------
of each fiscal year of the Company, the Committee shall establish the
Performance Measures for the payment of Annual Incentive Bonuses under the Plan.
5.2. Annual Incentive Bonus. Within the first ninety (90) days of each
----------------------
fiscal year, the Committee may establish percentages of each eligible
Participant's Base Compensation to be paid as an Annual Incentive Bonus under
this Article 5 upon the attainment of the Performance Measures. After
establishing the percentages of Base Compensation to be paid as an Annual
Incentive Bonus under this Article 5 for a fiscal year, the Committee may
reduce, but not increase, the Annual Incentive Bonus payable to a Participant
based upon the Committee's determination of the individual performance of such
Participant for such fiscal year. In no event shall the amount of the Annual
Incentive Bonus payable to any Participant attributable to a fiscal year exceed
$2,000,000.
5.3. Determination of Achievement of Performance Measures. The Committee
----------------------------------------------------
shall certify the level of achievement of the Performance Measures as soon as
practical after the end of the fiscal year for which the determination is being
made.
5.4. Payment of Annual Incentive Bonus.
---------------------------------
(a) As soon as practical after the expiration of each fiscal year of the
Company, Participants who remained employed until the last day of the
fiscal year, shall be entitled to receive the Annual Incentive Bonus
determined in accordance with this Article 5 except to the extent a
Participant elects to defer the receipt of a portion of his or her
Annual Incentive Bonus in accordance with the procedures adopted by
the Committee pursuant to Subsection 5.4(b). A Participant who during
the year died, became disabled or terminated without Cause shall be
entitled to a prorated Annual Incentive Bonus based on the number of
months and partial months elapsed during such fiscal year. Payment of
Annual Incentive Bonuses shall be made in cash or in shares of
Restricted Stock issued pursuant to the Company's 1997 Long-Term
Incentive Plan as set forth in Subsection (d) of this Section, or a
combination thereof, as determined by the Committee.
-4-
<PAGE>
Notwithstanding any provision in this Plan, in the event of a Change in
Control, all Performance Measures relating to any Annual Incentive Bonus
will be deemed satisfied and any such award shall be paid out as soon as
practicable after such Change in Control.
(b) The Committee may, in its discretion, institute a program allowing
Participants to defer the receipt of all or a portion of their Annual
Incentive Bonus otherwise payable under Subsection (a) of this
Section. Any such deferred Annual Incentive Bonus shall be credited
with interest until paid. Such interest shall accrue at the prime rate
as reported in the Wall Street Journal as of the date any election to
defer a portion of the Annual Incentive Bonus is made.
(c) In lieu of the payment otherwise payable under this Section 5.4, the
Committee may authorize the payment of all or a portion of the Annual
Incentive Bonus in the form of Restricted Stock under the 1997 Long-
Term Incentive Plan based upon a price for the shares of Restricted
Stock equal to 75% of Fair Market Value (as defined in the 1997 Long-
Term Incentive Plan). Any such shares of Restricted Stock will be
subject to such terms and conditions as the Committee may from time to
time determine.
(d) The Committee may condition the payment of any or all payments of a
Participant's Annual Incentive Bonus based on the Participant's
providing of future services to the Company or its Affiliates.
5.5. Participants Rights Unsecured. The right of any Participant to receive
-----------------------------
Annual Incentive Bonus under the Plan shall constitute an unsecured claim
against the general assets of the Company.
5.6. Withholding Taxes. The Company shall have the right to deduct from
-----------------
each bonus payment any federal, state and local taxes required by such laws to
be withheld with respect to the payment.
VI. PERFORMANCE PERIOD BONUS
6.1. Establishment of Performance Goals. Within the first ninety (90) days
----------------------------------
of each Performance Period, the Committee shall establish the Performance
Measures and the Performance Period for the payment of Performance Period
Bonuses under the Plan.
6.2. Performance Period Bonus. Within the first ninety (90) days of each
------------------------
Performance Period, the Committee may establish percentages of each eligible
Participant's Base Compensation to be paid as a Performance Period Bonus under
this Article 6 upon the attainment of the Performance Measures during the
Performance Period. After establishing the percentages of Base Compensation to
be paid as a Performance Period Bonus under this Article 6 for a Performance
Period, the Committee may reduce, but not increase, the Performance Period Bonus
payable to a Participant based upon the Committee's determination of the
individual performance of such Participant for such Performance Period. In no
event shall the amount of the Performance Period Bonus payable to any
Participant attributable to a Performance Period exceed $10,000,000.
-5-
<PAGE>
6.3. Determination of Achievement of Performance Measures. The Committee
----------------------------------------------------
shall certify the level of achievement of the Performance Measures as soon as
practical after the end of the Performance Period for which the determination is
being made.
6.4. Payment of Performance Period Bonus.
-----------------------------------
(a) As soon as practical after the expiration of each Performance Period,
Participants who remained employed until the last day of the
Performance Period, shall be entitled to receive the Performance
Period Bonus determined in accordance with this Article 6 except to
the extent a Participant elects to defer the receipt of a portion of
his or her Performance Period Bonus in accordance with the procedures
adopted by the Committee pursuant to Subsection 6.4(b). A participant
who during the Performance Period died, became disabled or terminated
without Cause shall be entitled to a prorated Performance Period
Bonus based on the number of months and partial months elapsed during
such Performance Period. Payment of Performance Period Bonuses shall
be made in cash or in shares of Restricted Stock issued pursuant to
the Company's 1997 Long-Term Incentive Plan as set forth in
Subsection (d) hereof, or a combination thereof, as determined by the
Committee
(b) Notwithstanding any provision in this Plan, in the event of a Change
in Control, all Performance Measures relating to any Performance
Period Bonus will be deemed satisfied and any such award shall be
paid out as soon as practicable after the date of such Change in
Control.
(c) The Committee may, in its discretion, institute a program allowing
Participants to defer the receipt of all or a portion of their
Performance Period Bonus otherwise payable under Subsection (a) of
this Section. Any such deferred Performance Period Bonus shall be
credited with interest until paid. Such interest shall accrue at the
prime rate as reported in the Wall Street Journal as of the date any
election to defer a portion of the Performance Period Bonus is made.
(d) In lieu of the payment otherwise payable under this Section 6.4, the
Committee may authorize the payment of all or a portion of the
Performance Period Bonus with Restricted Stock under the 1997 Long-
Term Incentive Plan based upon a price for the shares of Restricted
Stock equal to 75% of Fair Market Value (as defined in the 1997 Long-
Term Incentive Plan.) Any such shares of Restricted Stock will be
subject to such terms and conditions as the Committee may from time
to time determine.
(e) The Committee may condition the payment of any or all payments of a
Participant's Performance Period Bonus based on the Participant's
providing of future services to the Company or its Affiliates.
6.5. Participants Rights Unsecured. The right of any Participant to
-----------------------------
receive Performance Period Bonuses under the Plan shall constitute an unsecured
claim against the general assets of the Company.
-6-
<PAGE>
6.6. Withholding Taxes. The Company shall have the right to deduct from
-----------------
each bonus payment any federal, state and local taxes required by such laws to
be withheld with respect to the payment.
VII. GENERAL PROVISIONS
7.1. Amendment and Termination. The Committee may at any time amend,
-------------------------
suspend, discontinue or terminate the Plan; provided, however, that no such
amendment, suspension, discontinuance or termination shall adversely affect the
rights of any Participant with respect to any outstanding award without his
consent. All determinations concerning the interpretation and application of
this Section 7.1 shall be made by the Committee.
7.2. Designation of Beneficiary. Each Participant who defers receipt of all
--------------------------
or a portion of any Annual Bonus under the Plan may designate a beneficiary or
beneficiaries (which beneficiary may be an entity other than a natural person)
to receive any payments to be made following the Participant's death. Such
designation may be changed or cancelled at any time without the consent of any
such beneficiary. Any such designation, change or cancellation must be made on a
form provided for that purpose by the plan administrator and shall not be
effective until received by the plan administrator. If no beneficiary has been
named, or the designated beneficiary or beneficiaries shall have predeceased the
Participant, the beneficiary shall be the Participant's spouse or, if no such
spouse shall survive the Participant, the Participant's estate. If a Participant
designates more than one beneficiary, the rights of such beneficiaries shall be
made in equal shares, unless the Participant has designated otherwise.
7.3. Excess Parachute Payments. Notwithstanding any other provision of this
-------------------------
Plan, in the event that any payment or benefit received or to be received by a
Participant in connection with a Change in Control would not be deductible (in
whole or part) by the Company, as a result of Section 280G of the Code, then to
the extent necessary to make such portion of any payments deductible by the
Company when taking into account such other payments made to a Participant in
connection with such Change in Control, the Committee shall reduce the amount of
any Performance Period Bonuses or Annual Incentive Bonuses payable to such
Participant under the Plan.
7.4. Miscellaneous.
-------------
(a) No Right of Continued Employment. Nothing in this Plan shall be
--------------------------------
construed as conferring upon any Participant any right to continue in the
employment of the Company or any of its subsidiaries or Affiliates.
(b) No Limitation on Corporate Actions. Nothing contained in the Plan
----------------------------------
shall be construed to prevent the Company or any Affiliate from taking any
corporate action which is deemed by it to be appropriate or in its best
interest, whether or not such action would have an adverse effect on the
Plan or any awards made under the Plan. No employee, Participant or other
person shall have any claim against the Company or any of its subsidiaries
or Affiliates as a result of any such action.
-7-
<PAGE>
(c) Nonalienation of Benefits. Except as expressly provided herein,
-------------------------
no Participant or his beneficiaries shall have the power or right to
transfer, anticipate, or otherwise encumber the Participant's interest
under the Plan. The Company's obligations under this Plan are not
assignable or transferable except to a corporation which acquires all or
substantially all of the assets of the Company or any corporation into
which the Company may be merged or consolidated. The provisions of the Plan
shall inure to the benefit of each Participant and his beneficiaries,
heirs, executors, administrators or successors in interest.
(d) Severability. If any provision of this Plan is held
------------
unenforceable, the remainder of the Plan shall continue in full force and
effect without regard to such unenforceable provision and shall be applied
as though the unenforceable provision were not contained in the Plan.
(e) Governing Law. The Plan shall be construed in accordance with and
-------------
governed by the laws of the State of Delaware, without reference to the
principles of conflict of laws.
(f) Headings. Headings are inserted in this Plan for convenience of
--------
reference only and are to be ignored in a construction of the provisions of
the Plan.
PARAGON HEALTH NETWORK, INC.
Dated: November 4, 1997 By: /s/ Susan Thomas Whittle
----------------------- ---------------------------------
Title: Senior Vice President and General
Counsel
---------------------------------
Attest:_______________________
Title:________________________
-8-
<PAGE>
EXHIBIT 10.27
EXECUTION COPY
LIVING CENTERS OF AMERICA, INC.
(to be renamed Paragon Health Network, Inc.)
$275,000,000
9 1/2% Senior Subordinated Notes due 2007
$294,000,000
10 1/2% Senior Subordinated Discount Notes due 2007
PURCHASE AGREEMENT
------------------
October 30, 1997
CHASE SECURITIES INC.
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
c/o Chase Securities Inc.
270 Park Avenue, 4th floor
New York, New York 10017
Ladies and Gentlemen:
LIVING CENTERS OF AMERICA, INC., a Delaware corporation (the
"Company"), proposes to issue and sell $275,000,000 aggregate principal amount
-------
of its 9 1/2% Senior Subordinated Notes due 2007 (the "Senior Subordinated
-------------------
Notes") and $294,000,000 aggregate principal amount of its 10 1/2% Senior
- -----
Subordinated Discount Notes due 2007 (the "Senior Subordinated Discount Notes,"
----------------------------------
and together with the Senior Subordinated Notes, the "Securities"). The
----------
Securities will be issued pursuant to an Indenture to be dated as of November 1,
1997 (the "Indenture") among the Company and IBJ Schroder Bank & Trust Company,
---------
as trustee (the "Trustee"). The Company hereby confirms its agreement with
-------
Chase Securities Inc. ("CSI"), Smith Barney Inc. ("Smith Barney") and Credit
--- ------------
Suisse First Boston Corporation ("CSFB", and together with CSI and Smith Barney,
----
the "Initial Purchasers") concerning the purchase of the Securities from the
------------------
Company by the Initial Purchasers.
The Securities will be offered and sold to the Initial Purchasers
without being registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon an exemption therefrom. The Company has
--------------
prepared a preliminary offering memorandum dated October 10, 1997 (the
"Preliminary Offering Memorandum") and will prepare an offering memorandum dated
-------------------------------
the date hereof (the "Offering Memorandum") setting forth information concerning
-------------------
the Company and the Securities. Copies of the Preliminary Offering Memorandum
have been, and copies of the Offering Memorandum will be, delivered by the
Company to the Initial Purchasers pursuant to the terms of this Agreement. Any
references herein to the Preliminary Offering Memorandum and the Offering
Memorandum shall be deemed to include all amendments and supplements thereto,
unless otherwise noted. The Company hereby confirms that it has authorized the
use of the Preliminary Offering Memorandum and the Offering Memorandum in
connection with the offering and resale of the Securities by the Initial
Purchasers in accordance with Section 2.
<PAGE>
2
Holders of the Securities (including the Initial Purchasers and their
direct and indirect transferees) will be entitled to the benefits of an Exchange
and Registration Rights Agreement, substantially in the form attached hereto as
Annex A (the "Registration Rights Agreement"), pursuant to which the Company
-----------------------------
will agree to file with the Securities and Exchange Commission (the
"Commission") (i) a registration statement under the Securities Act (the
----------
"Exchange Offer Registration Statement") registering (a) an issue of senior
-------------------------------------
subordinated notes of the Company (the "Senior Subordinated Exchange Notes")
----------------------------------
which are identical in all material respects to the Senior Subordinated Notes
(except as indicated below) and (b) an issue of senior subordinated discount
notes of the Company (the "Senior Subordinated Exchange Discount Notes", and
-------------------------------------------
together with the Senior Subordinated Exchange Notes, the "Exchange Securities")
-------------------
which are identical in all material respects to the Senior Subordinated Discount
Notes (except that the Exchange Securities will not contain terms with respect
to transfer restrictions or additional interest upon certain failures to comply
with the Registration Rights Agreement) and (ii) under certain circumstances, a
shelf registration statement pursuant to Rule 415 under the Securities Act (the
"Shelf Registration Statement").
----------------------------
In connection with the offering and sale of the Securities, the
Company intends to borrow up to $890 million under the Senior Credit Facility.
The proceeds of the initial borrowing under the Senior Credit Facility, together
with the Apollo Investment and the proceeds from the offering of the Securities,
will be applied by the Company to finance the cash paid in the Recapitalization
Merger, the refinancing of a portion of the existing indebtedness of the Company
and GranCare, Inc. ("GranCare") and fees and expenses relating to the
--------
Transactions (as defined below). On the Closing Date, (i) pursuant to an
Agreement and Plan of Merger dated as of May 7, 1997, which was subsequently
amended and restated as of September 17, 1997 (the "Recapitalization Merger
-----------------------
Agreement") among Living Centers of America, Inc. ("LCA"), Apollo Management,
- --------- ---
L.P. ("Apollo"), on behalf of one or more managed investment funds and Apollo
LCA Acquisition Corp. ("Apollo Sub"), a subsidiary of Apollo, Apollo Sub will be
----------
merged with and into LCA (the "Recapitalization Merger"), with LCA as the
-----------------------
surviving corporation and (ii) pursuant to an Agreement and Plan of Merger dated
as of May 7, 1997, as amended and restated as of September 17, 1997 (the
"GranCare Merger Agreement") among LCA, GranCare, Apollo and LCA Acquisition
-------------------------
Sub, Inc. ("LCA Sub"), GranCare will merge with LCA Sub (the "GranCare Merger"),
---------------
with GranCare being the surviving corporation in the merger. The
Recapitalization Merger and the GranCare Merger are herein referred to as the
"Mergers" and, together with the other transactions in connection therewith, are
-------
collectively referred to herein as the "Transactions." Following completion of
------------
the Transactions, GranCare will become a wholly-owned subsidiary of LCA and LCA
will be renamed Paragon Health Network, Inc. ("Paragon").
-------
Capitalized terms used but not defined herein shall have the meanings
given to such terms in the Offering Memorandum. As used in this Agreement,
unless the context otherwise requires: (i) the "Company" refers to LCA and its
subsidiaries, and the related business and operations thereof, prior to the
Mergers and to Paragon (formerly LCA) and its subsidiaries (including GranCare),
and the related business and operations thereof (including the GranCare
operations), after the Mergers and (ii) "GranCare" refers to GranCare, Inc., a
California corporation, and its subsidiaries for periods on or prior to February
12, 1997 and to GranCare, Inc., a Delaware corporation, and its subsidiaries for
periods subsequent to February 12, 1997.
1. Representations, Warranties and Agreements of the Company. The
---------------------------------------------------------
Company and GranCare represent and warrant to the several Initial Purchasers on
and as of the date hereof and the Closing Date (as defined in Section 3 and
after giving effect to the Mergers) that:
(a) Each of the Preliminary Offering Memorandum and the Offering
Memorandum, as of its respective date, did not, and on the Closing Date the
Offering Memorandum will not, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided that no
--------
representation or warranty is
<PAGE>
3
made as to information contained in or omitted from the Preliminary
Offering Memorandum or the Offering Memorandum in reliance upon and in
conformity with written information relating to the Initial Purchasers
furnished to the Company by or on behalf of any Initial Purchaser
specifically for use therein (collectively, the "Initial Purchasers'
------------------
Information").
-----------
(b) Each of the Preliminary Offering Memorandum and the Offering
Memorandum, as of its respective date, contains all of the information
that, if requested by a prospective purchaser of the Securities, would be
required to be provided to such prospective purchaser pursuant to Rule
144A(d)(4) under the Securities Act.
(c) Assuming the accuracy of the representations and warranties of
the Initial Purchasers contained in Section 2 and their compliance with the
agreements set forth therein, it is not necessary, in connection with the
issuance and sale of the Securities to the Initial Purchasers and the
offer, resale and delivery of the Securities by the Initial Purchasers in
the manner contemplated by this Agreement and the Offering Memorandum, to
register the Securities under the Securities Act or to qualify the
Indenture under the Trust Indenture Act of 1939, as amended (the "Trust
-----
Indenture Act").
-------------
(d) The Company, GranCare and each of their respective subsidiaries
have been duly incorporated and are validly existing as corporations in
good standing under the laws of their respective jurisdictions of
incorporation, are duly qualified to do business and are in good standing
as foreign corporations in each jurisdiction in which their respective
ownership or lease of property or the conduct of their respective
businesses requires such qualification, and have all power and authority
necessary to own or hold their respective properties and to conduct the
businesses in which they are engaged, except where the failure to so
qualify or have such power or authority would not, singularly or in the
aggregate, have a material adverse effect on the condition (financial or
otherwise), results of operations, business or prospects of the Company,
GranCare and their respective subsidiaries taken as a whole (a "Material
--------
Adverse Effect").
--------------
(e) The Company will, on the Closing Date, have capitalization as set
forth in the Offering Memorandum under the heading "Capitalization"; and
all of the outstanding shares of capital stock of the Company have been
duly and validly authorized and issued and are fully paid and non-
assessable. All of the outstanding shares of capital stock of each
subsidiary of the Company and GranCare have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned
directly or indirectly by the Company and GranCare, respectively, free and
clear of any lien, charge, encumbrance, security interest, restriction upon
voting or transfer or any other claim of any third party, except as
otherwise disclosed in the Offering Memorandum.
(f) The Company has full right, power and authority to execute and
deliver this Agreement, the Indenture, the Registration Rights Agreement,
the Securities and the Merger Documents (as defined in Section 15)
(collectively, the "Transaction Documents") to which it is a party and to
---------------------
perform its obligations hereunder and thereunder; and all corporate action
required to be taken for the due and proper authorization, execution and
delivery of each of the Transaction Documents to which it is a party and
the consummation of the transactions contemplated thereby have been duly
and validly taken.
(g) GranCare has full right, power and authority to execute and
deliver this Agreement and the Merger Documents to which it is a party and
to perform its obligations hereunder and thereunder; all corporate action
required to be taken for the due and proper authorization, execution and
delivery of each of the Merger Documents to which it is a party and the
consummation of the transactions contemplated thereby have been duly and
validly taken; and
<PAGE>
4
this Agreement has been duly authorized, executed and delivered by GranCare
and constitutes a valid and binding agreement of GranCare.
(h) This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding agreement of the
Company.
(i) The Registration Rights Agreement has been duly authorized by the
Company and, when duly executed and delivered in accordance with its terms
by each of the parties thereto, will constitute a valid and binding
agreement of the Company enforceable against the Company in accordance with
its terms, except to the extent that such enforceability may be limited by
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws affecting creditors' rights generally and
by general equitable principles (whether considered in a proceeding in
equity or at law).
(j) The Indenture has been duly authorized by the Company and, when
duly executed and delivered in accordance with its terms by each of the
parties thereto, will constitute a valid and binding agreement of the
Company enforceable against the Company in accordance with its terms,
except to the extent that such enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium
and other similar laws affecting creditors' rights generally and by general
equitable principles (whether considered in a proceeding in equity or at
law). On the Closing Date, the Indenture will conform in all material
respects to the requirements of the Trust Indenture Act and the rules and
regulations of the Commission applicable to an indenture which is qualified
thereunder.
(k) The Securities and the Exchange Securities have been duly
authorized by the Company and, when duly executed, authenticated, issued
and delivered as provided in the Indenture and paid for as provided herein,
will be duly and validly issued and outstanding and will constitute valid
and binding obligations of the Company entitled to the benefits of the
Indenture and enforceable against the Company in accordance with their
terms, except to the extent that such enforceability may be limited by
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws affecting creditors' rights generally and
by general equitable principles (whether considered in a proceeding in
equity or at law).
(l) The Recapitalization Merger Agreement and the GranCare Merger
Agreement have been duly authorized, executed and delivered by the Company,
and each constitutes a valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, except to the
extent that such enforceability may be limited by applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other
similar laws affecting creditors' rights generally and by general equitable
principles (whether considered in a proceeding in equity or at law).
(m) The GranCare Merger Agreement has been duly authorized, executed
and delivered by GranCare, and constitutes a valid and binding agreement of
GranCare enforceable against GranCare in accordance with its terms, except
to the extent that such enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium
and other similar laws affecting creditors' rights generally and by general
equitable principles (whether considered in a proceeding in equity or at
law).
(n) Each Transaction Document conforms in all material respects to
the description thereof contained in the Offering Memorandum.
<PAGE>
5
(o) The execution, delivery and performance by the Company of each of
the Transaction Documents to which it is a party, the issuance,
authentication, sale and delivery of the Securities and compliance by the
Company with the terms thereof and the consummation of the transactions
contemplated by the Transaction Documents to which it is a party will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or any of its subsidiaries pursuant to, any material
indenture, mortgage, deed of trust, loan agreement or other material
agreement or instrument to which the Company or any of its subsidiaries is
a party or by which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such actions result in any violation of
the provisions of the charter or by-laws of the Company or any of its
subsidiaries or any statute or any judgment, order, decree, rule or
regulation of any court or arbitrator or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties or assets; and no consent, approval, authorization or order of,
or filing or registration with, any such court or arbitrator or
governmental agency or body under any such statute, judgment, order,
decree, rule or regulation is required for the execution, delivery and
performance by the Company of each of the Transaction Documents to which it
is a party, the issuance, authentication, sale and delivery of the
Securities and compliance by the Company with the terms thereof and the
consummation of the transactions contemplated by the Transaction Documents
to which it is a party, except for such consents, approvals,
authorizations, filings, registrations or qualifications (i) which shall
have been obtained or made prior to the Closing Date, (ii) as may be
required to be obtained or made under the Securities Act and applicable
state securities laws as provided in the Registration Rights Agreement and
(iii) which shall not adversely affect the ability of the Company to
consummate the transactions contemplated by the Transaction Documents.
(p) The execution, delivery and performance by GranCare of each of
the Merger Documents to which it is a party and the consummation of the
transactions contemplated by the Merger Documents to which it is a party
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of GranCare or any of its subsidiaries pursuant to, any material
indenture, mortgage, deed of trust, loan agreement or other material
agreement or instrument to which GranCare or any of its subsidiaries is a
party or by which GranCare or any of its subsidiaries is bound or to which
any of the property or assets of GranCare or any of its subsidiaries is
subject, nor will such actions result in any violation of the provisions of
the charter or by-laws of GranCare or any of its subsidiaries or any
statute or any judgment, order, decree, rule or regulation of any court or
arbitrator or governmental agency or body having jurisdiction over GranCare
or any of its subsidiaries or any of their properties or assets; and no
consent, approval, authorization or order of, or filing or registration
with, any such court or arbitrator or governmental agency or body under any
such statute, judgment, order, decree, rule or regulation is required for
the execution, delivery and performance by GranCare of each of the Merger
Documents to which it is a party and the consummation of the transactions
contemplated therein, except for such consents, approvals, authorizations,
filings, registrations or qualifications (i) which shall have been obtained
or made prior to the Closing Date, (ii) as may be required to be obtained
or made under the Securities Act and applicable state securities laws and
(iii) which shall not adversely affect the ability of GranCare to
consummate the transactions contemplated by the Merger Documents.
(q) Ernst & Young LLP are independent certified public accountants
with respect to the Company, GranCare and their respective subsidiaries
within the meaning of Rule 101 of the Code of Professional Conduct of the
American Institute of Certified Public Accountants ("AICPA") and its
-----
interpretations and rulings thereunder. The historical financial
statements (including the related notes) contained in the Offering
Memorandum comply in all material
<PAGE>
6
respects with the requirements applicable to a registration statement on
Form S-1 under the Securities Act (except to the extent that certain
earnings per share data has been omitted from the "Selected Historical
Consolidated Financial and Other Data" section of the Offering Memorandum,
certain pro forma tax disclosure has been omitted from the "Unaudited Pro
Forma Condensed Consolidated Financial Statements" contained in the
Offering Memorandum and to the extent that the "Summary Unaudited Pro Forma
Financial and Other Data" and the "Unaudited Pro Forma Condensed
Consolidated Financial Statements" contain certain non-GAAP disclosure
without supporting footnotes); such financial statements have been prepared
in accordance with generally accepted accounting principles consistently
applied throughout the periods covered thereby and fairly present the
financial position of the entities purported to be covered thereby at the
respective dates indicated and the results of their operations and their
cash flows for the respective periods indicated; and the financial
information contained in the Offering Memorandum under the headings
"Summary--Summary Unaudited Pro Forma Financial and Other Data", "Summary--
Summary Historical Consolidated Financial and Other Data",
"Capitalization", "Unaudited Pro Forma Condensed Consolidated Financial
Statements", "Selected Historical Consolidated Financial and Other Data"
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is derived from the accounting records of the
Company, GranCare and their respective subsidiaries, as the case may be,
and such sections of the Offering Memorandum fairly present the information
purported to be shown thereby in all material respects. The pro forma
financial information contained in the Offering Memorandum has been
prepared on a basis consistent with the historical financial statements
contained in the Offering Memorandum (except for the pro forma adjustments
specified therein), includes all material adjustments to the historical
financial information required by Rule 11-02 of Regulation S-X under the
Securities Act and the Exchange Act to reflect the transactions described
in the Offering Memorandum, gives effect to assumptions made on a
reasonable basis and fairly presents the historical and proposed
transactions contemplated by the Offering Memorandum and the Transaction
Documents in all material respects. The other historical financial and
statistical information and data included in the Offering Memorandum are,
in all material respects, fairly presented.
(r) Except as otherwise stated in the Offering Memorandum, there are
no legal or governmental proceedings pending to which the Company, GranCare
or any of their respective subsidiaries is a party or of which any property
or assets of the Company, GranCare or any of their respective subsidiaries
is the subject which, singularly or in the aggregate, if determined
adversely to the Company or any of its subsidiaries, could reasonably be
expected to have a Material Adverse Effect; and to the best knowledge of
the Company and GranCare, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others.
(s) No action has been taken and no statute, rule, regulation or
order has been en acted, adopted or issued by any governmental agency or
body which prevents the issuance of the Securities or suspends the sale of
the Securities in any jurisdiction; no injunction, restraining order or
order of any nature by any federal or state court of competent jurisdiction
has been issued with respect to the Company, GranCare or any of their
respective subsidiaries which would prevent or suspend the issuance or sale
of the Securities or the use of the Offering Memorandum in any
jurisdiction; no action, suit or proceeding is pending against or, to the
knowledge of the Company and GranCare after reasonable due inquiry,
threatened against or affecting the Company, GranCare or any of their
respective subsidiaries before any court or arbitrator or any governmental
agency, body or official, domestic or foreign, which could reasonably be
expected to interfere with or adversely affect the issuance of the
Securities or in any manner draw into question the validity or
enforceability of any of the Transaction Documents or any action taken or
to be taken pursuant thereto; and the Company and GranCare have complied
with any and all requests by any securities authority in any jurisdiction
for additional
<PAGE>
7
information to be included in the Preliminary Offering Memorandum and the
Offering Memorandum.
(t) Neither the Company nor GranCare nor any of their respective
subsidiaries is (i) in violation of its charter or by-laws, (ii) in default
in any material respect, and no event has occurred which, with notice or
lapse of time or both, would constitute such a default, in the due
performance or observance of any term, covenant or condition contained in
any material indenture, mortgage, deed of trust, loan agreement or other
material agreement or instrument to which it is a party or by which it is
bound or to which any of its property or assets is subject or (iii) in
violation in any material respect of any material law, ordinance,
governmental rule, regulation or court decree to which it or its property
or assets may be subject.
(u) The Company, GranCare and each of their respective subsidiaries
possess all material licenses, certificates, authorizations and permits
issued by, and have made all declarations and filings with, the appropriate
federal, state or foreign regulatory agencies or bodies which are necessary
or desirable for the ownership of their respective properties or the
conduct of their respective businesses as described in the Offering
Memorandum, except where the failure to possess or make the same would not,
singularly or in the aggregate, have a Material Adverse Effect, and neither
the Company nor GranCare nor any of their respective subsidiaries has
received notification of any revocation or modification of any such
license, certificate, authorization or permit or has any reason to believe
that any such license, certificate, authorization or permit will not be
renewed in the ordinary course.
(v) The Company, GranCare and their respective subsidiaries have
filed all federal, state, local and foreign income and franchise tax
returns required to be filed through the date hereof and have paid all
taxes due thereon, except such returns, which individually or in the
aggregate, do not involve material amounts or where the failure to file
such returns by the Company, GranCare and their respective Significant
Subsidiaries (as defined in Regulation S-X under the Securities Act), as
the case may be, would not, individually or in the aggregate, materially
adversely affect the business, operations or prospects of such entity, and
no tax deficiency has been determined adversely to the Company, GranCare or
any of their respective subsidiaries, as the case may be, which has had
(nor does the Company, GranCare or any of their respective subsidiaries
have any knowledge of any tax deficiency which, if determined adversely to
the Company, GranCare or any of their respective subsidiaries, as the case
may be, could reasonably be expected to have) a Material Adverse Effect,
except to the extent that the validity thereof is being contested in good
faith pursuant to appropriate proceedings.
(w) Neither the Company nor GranCare nor any of their respective
subsidiaries is (i) an "investment company" or a company "controlled by" an
investment company within the meaning of the Investment Company Act of
1940, as amended (the "Investment Company Act"), and the rules and
----------------------
regulations of the Commission thereunder or (ii) a "holding company" or a
"subsidiary company" of a holding company or an "affiliate" thereof within
the meaning of the Public Utility Holding Company Act of 1935, as amended.
(x) The Company, GranCare and each of their respective subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences.
<PAGE>
8
(y) The Company, GranCare and their respective subsidiaries maintain
insurance of the types and in the amounts generally deemed adequate for
their businesses and consistent with insurance coverage maintained by
similar companies and businesses, all of which insurance is in full force
and effect.
(z) The Company, GranCare and each of their respective subsidiaries
own or possess adequate rights to use all material patents, patent
applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights, licenses and know-
how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures) necessary
for the conduct of their respective businesses; and the Company, GranCare
and their respective subsidiaries have not received any notice of any claim
of conflict with, any such rights of others, except for such notices of
conflicts, which, if individually or in the aggregate determined adversely
to the Company, GranCare or their respective subsidiaries, as the case may
be, would not have a Material Adverse Effect.
(aa) The Company, GranCare and each of their respective subsidiaries
have good and marketable title to, or have valid rights to lease or
otherwise use, all items of real and personal property which are material
to the business of the Company, GranCare and their respective subsidiaries,
in each case free and clear of all liens, encumbrances, claims and defects
and imperfections of title except such as (i) do not materially interfere
with the use made and proposed to be made of such property by the Company,
GranCare and their respective subsidiaries or (ii) could not reasonably be
expected to have a Material Adverse Effect.
(bb) No strike or work stoppages by the employees of the Company,
GranCare or any of their respective subsidiaries exists or, to the
Company's or GranCare's knowledge after reasonable due inquiry, is
contemplated or threatened.
(cc) No "prohibited transaction" (as defined in Section 406 of the
Employee Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"), or Section
-----
4975 of the Internal Revenue Code of 1986, as amended from time to time
(the "Code")) or "accumulated funding deficiency" (as defined in Section
----
302 of ERISA) or any of the events set forth in Section 4043(b) of ERISA
(other than events with respect to which the 30-day notice requirement
under Section 4043 of ERISA has been waived) has occurred with respect to
any employee benefit plan of the Company, GranCare or any of their
respective subsidiaries which could reasonably be expected to have a
Material Adverse Effect; each such employee benefit plan is in compliance
in all material respects with applicable law, including ERISA and the Code;
the Company, GranCare and each of their respective subsidiaries have not
incurred and do not expect to incur liability under Title IV of ERISA with
respect to the termination of, or withdrawal from, any pension plan for
which the Company, GranCare or any of their respective subsidiaries would
have any liability; and each such pension plan that is intended to be
qualified under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or by failure to act,
which could reasonably be expected to cause the loss of such qualification.
(dd) There has been no storage, generation, transportation, handling,
treatment, disposal, discharge, emission or other release of any kind of
toxic or other wastes or other hazardous substances by, due to or caused by
the Company, GranCare or any of their respective subsidiaries upon any of
the property now or, to the knowledge of the Company or GranCare, as the
case may be, previously owned or leased by the Company, GranCare or any of
their respective subsidiaries, in violation of any statute or any
ordinance, rule, regulation, order, judgment, decree or permit or which
would, under any statute or any ordinance, rule (including rule of common
law), regulation, order, judgment, decree or permit, give rise to any
liability, except for any violation or liability which could not reasonably
be expected to have,
<PAGE>
9
singularly or in the aggregate with all such violations and liabilities, a
Material Adverse Effect; and there has been no disposal, discharge,
emission or other release of any kind onto such property or into the
environment surrounding such property of any toxic or other wastes or other
hazardous substances with respect to which the Company or GranCare has
knowledge, except for any such disposal, discharge, emission or other
release of any kind which could not reasonably be expected to have,
singularly or in the aggregate with all such discharges and other releases,
a Material Adverse Effect.
(ee) Neither the Company nor GranCare nor any of their respective
subsidiaries nor, to the Company's or GranCare's knowledge after reasonable
due inquiry, any employee or agent of the Company, GranCare or any of their
respective subsidiaries has intentionally made any payment of funds of the
Company, GranCare or any of their respective subsidiaries, as the case may
be, or used, received or retained any funds in violation of the Foreign
Corrupt Practices Act of 1977.
(ff) On and immediately after the Closing Date, the Company (after
giving effect to the issuance of the Securities and to the other
transactions related thereto as described in the Offering Memorandum) will
be Solvent. As used in this paragraph, the term "Solvent" means, with
respect to a particular date, that on such date (i) the present fair market
value (or present fair saleable value) of the assets of the Company is not
less than the total amount required to pay the probable liabilities of the
Company on its total existing debts and liabilities (including contingent
liabilities) as they become absolute and matured, (ii) the Company is able
to realize upon its assets and pay its debts and other liabilities,
contingent obligations and commitments as they mature and become due in the
normal course of business, (iii) assuming the sale of the Securities as
contemplated by this Agreement and the Offering Memorandum, the Company is
not incurring debts or liabilities beyond its ability to pay as such debts
and liabilities mature and (iv) the Company is not engaged in any business
or transaction, and is not about to engage in any business or transaction,
for which its property would constitute unreasonably small capital after
giving due consideration to the prevailing practice in the industry in
which the Company is engaged. In computing the amount of such contingent
liabilities at any time, it is intended that such liabilities will be
computed at the amount that, in the light of all the facts and
circumstances existing at such time, represents the amount that can
reasonably be expected to become an actual or matured liability.
(gg) Neither the Company nor GranCare nor any of their respective
subsidiaries owns any "margin securities" as that term is defined in
Regulations G and U of the Board of Gover nors of the Federal Reserve
System (the "Federal Reserve Board"), and none of the proceeds of the sale
---------------------
of the Securities will be used, directly or indirectly, for the purpose of
purchasing or carrying any margin security, for the purpose of reducing or
retiring any indebtedness which was originally incurred to purchase or
carry any margin security or for any other purpose which might cause any of
the Securities to be considered a "purpose credit" within the meanings of
Regulation G, T, U or X of the Federal Reserve Board.
(hh) Neither the Company nor GranCare nor any of their respective
subsidiaries is a party to any contract, agreement or understanding with
any person that would give rise to a valid claim against the Company,
GranCare or the Initial Purchasers for a brokerage commission, finder's fee
or like payment in connection with the offering and sale of the Securities.
(ii) The Securities (i) will not, when issued, be of the same class
as securities listed on a national securities exchange registered under
Section 6 of the Exchange Act or quoted in an automated inter-dealer
quotation system; provided, that securities that are convertible or
exchangeable into securities so listed or quoted at the time of issuance
and that had an effective conversion premium of less than 10%, shall be
treated as securities of the class into which they
<PAGE>
10
are convertible or exchangeable; and that warrants that may be exercised
for securities so listed or quoted at the time of issuance, or that had an
effective exercise premium of less than 10%, shall be treated as securities
of the class to be issued upon exercise; and provided further that the
Commission may from time to time, taking into account then-existing market
practices, designate additional securities and classes of securities that
will not be deemed of the same class as securities listed on a national
securities exchange or quoted in a U.S. automated inter-dealer quotation
system, and (ii) are not securities of an open-end investment company, unit
investment trust or face-amount certificate company that is or is required
to be registered under Section 8 of the Investment Company Act.
(jj) Assuming the accuracy of the representations and warranties of
the Initial Purchasers set forth in Section 2 hereof, none of the Company,
GranCare, any of their respective affiliates or any person acting on its or
their behalf has engaged or will engage in any directed selling efforts (as
such term is defined in Regulation S under the Securities Act ("Regulation
----------
S")), and all such persons have complied and will comply with the offering
-
restrictions requirement of Regulation S to the extent applicable.
(kk) Assuming the accuracy of the representations and warranties of
the Initial Purchasers set forth in Section 2 hereof, neither the Company
nor GranCare nor any of their affiliates has, directly or through any
agent, sold, offered for sale, solicited offers to buy or otherwise
negotiated in respect of, any security (as such term is defined in the
Securities Act) which is or will be integrated with the sale of the
Securities in a manner that would require registration of the Securities
under the Securities Act.
(ll) Assuming the accuracy of the representations and warranties of
the Initial Purchasers set forth in Section 2 hereof, none of the Company,
GranCare, or any of their respective affiliates or any other person acting
on its or their behalf has engaged, in connection with the offering of the
Securities, in any form of general solicitation or general advertising
within the meaning of Rule 502(c) under the Securities Act.
(mm) Assuming the accuracy of the representations and warranties of
the Initial Purchasers set forth in Section 2 hereof, the Company has not
taken and will not take, directly or indirectly, any action prohibited by
Regulation M under the Exchange Act in connection with the offering of the
Securities.
(nn) No forward-looking statement (within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act) contained in the
Preliminary Offering Memorandum or the Offering Memorandum has been made or
reaffirmed without, in light of the circumstances under which such
statements were made, a reasonable basis or has been disclosed other than
in good faith.
(oo) None of the Company, GranCare or any of their respective
subsidiaries does business with the government of Cuba or with any person
or affiliate located in Cuba within the meaning of Florida Statutes Section
517.075.
(pp) Since the date as of which information is given in the Offering
Memorandum, except as otherwise stated therein, (i) there has been no
material adverse change or any development involving a prospective material
adverse change in the condition, financial or otherwise, or in the
earnings, business affairs, management or business prospects of the Company
or GranCare, whether or not arising in the ordinary course of business,
(ii) the Company and GranCare have not incurred any material liability or
obligation, direct or contingent, other than in the ordinary course of
business, (iii) the Company and GranCare have not entered into any material
transaction other than in the ordinary course of business and (iv)
<PAGE>
11
there has not been any change in the capital stock or long-term debt of the
Company or GranCare, or any dividend or distribution of any kind declared,
paid or made by the Company or GranCare on any class of its capital stock.
2. Purchase and Resale of the Securities. (a) On the basis of the
-------------------------------------
representations, warranties and agreements contained herein, and subject to the
terms and conditions set forth herein, the Company agrees to issue and sell to
each of the Initial Purchasers, severally and not jointly, and each of the
Initial Purchasers, severally and not jointly, agrees to purchase from the
Company, the principal amount of Securities set forth opposite the name of such
Initial Purchaser on Schedule 1 hereto at a purchase price equal to, in the case
of the Senior Subordinated Notes, 96.804% of the principal amount thereof and,
in the case of the Senior Subordinated Discount Notes, 57.919% of the principal
amount thereof. The Company shall not be obligated to deliver any of the
Securities except upon payment for all of the Securities to be purchased as
provided herein.
(b) The Initial Purchasers have advised the Company that they propose
to offer the Securities for resale upon the terms and subject to the conditions
set forth herein and in the Offering Memorandum. Each Initial Purchaser,
severally and not jointly, represents, warrants and agrees that (i) it is
purchasing the Securities pursuant to a private sale exempt from registration
under the Securities Act, (ii) it has not solicited offers for, or offered or
sold, and will not solicit offers for, or offer or sell, the Securities by means
of any form of general solicitation or general advertising within the meaning of
Rule 502(c) of Regulation D under the Securities Act ("Regulation D") or in any
------------
manner involving a public offering within the meaning of Section 4(2) of the
Securities Act and (iii) it has solicited and will solicit offers for the
Securities only from, and has offered or sold and will offer, sell or deliver
the Securities, as part of their initial offering, only (A) within the United
States to persons whom it reasonably believes to be qualified institutional
buyers ("Qualified Institutional Buyers"), as defined in Rule 144A under the
------------------------------
Securities Act ("Rule 144A"), or if any such person is buying for one or more
---------
institutional accounts for which such person is acting as fiduciary or agent,
only when such person has represented to it that each such account is a
Qualified Institutional Buyer to whom notice has been given that such sale or
delivery is being made in reliance on Rule 144A and in each case, in
transactions in accordance with Rule 144A and (B) outside the United States to
persons other than U.S. persons in reliance on Regulation S under the Securities
Act ("Regulation S").
------------
(c) In connection with the offer and sale of Securities in reliance
on Regulation S, each Initial Purchaser, severally and not jointly, represents,
warrants and agrees that:
(i) the Securities have not been registered under the Securities Act
and may not be offered or sold within the United States or to, or for the
account or benefit of, U.S. persons except pursuant to an exemption from,
or in transactions not subject to, the registration requirements of the
Securities Act.
(ii) such Initial Purchaser has offered and sold the Securities, and
will offer and sell the Securities, (A) as part of their distribution at
any time and (B) otherwise until 40 days after the later of the
commencement of the offering of the Securities and the Closing Date, only
in accordance with Regulation S or Rule 144A or any other available
exemption from registration under the Securities Act.
(iii) none of such Initial Purchaser or any of its affiliates or any
other person acting on its or their behalf has engaged or will engage in
any directed selling efforts with respect to the Securities, and all such
persons have complied and will comply with the offering restrictions
requirement of Regulation S.
(iv) at or prior to the confirmation of sale of any Securities sold
in reliance on Regulation S, it will have sent to each distributor, dealer
or other person receiving a selling concession, fee
<PAGE>
12
or other remuneration that purchases Securities from it during the
restricted period a confirmation or notice to substantially the following
effect:
"The Securities covered hereby have not been registered under the U.S.
Securities Act of 1933, as amended (the "Securities Act"), and may not
be offered or sold within the United States or to, or for the account
or benefit of, U.S. persons (i) as part of their distribution at any
time or (ii) otherwise until 40 days after the later of the
commencement of the offering of the Securities and the date of
original issuance of the Securities, except in accordance with
Regulation S or Rule 144A or any other available exemption from
registration under the Securities Act. Terms used above have the
meanings given to them by Regulation S."
(v) it has not and will not enter into any contractual arrangement
with any distributor with respect to the distribution of the Securities,
except with its affiliates or with the prior written consent of the
Company.
Terms used in this Section 2(c) have the meanings given to them by Regulation S.
(d) Each Initial Purchaser, severally and not jointly, represents,
warrants and agrees that (i) it has not offered or sold and prior to the date
six months after the Closing Date will not offer or sell any Securities to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 and the Public Offers
of Securities Regulations 1995 with respect to anything done by it in relation
to the Securities in, from or otherwise involving the United Kingdom; and (iii)
it has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the
Securities to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or is a person to whom such document may otherwise lawfully be issued or passed
on.
(e) Each Initial Purchaser, severally and not jointly, agrees that,
prior to or simultaneously with the confirmation of sale by such Initial
Purchaser to any purchaser of any of the Securities purchased by such Initial
Purchaser from the Company pursuant hereto, such Initial Purchaser shall furnish
to that purchaser a copy of the Offering Memorandum (and any amendment or
supplement thereto that the Company shall have furnished to such Initial
Purchaser prior to the date of such confirmation of sale). In addition to the
foregoing, each Initial Purchaser acknowledges and agrees that the Company and,
for purposes of the opinions to be delivered to the Initial Purchasers pursuant
to Sections 5(d) and (e), counsel for the Company and for the Initial
Purchasers, respectively, may rely upon the accuracy of the representations and
warranties of the Initial Purchasers and their compliance with their agreements
contained in this Section 2, and each Initial Purchaser hereby consents to such
reliance.
(f) The Company acknowledges and agrees that the Initial Purchasers
may sell Securities to any affiliate of an Initial Purchaser and that any such
affiliate may sell Securities purchased by it to an Initial Purchaser.
3. Delivery of and Payment for the Securities. (a) Delivery of and
------------------------------------------
payment for the Securities shall be made at the offices of Simpson Thacher &
Bartlett, New York, New York, or at such other place as shall be agreed upon by
the Initial Purchasers and the Company, at 9:30 A.M., New York City time, on
November 4, 1997, or at such other time or date, not later than seven full
business days
<PAGE>
13
thereafter, as shall be agreed upon by the Initial Purchasers and the Company
(such date and time of payment and delivery being referred to herein as the
"Closing Date").
------------
(b) On the Closing Date, payment of the purchase price for the
Securities shall be made to the Company by wire or book-entry transfer of same-
day funds to such account or accounts as the Company shall specify prior to the
Closing Date or by such other means as the parties hereto shall agree prior to
the Closing Date against delivery to the Initial Purchasers of the certificates
evidencing the Securities. Time shall be of the essence, and delivery at the
time and place specified pursuant to this Agreement is a further condition of
the obligations of the Initial Purchasers hereunder. Upon delivery, the
Securities shall be in global form, registered in such names and in such
denominations as CSI on behalf of the Initial Purchasers shall have requested in
writing not less than two full business days prior to the Closing Date. The
Company agrees to make one or more global certificates evidencing the Securities
available for inspection by CSI on behalf of the Initial Purchasers in New York,
New York at least 24 hours prior to the Closing Date.
4. Further Agreements of the Company and GranCare. The Company and
----------------------------------------------
GranCare agree with each of the Initial Purchasers:
(a) to advise the Initial Purchasers promptly and, if requested,
confirm such advice in writing, of the happening of any event which makes
any statement of a material fact made in the Offering Memorandum untrue or
which requires the making of any additions to or changes in the Offering
Memorandum (as amended or supplemented from time to time) in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; to advise the Initial Purchasers promptly of any
order preventing or suspending the use of the Offering Memorandum, of any
suspension of the qualification of the Securities for offering or sale in
any jurisdiction and of the initiation or threatening of any proceeding for
any such purpose; and to use its best efforts to prevent the issuance of
any such order preventing or suspending the use of the Offering Memorandum
or suspending any such qualification and, if any such suspension is issued,
to obtain the lifting thereof at the earliest possible time;
(b) to furnish promptly to each of the Initial Purchasers and counsel
for the Initial Purchasers, without charge, as many copies of the Offering
Memorandum (and any amend ments or supplements thereto) as may be
reasonably requested;
(c) prior to making any amendment or supplement to the Offering
Memorandum, to furnish a copy thereof to each of the Initial Purchasers and
counsel for the Initial Purchasers and not to effect any such amendment or
supplement to which the Initial Purchasers shall reasonably object by
notice to the Company after a reasonable period to review;
(d) if, at any time prior to completion of the resale of the
Securities by the Initial Purchasers, any event shall occur or condition
exist as a result of which it is necessary, in the opinion of counsel for
the Initial Purchasers or counsel for the Company, to amend or supplement
the Offering Memorandum in order that the Offering Memorandum will not
include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances existing at the time it is delivered to a purchaser, not
misleading, or if it is necessary to amend or supplement the Offering
Memorandum to comply with applicable law, to promptly prepare such
amendment or supplement as may be necessary to correct such untrue
statement or omission or so that the Offering Memorandum, as so amended or
supplemented, will comply with applicable law;
(e) for so long as the Securities are outstanding and are "restricted
securities" within the meaning of Rule 144(a)(3) under the Securities Act,
to furnish to holders of the Securities and prospective purchasers of the
Securities designated by such holders, upon request of such
<PAGE>
14
holders or such prospective purchasers, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act, unless the
Company is then subject to and in compliance with Section 13 or 15(d) of
the Exchange Act (the foregoing agreement being for the benefit of the
holders from time to time of the Securities and prospective purchasers of
the Securities designated by such holders);
(f) for a three-year period ending on the third anniversary of the
Closing Date, to furnish to the Initial Purchasers copies of any annual
reports, quarterly reports and current reports filed by the Company with
the Commission on Forms 10-K, 10-Q and 8-K, or such other similar forms as
may be designated by the Commission, and such other documents, reports and
information as shall be furnished by the Company to the Trustee or to the
holders of the Securities pursuant to the Indenture or the Exchange Act or
any rule or regulation of the Commission thereunder;
(g) to promptly take from time to time such actions as the Initial
Purchasers may reasonably request to qualify the Securities for offering
and sale under the securities or Blue Sky laws of such jurisdictions in the
United States as the Initial Purchasers may reasonably designate and to
continue such qualifications in effect for so long as required for the
resale of the Securities; and to arrange for the determination of the
eligibility for investment of the Securities under the laws of such
jurisdictions as the Initial Purchasers may reasonably request; provided
--------
that the Company and its subsidiaries will not be required to qualify
generally to do business in any jurisdiction where it is not then so
qualified or to take any action which would subject it to general service
of process or to taxation in any such jurisdiction where it is not then so
subject;
(h) to assist the Initial Purchasers in arranging for the Securities
to be designated Private Offerings, Resales and Trading through Automated
Linkages ("PORTAL") Market securities in accordance with the rules and
------
regulations adopted by the National Association of Securities Dealers, Inc.
("NASD") relating to trading in the PORTAL Market and for the Securities to
----
be eligible for clearance and settlement through The Depository Trust
Company ("DTC");
---
(i) not to, and to cause its affiliates not to, sell, offer for sale
or solicit offers to buy or otherwise negotiate in respect of any security
(as such term is defined in the Securities Act) which could be integrated
with the sale of the Securities in a manner which would require
registration of the Securities under the Securities Act;
(j) except following the effectiveness of the Exchange Offer
Registration Statement or the Shelf Registration Statement, as the case may
be, not to, and to cause its affiliates not to, and not to authorize or
knowingly permit any person acting on their behalf to, solicit any offer to
buy or offer to sell the Securities by means of any form of general
solicitation or general advertising within the meaning of Regulation D or
in any manner involving a public offering within the meaning of Section
4(2) of the Securities Act; and not to offer, sell, contract to sell or
otherwise dispose of, directly or indirectly, any securities under
circumstances where such offer, sale, contract or disposition would cause
the exemption afforded by Section 4(2) of the Securities Act to cease to be
applicable to the offering and sale of the Securities as contemplated by
this Agreement and the Offering Memorandum;
(k) from the date hereof and until the earlier of (i) 180 days after
the date of the Offering Memorandum or (ii) the consummation of the
Exchange Offer, not to offer for sale, sell, contract to sell or otherwise
dispose of, directly or indirectly, or file a registration statement for,
or announce any offer, sale, contract for sale of or other disposition of
any debt securities issued or guaranteed by the Company or any of its
subsidiaries (other than the Securities) without the prior written consent
of the Initial Purchasers;
<PAGE>
15
(l) during the period from the Closing Date until two years after the
Closing Date, without the prior written consent of the Initial Purchasers,
not to, and not permit any of its affiliates (as defined in Rule 144 under
the Securities Act) to, resell any of the Securities that have been
reacquired by them, except for Securities purchased by the Company or any
of its affiliates and resold in a transaction registered under the
Securities Act;
(m) not to, for so long as the Securities are outstanding, be or
become, or be or become owned by, an open-end investment company, unit
investment trust or face-amount cer tificate company that is or is required
to be registered under Section 8 of the Investment Com-pany Act, and to not
be or become, or be or become owned by, a closed-end investment company
required to be registered, but not registered thereunder;
(n) in connection with the offering of the Securities, until CSI on
behalf of the Initial Purchasers shall have notified the Company of the
completion of the resale of the Securities, not to, and to cause its
affiliated purchasers (as defined in Regulation M under the Exchange Act)
not to, either alone or with one or more other persons, bid for or
purchase, for any account in which it or any of its affiliated purchasers
has a beneficial interest, any Securities, or attempt to induce any person
to purchase any Securities; and not to, and to cause its affiliated
purchasers not to, make bids or purchase for the purpose of creating
actual, or apparent, active trading in or of raising the price of the
Securities;
(o) to furnish to each of the Initial Purchasers on the date hereof a
copy of the independent accountants' report included in the Offering
Memorandum signed by the accountants rendering such report;
(p) to do and perform all things required to be done and performed by
it under this Agreement that are within its control prior to or after the
Closing Date, and to use its reasonable best efforts to satisfy all
conditions precedent on its part to the delivery of the Securities;
(q) prior to the Closing Date, not to issue any press release or
other communication directly or indirectly or hold any press conference
with respect to the Company or GranCare, its condition, financial or
otherwise, or earnings, business affairs or business prospects (except for
routine oral marketing communications in the ordinary course of business
and consistent with the past practices of the Company and of which the
Initial Purchasers are notified), without prior consultation with the
Initial Purchasers, unless in the judgment of the Company or GranCare and
their respective counsel, and after notification to the Initial Purchasers,
such press release or communication is required by law; and
(r) to apply the net proceeds from the sale of the Securities as set
forth in the Offering Memorandum under the heading "Use of Proceeds".
5. Conditions of Initial Purchasers' Obligations. The respective
---------------------------------------------
obligations of the several Initial Purchasers hereunder are subject to the
accuracy, on and as of the date hereof and the Closing Date, of the
representations and warranties of the Company and GranCare contained herein, to
the accuracy of the statements of the Company, GranCare and their respective
officers made in any certificates delivered pursuant hereto, to the performance
by the Company and GranCare of their respective obligations hereunder, and to
each of the following additional terms and conditions:
(a) The Offering Memorandum (and any amendments or supplements
thereto) shall have been printed and copies distributed to the Initial
Purchasers as promptly as practicable on or following the date of this
Agreement or at such other date and time as to which the Initial Purchasers
may agree; and no stop order suspending the sale of the Securities in any
jurisdic
<PAGE>
16
tion shall have been issued and no proceeding for that purpose shall have
been commenced or shall be pending or threatened.
(b) None of the Initial Purchasers shall have discovered and
disclosed to the Company on or prior to the Closing Date that the Offering
Memorandum or any amendment or supplement thereto contains an untrue
statement of a fact which, in the written advice of counsel for the Initial
Purchasers, is material or omits to state any fact which, in the written
advice of such counsel (a copy of which shall be supplied to GranCare and
the Company), is material and is required to be stated therein or is
necessary to make the statements therein not misleading.
(c) All corporate proceedings and other matters required for due
authorization and validity of each of the Transaction Documents and the
transactions contemplated thereby and the Offering Memorandum shall be
satisfactory in all material respects to the Initial Purchasers, and the
Company and GranCare shall have furnished to the Initial Purchasers copies
of such documents and information that they or their counsel may reasonably
request to enable them to pass upon such matters.
(d) Powell, Goldstein, Frazer & Murphy LLP shall have furnished to
the Initial Purchasers their written opinion, as counsel to the Company
following the Mergers and GranCare, addressed to the Initial Purchasers and
dated the Closing Date, in form and substance reasonably satisfactory to
the Initial Purchasers, substantially to the effect set forth in Annex B
hereto.
(e) The Initial Purchasers shall have received from Simpson Thacher &
Bartlett, counsel for the Initial Purchasers, such opinion or opinions,
dated the Closing Date, with respect to such matters as the Initial
Purchasers may reasonably require, and the Company and GranCare shall have
furnished to such counsel such documents and information as they request
for the purpose of enabling them to pass upon such matters.
(f) The Company and GranCare shall have furnished to the Initial
Purchasers a letter (the "Initial Letter") of Ernst & Young LLP, addressed
--------------
to the Initial Purchasers and dated the date hereof, in form and substance
satisfactory to the Initial Purchasers, substantially to the effect set
forth in Annex C hereto.
(g) The Company and GranCare shall have furnished to the Initial
Purchasers a letter (the "Bring-Down Letter") of Ernst & Young LLP,
-----------------
addressed to the Initial Purchasers and dated the Closing Date (i)
confirming that they are independent public accountants with respect to the
Company and its subsidiaries and GranCare and its subsidiaries,
respectively, within the meaning of Rule 101 of the Code of Professional
Conduct of the AICPA and its interpretations and rulings thereunder, (ii)
stating, as of the date of the Bring-Down Letter (or, with respect to
matters involving changes or developments since the respective dates as of
which specified financial information is given in the Offering Memorandum,
as of a date not more than three business days prior to the date of the
Bring-Down Letter), that the conclusions and findings of such accountants
with respect to the financial information and other matters covered by the
Initial Letter are accurate and (iii) confirming in all material respects
the conclusions and findings set forth in the Initial Letter.
(h) The Company shall have furnished to the Initial Purchasers a
certificate, dated the Closing Date, of its Executive Vice President and
Chief Financial Officer and Vice President and Associate General Counsel,
solely in their capacity as officers and not in their individual capacity,
stating that (A) such officers have examined the Offering Memorandum, (B)
in their opinion, the Offering Memorandum, as of its date, did not include
any untrue statement of a material fact and did not omit to state a
material fact required to be stated therein or necessary in
<PAGE>
17
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and since the date of the
Offering Memorandum, no event has occurred which should have been set forth
in a supplement or amendment to the Offering Memorandum so that the
Offering Memorandum (as so amended or supplemented) would not include any
untrue statement of a material fact and would not omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading and (C) to his knowledge after reasonable due inquiry,
as of the Closing Date, the representations and warranties of the Company
in this Agreement are true and correct, the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied hereunder on or prior to the Closing Date in all material
respects, and subsequent to the date of the most recent financial
statements contained in the Offering Memorandum, there has been no material
adverse change in the financial position or results of operation of the
Company and its subsidiaries taken as a whole, or any change, or any
development including a prospective change, in or affecting the condition
(financial or otherwise), results of operations, business or prospects of
the Company and its subsidiaries taken as a whole, except as set forth in
the Offering Memorandum. Such officers may also state that (i) they were
the Executive Vice President and Chief Financial Officer of LCA (prior to
the Mergers) and the Vice President, Assistant General Counsel and
Assistant Secretary of GranCare (prior to the Mergers), (ii) they
participated in the preparation of the Offering Memorandum, and (iii) they
are generally familiar with the operations and business of the respective
corporations of which they were officers, have made such inquiries as they
deemed appropriate in connection with making this certificate and have
conferred amongst themselves in its preparation.
(i) GranCare shall have furnished to the Initial Purchasers a
certificate, dated the Closing Date, of its general counsel and its chief
financial officer, solely in their capacity as officers and not in their
individual capacity, stating that (A) such officers have examined the
Offering Memorandum, (B) in their opinion, the GranCare Information
contained in the Offering Memorandum, as of its date, did not include any
untrue statement of a material fact and did not omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and since the date of the Offering Memorandum, no
event has occurred in respect of GranCare which should have been set forth
in a supplement or amendment to the Offering Memorandum so that the
Offering Memorandum (as so amended or supplemented) would not include any
untrue statement of a material fact and would not omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading and (C) to their knowledge after reasonable due
inquiry, as of the Closing Date, the representations and warranties of
GranCare in this Agreement are true and correct, GranCare has complied with
all agreements and satisfied all conditions on its part to be performed or
satisfied hereunder on or prior to the Closing Date in all material
respects, and subsequent to the date of the most recent financial
statements contained in the Offering Memorandum, there has been no material
adverse change in the financial position or results of operations of
GranCare and its subsidiaries taken as a whole, or any change, or any
development including a prospective change, in or affecting the condition
(financial or otherwise), results of operations, business or prospects of
GranCare and its subsidiaries taken as a whole, except as set forth in the
Offering Memorandum.
(j) The Initial Purchasers shall have received a counterpart of the
Registration Rights Agreement which shall have been executed and delivered
by a duly authorized officer of the Company.
<PAGE>
18
(k) The Indenture shall have been duly executed and delivered by the
Company and the Trustee, and the Securities shall have been duly executed
and delivered by the Company and duly authenticated by the Trustee.
(l) The Securities shall have been approved by the NASD for trading
in the PORTAL Market.
(m) If any event shall have occurred that requires the Company under
Section 4(d) to prepare an amendment or supplement to the Offering
Memorandum, such amendment or supplement shall have been prepared, the
Initial Purchasers shall have been given a reasonable opportunity to
comment thereon, and copies thereof shall have been delivered to the
Initial Purchasers reasonably in advance of the Closing Date.
(n) There shall not have occurred any invalidation of Rule 144A under
the Securities Act by any court or any withdrawal or proposed withdrawal of
any rule or regulation under the Securities Act or the Exchange Act by the
Commission or any amendment or proposed amendment thereof by the Commission
which, in the case of a proposed withdrawal, in the written advice of
counsel to the Initial Purchasers, a copy of which will be delivered to
GranCare and the Company, is reasonably likely to occur and would
materially impair the ability of the Initial Purchasers to purchase, hold
or effect resales of the Securities as contemplated hereby.
(o) Except as otherwise disclosed in the Offering Memorandum
(exclusive of any amendment or supplement thereto), subsequent to the
execution and delivery of this Agreement or, if earlier, the dates as of
which information is given in the Offering Memorandum (exclusive of any
amendment or supplement thereto), there shall not have been any change in
the capital stock or long-term debt or any change, or any development
involving a prospective change, in or affecting the condition (financial or
otherwise), results of operations, business or prospects of the Company and
its subsidiaries taken as a whole (including GranCare prior to the
consummation of the Mergers), the effect of which, in any such case
described above, is, in the judgment of the Initial Purchasers, so material
and adverse as to make it impracticable or inadvisable to proceed with the
sale or delivery of the Securities on the terms and in the manner
contemplated by this Agreement and the Offering Memorandum, which change or
development shall be specified in writing by the Initial Purchasers to the
Company and GranCare (exclusive of any amendment or supplement thereto).
(p) No action shall have been taken and no statute, rule, regulation
or order shall have been enacted, adopted or issued by any governmental
agency or body which would, as of the Closing Date, prevent the issuance or
sale of the Securities; and no injunction, restraining order or order of
any other nature by any federal or state court of competent jurisdiction
shall have been issued as of the Closing Date which would prevent the
issuance or sale of the Securities.
(q) Subsequent to the execution and delivery of this Agreement (i) no
downgrading shall have occurred in the rating accorded the Securities or
any of the Company's or GranCare's other debt securities or preferred stock
by any "nationally recognized statistical rating organization", as such
term is defined by the Commission for purposes of Rule 436(g)(2) of the
rules and regulations of the Commission under the Securities Act and (ii)
no such organization shall have publicly announced that it has under
surveillance or review (other than an announcement with positive
implications of a possible upgrading), its rating of the Securities or any
of the Company's or GranCare's other debt securities or preferred stock.
(r) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the over-the-counter market
shall have been suspended or limited, or minimum prices shall
<PAGE>
19
have been established on any such exchange or market by the Commission, by
any such exchange or by any other regulatory body or governmental authority
having jurisdiction, or trading in any securities of the Company on any
exchange or in the over-the-counter market shall have been suspended or
(ii) any moratorium on commercial banking activities shall have been
declared by federal or New York state authorities or (iii) an outbreak or
escalation of hostilities or a declaration by the United States of a
national emergency or war shall have occurred or (iv) a material adverse
change in general economic, political or financial conditions (or in the
effect of international conditions on the financial markets in the United
States) shall have occurred, the effect of which, in the case of this
clause (iv), is, in the judgment of the Initial Purchasers, so material and
adverse as to make it impracticable or inadvisable to proceed with the sale
or the delivery of the Securities on the terms and in the manner
contemplated by this Agreement and in the Offering Memorandum (exclusive of
any amendment or supplement thereto).
(s) The Initial Purchasers shall have received (i) copies of each of
the Merger Documents, and the documentation evidencing the Senior Credit
Facility (the "Bank Documents"), in each case certified by the secretary of
--------------
the Company as being true, complete and correct and (ii) evidence,
reasonably satisfactory to them, that (A) each of the Transactions shall
have been or is being consummated in accordance with the terms of the
Merger Documents (and without waiver or amendment of any material condition
contained therein) and (B) the initial funding shall have occurred or is
occurring under the Bank Documents and the Company shall have received at
least $690 million in gross cash proceeds therefrom. The Bank Documents and
the Merger Documents shall be in form and substance reasonably satisfactory
to the Initial Purchasers; provided, however, the condition set forth in
clause (ii)(A) of this paragraph relating to the consummation of the
Transactions may not be waived by the Initial Purchasers.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Initial Purchasers.
6. Termination. The obligations of the Initial Purchasers hereunder
-----------
may be terminated by the Initial Purchasers, in their absolute discretion, by
notice given to and received by the Company prior to delivery of and payment for
the Securities if, prior to that time, any of the events described in Section
5(n), (o), (p), (q) or (r) shall have occurred and be continuing.
7. Defaulting Initial Purchasers. (a) If, on the Closing Date, any
-----------------------------
Initial Purchaser defaults in the performance of its obligations under this
Agreement, the non-defaulting Initial Purchasers may make arrangements for the
purchase of the Securities which such defaulting Initial Purchaser agreed but
failed to purchase by other persons satisfactory to the Company and the non-
defaulting Initial Purchasers, but if no such arrangements are made within 48
hours after such default, this Agreement shall terminate without liability on
the part of the non-defaulting Initial Purchasers or the Company, except that
the Company will continue to be liable for the payment of expenses to the extent
set forth in Sections 8 and 12 and except that the provisions of Sections 9 and
10 shall not terminate and shall remain in effect. As used in this Agreement,
the term "Initial Purchasers" includes, for all purposes of this Agreement
unless the context otherwise requires, any party not listed in Schedule 1 hereto
that, pursuant to this Section 7, purchases Securities which a defaulting
Initial Purchaser agreed but failed to purchase.
(b) Nothing contained herein shall relieve a defaulting Initial
Purchaser of any liability it may have to the Company or any non-defaulting
Initial Purchaser for damages caused by its default. If other persons are
obligated or agree to purchase the Securities of a defaulting Initial Purchaser,
either the non-defaulting Initial Purchasers or the Company may postpone the
Closing Date for up to seven full
<PAGE>
20
business days in order to effect any changes that in the opinion of counsel for
the Company or counsel for the Initial Purchasers may be necessary in the
Offering Memorandum or in any other document or arrangement, and the Company
agrees to promptly prepare any amendment or supplement to the Offering
Memorandum that effects any such changes.
8. Reimbursement of Initial Purchasers' Expenses. If (a) this
---------------------------------------------
Agreement shall have been terminated pursuant to Section 6 or 7, (b) the Company
shall fail to tender the Securities for delivery to the Initial Purchasers for
any reason or (c) the Initial Purchasers shall decline to purchase the
Securities for any reason permitted under this Agreement, the Company shall
reimburse the Initial Purchasers for such out-of-pocket expenses (including
reasonable fees and disbursements of counsel) as shall have been reasonably
incurred by the Initial Purchasers in connection with this Agreement and the
proposed purchase and resale of the Securities. If this Agreement is terminated
pursuant to Section 7 by reason of the default of one or more of the Initial
Purchasers, the Company shall not be obligated to reimburse any defaulting
Initial Purchaser on account of such expenses.
9. Indemnification. (a) The Company shall indemnify and hold
---------------
harmless each Initial Purchaser, its affiliates, their respective officers,
directors, employees, representatives and agents, and each person, if any, who
controls any Initial Purchaser within the meaning of the Securities Act or the
Exchange Act (collectively referred to for purposes of this Section 9(a) and
Section 10 as an Initial Purchaser), from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof (including,
without limitation, any loss, claim, damage, liability or action relating to
purchases and sales of the Securities), to which that Initial Purchaser may
become subject, whether commenced or threatened, under the Securities Act, the
Exchange Act, any other federal or state statutory law or regulation, at common
law or otherwise, solely insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in the Preliminary Offering
Memorandum or the Offering Memorandum or in any amendment or supplement thereto
or in any information provided by the Company pursuant to Section 4(e) or (ii)
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, and shall
reimburse each Initial Purchaser promptly upon demand for any legal or other
expenses reasonably incurred by that Initial Purchaser in connection with
investigating or defending or preparing to defend against or appearing as a
third party witness in connection with any such loss, claim, damage, liability
or action as such expenses are incurred; provided, however, that the Company
-------- -------
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, an untrue statement
or alleged untrue statement in or omission or alleged omission from any of such
documents in reliance upon and in conformity with any Initial Purchasers'
Information furnished by such Initial Purchaser; and provided, further, that
-------- -------
with respect to any such untrue statement in or omission from the Preliminary
Offering Memorandum, the indemnity agreement contained in this Section 9(a)
shall not inure to the benefit of any such Initial Purchaser to the extent that
the sale to the person asserting any such loss, claim, damage, liability or
action was an initial resale by such Initial Purchaser and any such loss, claim,
damage, liability or action of or with respect to such Initial Purchaser results
from the fact that both (A) to the extent required by applicable law, a copy of
the Offering Memorandum was not sent or given to such person at or prior to the
written confirmation of the sale of such Securities to such person and (B) the
untrue statement in or omission from the Preliminary Offering Memorandum was
corrected in the Offering Memorandum unless such failure to deliver the Offering
Memorandum was a result of non-compliance by the Company with Section 4(b).
(b) Each Initial Purchaser, severally and not jointly, shall
indemnify and hold harmless the Company, its affiliates, their respective
officers, directors, employees, representatives and agents, and each person, if
any, who controls the Company within the meaning of the Securities Act or the
Exchange Act (collectively referred to for purposes of this Section 9(b) and
Section 10 as the Company), from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which the
Company may become subject, whether commenced or threatened, under the
Securities Act,
<PAGE>
21
the Exchange Act, any other federal or state statutory law or regulation, at
common law or otherwise, solely insofar as such loss, claim, damage, liability
or action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in the Preliminary Offering
Memorandum or the Offering Memorandum or in any amendment or supplement thereto
or (ii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, but in each case only to the extent that the untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with any Initial Purchasers' Information furnished by
such Initial Purchaser, and shall reimburse the Company for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending or preparing to defend against or appearing as a third party witness
in connection with any such loss, claim, damage, liability or action as such
expenses are incurred.
(c) Promptly after receipt by an indemnified party under this Section
9 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party pursuant to Section 9(a) or 9(b), notify the indemnifying
party in writing of the claim or the commencement of that action; provided,
--------
however, that the failure to notify the indemnifying party shall not relieve it
- -------
from any liability which it may have under this Section 9 except to the extent
that it has been materially prejudiced (through the forfeiture of substantive
rights or defenses) by such failure; and, provided, further, that the failure to
-------- -------
notify the indemnifying party shall not relieve it from any liability which it
may have to an indemnified party otherwise than under this Section 9. If any
such claim or action shall be brought against an indemnified party, and it shall
notify the indemnifying party thereof, the indemnifying party shall be entitled
to participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 9 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that an
-------- -------
indemnified party shall have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel for the
indemnified party will be at the expense of such indemnified party unless (i)
the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (ii) the indemnified party has reasonably
concluded (based upon written advice of counsel to the indemnified party, a copy
of which shall be provided to the indemnifying party) that there may be legal
defenses available to it or other indemnified parties that are different from or
in addition to those available to the indemnifying party, (iii) a conflict or
potential conflict exists (based upon written advice of counsel to the
indemnified party, a copy of which shall be provided to the indemnifying party)
between the indemnified party and the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (iv) the indemnifying party has not in
fact employed counsel reasonably satisfactory to the indemnified party to assume
the defense of such action within a reasonable time after receiving notice of
the commencement of the action, in each of which cases the reasonable fees,
disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm of attorneys (in addition to any
local counsel) at any one time for all such indemnified party or parties. Each
indemnified party, as a condition of the indemnity agreements contained in
Sections 9(a) and 9(b), shall use all reasonable efforts to cooperate with the
indemnifying party in the defense of any such action or claim. No indemnifying
party shall be liable for any settlement of any such action effected without its
written consent (which consent shall not be unreasonably withheld), but if
settled with its written consent or if there be a final judgment for the
plaintiff in any such action, the indemnifying party agrees to indemnify and
hold harmless any indemnified party from and against any loss or liability by
reason of such settlement or judgment. No indemnifying party shall, without the
prior written consent of the indemnified
<PAGE>
22
party (which consent shall not be unreasonably withheld), effect any settlement
of any pending or threatened proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
The obligations of the Company and the Initial Purchasers in this
Section 9 and in Section 10 are in addition to any other liability that the
Company or the Initial Purchasers, as the case may be, may otherwise have,
including in respect of any breaches of representations, warranties and
agreements made herein by any such party.
10. Contribution. If the indemnification provided for in Section 9
------------
is unavailable or insufficient to hold harmless an indemnified party under
Section 9(a) or 9(b), then each indemnifying party shall, in lieu of
indemnifying such indemnified party, contribute to the amount paid or payable by
such indemnified party as a result of such loss, claim, damage or liability, or
action in respect thereof, (i) in such proportion as shall be appropriate to
reflect the relative benefits received by the Company on the one hand and the
Initial Purchasers on the other from the offering of the Securities or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and the Initial Purchasers on the other with respect to the
statements or omissions that resulted in such loss, claim, damage or liability,
or action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Initial Purchasers on the other with respect to such offering shall be
deemed to be in the same proportion as the total net proceeds from the offering
of the Securities purchased under this Agreement (before deducting expenses)
received by or on behalf of the Company, on the one hand, and the total
discounts and commissions received by the Initial Purchasers with respect to the
Securities purchased under this Agreement, on the other, bear to the total gross
proceeds from the sale of the Securities under this Agreement, in each case as
set forth in the table on the cover page of the Offering Memorandum. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to the Company or information
supplied by the Company on the one hand or to any Initial Purchasers'
Information on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Initial Purchasers agree that
it would not be just and equitable if contributions pursuant to this Section 10
were to be determined by pro rata allocation (even if the Initial Purchasers
were treated as one entity for such purpose) or by any other method of
allocation that does not take into account the equitable considerations referred
to herein. The amount paid or payable by an indemnified party as a result of the
loss, claim, damage or liability, or action in respect thereof, referred to
above in this Section 10 shall be deemed to include, for purposes of this
Section 10, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending or preparing to defend any
such action or claim. Notwithstanding the provisions of this Section 10, no
Initial Purchaser shall be required to contribute any amount in excess of the
amount by which the total discounts and commissions received by such Initial
Purchaser with respect to the Securities purchased by it under this Agreement
exceeds the amount of any damages which such Initial Purchaser has otherwise
paid or become liable to pay by reason of any untrue or alleged untrue statement
or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 12(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Initial Purchasers' obligations to contribute
as provided in this Section 10 are several in proportion to their respective
purchase obligations and not joint.
11. Persons Entitled to Benefit of Agreement. This Agreement shall
----------------------------------------
inure to the benefit of and be binding upon the Initial Purchasers, the Company
and their respective successors. This Agreement and the terms and provisions
hereof are for the sole benefit of only those persons, except as
<PAGE>
23
provided in Sections 9 and 10 with respect to affiliates, officers, directors,
employees, representatives, agents and controlling persons of the Company and
the Initial Purchasers and in Section 4(e) with respect to holders and
prospective purchasers of the Securities. Nothing in this Agreement is intended
or shall be construed to give any person, other than the persons referred to in
this Section 11, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
12. Expenses. The Company agrees with the Initial Purchasers to pay
--------
(a) the costs incident to the authorization, issuance, sale, preparation and
delivery of the Securities and any taxes payable in that connection; (b) the
costs incident to the preparation, printing and distribution of the Preliminary
Offering Memorandum, the Offering Memorandum and any amendments or supplements
thereto; (c) the costs of reproducing and distributing each of the Transaction
Documents; (d) the costs incident to the preparation, printing and delivery of
the certificates evidencing the Securities, including stamp duties and transfer
taxes, if any, payable upon issuance of the Securities; (e) the fees and
expenses of the Company's counsel (including, without limitation, the fees and
expenses of counsel to the Company prior to completion of the Mergers),
GranCare's counsel and their respective independent accountants; (f) the fees
and expenses of qualifying the Securities under the securities laws of the
several jurisdictions as provided in Section 4(g) and of preparing, printing and
distributing Blue Sky Memoranda (including related fees and expenses of counsel
for the Initial Purchasers); (g) any fees charged by rating agencies for rating
the Securities; (h) the fees and expenses of the Trustee and any paying agent
(including related fees and expenses of any counsel to such parties); (i) all
expenses and application fees incurred in connection with the application for
the inclusion of the Securities on the PORTAL Market and the approval of the
Securities for book-entry transfer by DTC; and (j) all other costs and expenses
incident to the performance of the obligations of the Company under this
Agreement which are not otherwise specifically provided for in this Section 12;
provided, however, that except as provided in this Section 12 and Section 8, the
- -------- -------
Initial Purchasers shall pay their own costs and expenses.
13. Survival. The respective indemnities, rights of contribution,
--------
representations, warranties and agreements of the Company and the Initial
Purchasers contained in this Agreement or made by or on behalf of the Company
or the Initial Purchasers pursuant to this Agreement or any certificate
delivered pursuant hereto shall survive the delivery of and payment for the
Securities and shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement or any investigation made by or on
behalf of any of them or any of their respective affiliates, officers,
directors, employees, representatives, agents or controlling persons, until such
time as the applicable statute of limitations has expired.
14. Notices, etc.. All statements, requests, notices and agreements
-------------
hereunder shall be in writing, and:
(a) if to the Initial Purchasers, shall be delivered or sent by mail
or telecopy transmission to Chase Securities Inc., 270 Park Avenue, New
York, New York 10017, Attention: David Fass (telecopier no.: (212) 270-
0994);
(b) if to the Company, shall be delivered or sent by mail or telecopy
transmission to the address of the Company set forth in the Offering
Memorandum, Attention: General Counsel (telecopier no.: (770) 698-8199);
or
(c) if to GranCare, shall be delivered or sent by mail or telecopy
transmission to GranCare, Inc., One Ravinia Drive, Suite 1500, Atlanta
Georgia 30346, Attention: General Counsel (telecopier no.: (770) 698-
8199).
provided that any notice to an Initial Purchaser pursuant to Section 9(c) shall
- --------
also be delivered or sent by mail to such Initial Purchaser at its address set
forth on the signature page hereof. Any such statements,
<PAGE>
24
requests, notices or agreements shall take effect at the time of receipt
thereof. The Company shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the Initial Purchasers
by CSI.
15. Definition of Terms. For purposes of this Agreement, (a) the
-------------------
term "business day" means any day on which the New York Stock Exchange, Inc. is
open for trading, (b) the term "subsidiary" has the meaning set forth in Rule
405 under the Securities Act, (c) except where otherwise expressly provided, the
term "affiliate" has the meaning set forth in Rule 405 under the Securities Act
and (d) the term "Merger Documents" means the collective reference to the
Recapitalization Merger Agreement, the GranCare Merger Agreement and each of the
other related agreements to which either LCA or GranCare is a party to be
executed and delivered on or prior to the Closing Date pursuant thereto or in
connection therewith.
16. Initial Purchasers' Information. The parties hereto acknowledge
-------------------------------
and agree that, for all purposes of this Agreement, the Initial Purchasers'
Information consists solely of the following information in the Preliminary
Offering Memorandum and the Offering Memorandum: (i) the last paragraph on the
front cover page concerning the terms of the offering by the Initial Purchasers;
(ii) the first paragraph on page (i); and (iii) the information contained in the
first sentence of the third paragraph, the second sentence of the fourth
paragraph, the fifth paragraph, the seventh paragraph, the second sentence of
the ninth paragraph, the twelfth paragraph and the thirteenth paragraph under
the heading "Plan of Distribution".
17. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
18. Counterparts. This Agreement may be executed in one or more
------------
counterparts (which may include counterparts delivered by telecopier) and, if
executed in more than one counterpart, the executed counterparts shall each be
deemed to be an original, but all such counterparts shall together constitute
one and the same instrument.
19. Amendments. No amendment or waiver of any provision of this
----------
Agreement, nor any consent or approval to any departure therefrom, shall in any
event be effective unless the same shall be in writing and signed by the parties
hereto.
20. Headings. The headings herein are inserted for convenience of
--------
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement among the parties hereto in
accordance with its terms.
Very truly yours,
LIVING CENTERS OF AMERICA, INC.
By /s/ Charles B. Carden
--------------------------------
Name: Charles B. Carden
Title: Chief Financial Officer
GRANCARE, INC.
(solely as to its representations, warranties and
agreements contained in Sections 1 and 4 that
pertain to GranCare)
By /s/ Keith J. Yoder
----------------------------------
Name: Keith J. Yoder
Title: Chief Financial Officer
Accepted:
CHASE SECURITIES INC.
By /s/ David Fass
----------------------------
Authorized Signatory
Address for notices pursuant to Section 9(c):
1 Chase Plaza, 25th floor
New York, New York 10081
Attention: Legal Department
SMITH BARNEY INC.
By /s/ John K. Hudson
---------------------------
Authorized Signatory
Address for notices pursuant to Section 9(c):
388 Greenwich Street
New York, New York 10003
Attention: Legal Department
<PAGE>
CREDIT SUISSE FIRST BOSTON CORPORATION
By /s/ M.W. Kennelly
--------------------------
Authorized Signatory
Address for notices pursuant to Section 9(c):
Eleven Madison Avenue, 24th Floor
New York, New York 10010
Attention: Investment Banking Department/Transactions Advisory Group
<PAGE>
SCHEDULE 1
SENIOR SUBORDINATED NOTES
<TABLE>
<CAPTION>
Principal Amount of Senior
Initial Purchasers Subordinated Notes to be Purchased
- ------------------ ----------------------------------
<S> <C>
Chase Securities Inc. $ 176,000,000
Smith Barney Inc. $ 74,250,000
Credit Suisse First Boston Corporation $ 24,750,000
------------------------
Total $ 275,000,000
==========================
</TABLE>
SENIOR SUBORDINATED DISCOUNT NOTES
<TABLE>
<CAPTION>
Principal Amount of Senior
Initial Purchasers Subordinated Discount Notes to Be Purchased
- ------------------ -------------------------------------------
<S> <C>
Chase Securities Inc. $ 188,160,000
Smith Barney Inc. $ 79,380,000
Credit Suisse First Boston Corporation $ 26,460,000
------------------------
Total $ 294,000,000
==========================
</TABLE>
<PAGE>
EXHIBIT 10.28
FOR SETTLEMENT PURPOSES ONLY
TERMINATION AND RELEASE AGREEMENT
---------------------------------
THIS TERMINATION AND RELEASE AGREEMENT (the "Agreement") dated as of
September 3, 1997, by and among GranCare, Inc., a Delaware corporation
("GranCare"), Manor Care, Inc., a Delaware corporation ("Manor Care"), Vitalink
Pharmacy Services, Inc., a Delaware corporation ("Vitalink;" together with Manor
Care and GranCare, referred to collectively herein as the "Transaction
Parties"), and, solely for the purpose of making the representations and
warranties set forth in Section 7 hereof and obtaining and granting the release
contained in Section 8 hereof, Apollo Management, L.P., a Delaware limited
partnership ("Apollo") and Living Centers of America, Inc., a Delaware
corporation ("LCA").
W I T N E S S E T H:
-------------------
WHEREAS, in connection with the consummation of the transactions
contemplated by that certain Amended and Restated Agreement and Plan of
Distribution dated as of September 3, 1996 (the "Distribution Agreement") and
that certain Amended and Restated Agreement and Plan of Merger dated as of
September 3, 1996 (the "Vitalink Merger Agreement"), GranCare, Vitalink and
Manor Care executed and delivered a Non-Competition Agreement, dated as of
February 12, 1997 (the "Non-Competition Agreement");
WHEREAS, GranCare desires to obtain the flexibility to pursue such
strategic initiatives as it may determine from time to time to present the best
alternatives then available to GranCare free from the limitations that Vitalink
has asserted are imposed by the Non-Competition Agreement; and
<PAGE>
WHEREAS, the Transaction Parties desire to terminate the Non-Competition
Agreement on the terms and subject to the conditions contemplated by this
Agreement.
NOW THEREFORE, in consideration of the premises and covenants set forth
herein, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, do hereby agree as follows:
Section 1. As of the Closing Date (as defined below), the Non-Competition
----------
Agreement shall be terminated and have no further force and effect with respect
to any of the Transaction Parties.
Section 2. At the Closing (as defined below) of the transactions
----------
contemplated by this Agreement, GranCare shall pay to Vitalink and Manor Care,
in cash by wire transfer of immediately available funds, the sums of $18,500,000
and $500,000, respectively (collectively, the "Termination Fee") in
consideration of the cancellation and termination of the Non-Competition
Agreement.
Section 3. In recognition of the intention of the Transaction Parties to
----------
terminate the Non-Competition Agreement as of the Closing Date, the Transaction
Parties will, concurrently with the execution of this document, execute
stipulations and proposed orders in the forms attached hereto as Schedule 3.1
which orders will, inter alia, vacate the preliminary injunction issued in the
Litigation (as defined in Section 8 hereof), and the stipulation and order to be
filed in the Court of Chancery for the State of Delaware (the "Chancery Court
Stipulation") will provide that GranCare will not consummate the LCA
Transactions (as defined in the Chancery Court Stipulation) in their present or
any alternative form except contemporaneously with or subsequent to the payment
of the Termination Fee as contemplated by this Agreement. The Transaction
Parties shall use commercially reasonable efforts to secure the entry of such
orders.
-2-
<PAGE>
Nothing in this Agreement or the proposed Chancery Court Stipulation
shall constitute a waiver by LCA or Apollo of any rights with respect to
GranCare conferred upon them by the GranCare Merger Agreement (as defined in the
Proxy Statement/Prospectus (as defined below)).
Section 4. In furtherance of the reciprocal obligations of GranCare and
----------
Vitalink pursuant to Article IV of the Distribution Agreement, following the
Closing, GranCare and Vitalink will cooperate fully with each other in
completing any audits and/or the preparation of any necessary filings regarding
prior financial or fiscal periods. Such cooperation shall include, but is not
limited to, GranCare requesting (if so requested by Vitalink) Ernst & Young to
perform audit work for Vitalink at Vitalink's expense. The foregoing agreement
shall be subject at times to the other provisions of the Distribution Agreement.
Section 5. The consummation of the transactions contemplated hereby (the
----------
"Closing") shall occur at the offices of Powell, Goldstein, Frazer & Murphy LLP,
or at such other location as the Transaction Parties may agree, on such date as
GranCare shall select following the fulfillment or waiver of all conditions to
such Closing; provided, however, that in no event shall the Closing be effective
(the "Closing Date") later than the first to occur of either the Effective Time
of the Mergers (as defined in Amendment No. 2 to the Joint Proxy
Statement/Prospectus of GranCare and LCA (the "Proxy Statement/Prospectus")) or
July 31, 1998.
Section 6. The obligation of the Transaction Parties to consummate the
----------
transactions contemplated by this Agreement is subject only to the fulfillment
or waiver of the following conditions:
(i) The waiver or fulfillment of all of the conditions to the
consummation of the LCA Transactions in the form described in
the Proxy Statement/Prospectus or any alternative form. This
condition may be waived by GranCare in its sole discretion.
-3-
<PAGE>
(ii) The waiver or fulfillment of all of the conditions to the
termination of that certain Shareholders Agreement, dated as
of February 12, 1997, by and between Manor Care and Vitalink.
This condition may be waived by Manor Care in its sole
discretion.
Section 7. The parties hereto do hereby represent and warrant as follows:
----------
(i) Manor Care is duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the
requisite corporate power and authority to carry on its
business as now being conducted. Manor Care has the requisite
corporate power and authority to enter into this Agreement and
consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by Manor Care and the
consummation of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part
of Manor Care. This Agreement has been duly executed and
delivered by Manor Care and constitutes a valid and binding
obligations of Manor Care enforceable against Manor Care in
accordance with its terms.
(ii) Vitalink is duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the
requisite corporate power and authority to carry on its
business as now being conducted. Vitalink has the requisite
corporate power and authority to enter into this Agreement and
consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by Vitalink and the
consummation of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part
of Vitalink. This Agreement has been duly executed and
delivered by Vitalink and constitutes a valid and binding
obligation of Vitalink enforceable against Vitalink in
accordance with its terms.
(iii) GranCare is duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the
requisite corporate power and authority to carry on its
business as now being conducted. GranCare has the requisite
corporate power and authority to enter into this Agreement and
consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by GranCare and the consummation
of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of
GranCare. This Agreement has been duly executed and delivered
by GranCare and constitutes a valid and binding obligation of
GranCare enforceable against GranCare in accordance with its
terms.
(iv) Apollo is duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the requisite
power and authority
-4-
<PAGE>
under its organizational documents to carry on its business as
now being conducted. Apollo has the requisite power and
authority to enter into this Agreement solely for the purpose
of granting and obtaining the release contained in Section 8
hereof. The execution and delivery of this Agreement by Apollo
and the granting of the release contemplated hereby have been
duly authorized by all necessary action on the part of Apollo.
This Agreement has been duly executed and delivered by Apollo
and constitutes a valid and binding obligation of Apollo
enforceable against Apollo in accordance with its terms.
(v) LCA is duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the requisite
corporate power and authority to carry on its business as now
being conducted. LCA has the requisite corporate power and
authority to enter into this Agreement solely for the purpose
of granting and obtaining the release contained in Section 8
hereof. The execution and delivery of this Agreement by LCA and
the granting of the release contemplated hereby have been duly
authorized by all necessary corporate action on the part of
LCA. This Agreement has been duly executed and delivered by LCA
enforceable against LCA in accordance with its terms.
Section 8. Effective as of the Closing Date, and simultaneously with the
----------
payment of the Termination Fee, each of GranCare, Apollo and LCA, as one party,
and Manor Care and Vitalink, as the other party, do hereby settle, release and
discharge the other party; the other party's past or present officers,
directors, employees, partners, principals, counsel, investment bankers, agents,
controlling persons, if any; the other party's past or present affiliates; and
the other party's past and present affiliates' respective past or present
officers, directors, employees, partners, principals, counsel, investment
bankers, agents, controlling persons, if any, (but nothing herein shall
constitute a release or waiver of any claims by GranCare, Apollo and LCA against
one another) of and from any and all manner of claims, actions or proceedings of
any nature which have been, could have been, or could be brought in any local,
state or federal court, administrative agency or other tribunal, including but
not limited to, those arising under common law, federal law, or state statutory
law, including the state and federal securities laws, in law or in equity,
suits, debts, liens, contracts, agreements, promises, liability, claims,
demands,
-5-
<PAGE>
damages, loss, cost or expense, of any nature whatsoever, known or unknown,
fixed or contingent, including all claims for incidental, consequential,
punitive or exemplary damages or other equitable relief (including injunctive
relief) arising out of any of the foregoing, which each now has or may hereafter
have against any of the foregoing, by reason of any matter, cause or thing
whatsoever from the beginning of time to the date hereof, arising out of or
relating to the Non-Competition Agreement, including, without limitation, in the
case of the Transaction Parties, any claims and causes of action that were or
could have been asserted by any or all of them against any or all of the other
Transaction Parties directly related to or arising out of the Non-Competition
Agreement, including claims or causes of action that were or could have been
asserted in that certain litigation commenced by Manor Care and Vitalink in the
Court of Chancery in and for the County of New Castle, State of Delaware,
entitled Vitalink Pharmacy Services, Inc. and Manor Care, Inc. v. GranCare, Inc.
-----------------------------------------------------------------------
f/k/a New GranCare, Inc., Civil Action No. 15744, and all proceedings before the
- -------------------------
Court of Chancery of the State of Delaware and the Supreme Court of the State of
Delaware (collectively, the "Litigation"), and, in the case of Apollo and LCA,
any claims that could have been asserted by either or both of them against Manor
Care and/or Vitalink, or by Manor Care and/or Vitalink against Apollo or LCA
arising out of or relating to the Litigation or the actions of any released
party in connection therewith or the actions of Apollo or LCA in connection with
the various proposed transactions described in the Proxy Statement/Prospectus,
except claims and causes of action arising out of or relating to any breach of
- ------
or failure to perform any obligation under this Agreement or any document or
instrument delivered pursuant to or in connection with this Agreement. For
purposes of this Agreement, the term "affiliates" shall have the meaning as
defined in Rule 12b-2 under the Securities Exchange Act of 1934. Nothing herein
shall constitute a release or termination of any
-6-
<PAGE>
written contract among the parties hereto other than the Non-Competition
Agreement or a release by any party of any claims by such party against such
party's own employees, officers and directors.
Section 9. At the Closing, the Transaction Parties shall execute and
----------
deliver any agreements and other documents contemplated by this Agreement
necessary to give effect to the consummation of the transactions contemplated
hereby and GranCare shall pay to Vitalink and Manor Care the Termination Fee.
Effective as of the Closing Date, Manor Care, Vitalink and GranCare, in
recognition of the termination and discharge of the Non-Competition Agreement,
shall take action as shall be necessary to dismiss with prejudice the
Litigation.
Section 10. This Agreement shall be governed by the laws of the State of
-----------
Delaware (regardless of the law that might otherwise govern under applicable
Delaware principles of conflicts of law) as to all matters, including but not
limited to matters of validity, construction, effect, performance and remedies.
Section 11. This Agreement shall be binding on and inure to the benefit of
-----------
the parties hereto and their respective legal representatives, successors and
assigns including, without limitation, any successor by operation of law to any
of such parties. Nothing in this Agreement, expressed or implied, is intended
to confer on any persons other than the parties hereto or their respective
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
Section 12. In case any one or more of the provisions contained in this
-----------
Agreement should be invalid, illegal or unenforceable in any respect against a
party hereto, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be
-7-
<PAGE>
affected or impaired thereby and such invalidity, illegality or unenforceability
shall only apply as to such party in the specific jurisdiction where such
judgment shall be made.
Section 13. All notices and other communications hereunder shall be in
-----------
writing and shall be deemed to have been duly given when delivered in person, by
facsimile transmission with confirmation of receipt, or by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties as follows:
If to GranCare:
GranCare, Inc.
One Ravina Drive, Suite 1500
Atlanta, Georgia 30346
Attention: General Counsel
If to Manor Care:
Manor Care, Inc.
11555 Darnestown Road
Gaithersburg, Maryland 20878
Attention: General Counsel
If to Vitalink:
Vitalink Pharmacy Services, Inc.
1250 E. Diehl Road
Naperville, Illinois 60563
Attention: General Counsel
If to Apollo:
c/o Apollo Management, L.P.
1999 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Peter P. Copses
If to LCA:
Living Centers of America, Inc.
15415 Katy Freeway, Suite 800
Houston, Texas 77094
Attention: General Counsel
-8-
<PAGE>
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
Section 14. This Agreement may be executed in two or more counterparts,
-----------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
Section 15. This Agreement may be amended, modified or supplemented only
-----------
with the written agreement of GranCare, Vitalink and Manor Care and, with
respect to any amendments to Section 7 or Section 8 hereof, the written
agreement of Apollo and LCA.
[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Termination and
Release Agreement as of the date first written above.
MANOR CARE, INC.
By: /s/ Stewart Bainum, Jr.
------------------------------
Stewart Bainum, Jr.
Chief Executive Officer
VITALINK PHARMACY SERVICES, INC.
By: /s/ Donna L. DeNardo
------------------------------
Donna L. DeNardo
President
GRANCARE, INC.
By: /s/ M. Scott Athans
--------------------------------
M. Scott Athans
Chief Executive Officer
The undersigned has executed this Termination and Release Agreement solely
for the purpose of making the representations and warranties set forth in
Section 7 and obtaining and granting the release contained in Section 8
hereinabove.
APOLLO MANAGEMENT, L.P.
By: AIF Management, Inc.
Its: General Partner
By:/s/ Peter P. Copses
----------------------------
Name: Peter P. Copses
Title: Vice President
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Termination and
Release Agreement as of the date first written above.
MANOR CARE, INC.
By:_____________________________
Stewart Bainum, Jr.
Chief Executive Officer
VITALINK PHARMACY SERVICES, INC.
By:_____________________________
Donna L. DeNardo
President
GRANCARE, INC.
By:_____________________________
M. Scott Athans
Chief Executive Officer
The undersigned has executed this Termination and Release Agreement solely
for the purpose of making the representations and warranties set forth in
Section 7 and obtaining and granting the release contained in Section 8
hereinabove.
APOLLO MANAGEMENT, L.P.
By: AIF Management, Inc.
Its: General Partner
By:_____________________________
Name:
Title:
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Termination and
Release Agreement as of the date first written above.
MANOR CARE, INC.
By:_________________________________________
Stewart Bainum, Jr.
Chief Executive Officer
VITALINK PHARMACY SERVICES, INC.
By:_________________________________________
Donna L. DeNardo
President
GRANCARE, INC.
By:_________________________________________
M. Scott Athans
Chief Executive Officer
The undersigned has executed this Termination and Release Agreement solely
for the purpose of making the representations and warranties set forth in
Section 7 and obtaining and granting the release contained in Section 8
hereinabove.
APOLLO MANAGEMENT, L.P.
By: AIF Management, Inc.
Its: General Partner
By:_________________________________________
Name:
Title:
-12-
<PAGE>
The undersigned has executed this Termination and Release Agreement solely
for the purpose of making the representations and warranties set forth in
Section 7 and obtaining and granting the release contained in Section 8
hereinabove.
LIVING CENTERS OF AMERICA, INC.
By: /s/ Edward Kuntz
------------------------------
Edward Kuntz
Chief Executive Officer
-13-
<PAGE>
SCHEDULE 3.1
IN THE SUPREME COURT OF THE STATE OF DELAWARE
GRANCARE, INC. )
)
Defendant Below- )
Appellant, )
)
v. ) No. 342, 1997
)
VITALINK PHARMACY SERVICES, )
INC. and MANOR CARE, INC. )
)
Plaintiffs Below- )
Appellees. )
STIPULATION AND ORDER
---------------------
WHEREAS, on June 17, 1997, plaintiffs Manor Care, Inc. ("Manor Care") and
Vitalink Pharmacy Services, Inc. ("Vitalink") initiated an action in the Court
of Chancery seeking to enjoin certain transactions (the "LCA Transactions")
among defendant GranCare, Inc. ("GranCare") and non-parties Living Centers of
America, Inc. and Apollo Management, L.P. as set forth in the Joint Proxy
Statement/Prospectus of GranCare and LCA, draft of August 27, 1997 (the "LCA
Transactions");
WHEREAS, on August 8, 1997, the Court of Chancery entered an order (the
"Preliminary Injunction Order") preliminarily enjoining GranCare from
consummating the LCA Transactions in their present or any alternative form;
WHEREAS, the Court of Chancery certified the Preliminary Injunction Order
for interlocutory appeal by order dated August 8, 1997;
<PAGE>
WHEREAS, on August 15, 1997, this Court accepted GranCare's interlocutory
appeal and set a schedule for briefing and oral argument; and
WHEREAS, on August __, 1997, GranCare, Vitalink and Manor Care executed a
termination and release agreement which provided for, among other things, (i)
dismissal of GranCare's interlocutory appeal and (ii) vacatur of the Preliminary
Injunction Order.
IT IS HEREBY STIPULATED by the parties, subject to the approval of the
Court, that GranCare's interlocutory appeal is dismissed.
OF COUNSEL:
__________________________________
James A. Laurenson Martin P. Tully
Susan V. Belanger Morris, Nichols, Arsht & Tunnell
Arter & Hadden 1201 North Market Street
925 Euclid Avenue P.O. Box 1347
Suite 1100 Wilmington, Delaware 19899
Cleveland, Ohio 44115 (302) 658-9200
(216) 696-1100 Attorneys for Vitalink
Pharmacy Services, Inc.
__________________________________
Laurence A. Silverman Bruce M. Stargatt
Kevin J. Burke Bruce L. Silverstein
Daniel L. Cantor James P. Hughes, Jr.
Cahill Gordon & Reindel Young, Conaway, Stargatt & Taylor
(a partnership including a P.O. Box 391
professional corporation Wilmington, Delaware 19899
80 Pine Street (302) 571-6600
New York, New York 10005 Attorneys for Manor Care,
(212) 701-3000 Inc.
-2-
<PAGE>
__________________________________
William W. Maycock Allen M. Terrell, Jr.
Jason S. Bell Jesse A. Finkelstein
Smith, Gambrell & Russell Raymond J. DiCamillo
1230 Peachtree Street, N.E. Richards, Layton & Finger
Suite 3100, Promendade II One Rodney Square
Atlanta, Georgia 30309-3592 P.O. Box 551
(404) 815-3500 Wilmington, Delaware 19899
(302) 658-6541
Attorneys for Defendant
Below-Appellant
SO ORDERED this ____ day
Of _________________, 1997.
_____________________________
Justice
-3-
<PAGE>
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
VITALINK PHARMACY SERVICES, )
INC., a Delaware corporation, and MANOR )
CARE, INC., a Delaware corporation, )
)
Plaintiffs, )
)
v. ) C.A. No. 15744
)
GRANCARE, INC., a Delaware )
corporation, f/k/a NEW GRANCARE, INC. )
)
Defendant. )
STIPULATION AND ORDER
---------------------
WHEREAS, on June 17, 1997, plaintiffs Manor Care, Inc. ("Manor Care") and
Vitalink Pharmacy Services, Inc. ("Vitalink") initiated this action seeking to
enjoin certain transactions among defendant GranCare, Inc. ("GranCare") and non-
parties Living Centers of America, Inc. ("LCA") and Apollo Management, L.P. as
set forth in the Joint Proxy Statement/Prospectus of GranCare and LCA, draft of
August 27, 1997 (the "LCA Transactions");
WHEREAS, on August 8, 1997, this Court entered an order (the "Preliminary
Injunction Order") preliminarily enjoining GranCare from consummating the LCA
Transactions in their present or any alternative form;
WHEREAS, this Court certified the Preliminary Injunction Order for
interlocutory appeal by order dated August 8, 1997;
WHEREAS, on August 15, 1997, the Supreme Court accepted GranCare's
interlocutory appeal and set a schedule for briefing and oral argument;
<PAGE>
WHEREAS, on August __, 1997, GranCare, Vitalink and Manor Care executed a
termination and release agreement (the "Termination Agreement") which provided
for, among other things, (i) dismissal of GranCare's interlocutory appeal and
(ii) vacatur of the Preliminary Injunction Order; and
WHEREAS, the Supreme Court dismissed GranCare's interlocutory appeal by
order dated August __, 1997, pursuant to the stipulation of the parties.
IT IS HEREBY STIPULATED by the parties, subject to the approval of the
Court, that:
1. The Preliminary Injunction Order is vacated.
2. Manor Care and Vitalink are released from all obligations under the
bond on preliminary injunction filed with the Court on August 11, 1997 (the
"Bond").
3. The security for the Bond held by the law firm of Morris, Nichols,
Arsht & Tunnell in an interest-bearing escrow account at Wilmington Trust
Company shall be returned forthwith in its entirety to Vitalink.
4. GranCare will not consummate the LCA Transactions in their present or
any alternative form except contemporaneously with or subsequent to the
completion of the transactions contemplated by the Termination Agreement.
OF COUNSEL:
__________________________________
James A. Laurenson Martin P. Tully
Susan V. Belanger A. Gilchrist Sparks, III
Arter & Hadden Morris, Nichols, Arsht & Tunnell
925 Euclid Avenue 1201 North Market Street
Suite 1100 P.O. Box 1347
Cleveland, Ohio 44115 Wilmington, Delaware 19899
(216) 696-1100 (302) 658-9200
Attorneys for Plaintiff Vitalink Pharmacy
Services, Inc.
-2-
<PAGE>
__________________________________
Laurence A. Silverman Bruce M. Stargatt
Kevin J. Burke Bruce L. Silverstein
Daniel L. Cantor James P. Hughes, Jr.
Cahill Gordon & Reindel Young, Conaway, Stargatt & Taylor
(a partnership including a Rodney Square North, P.O. Box 391
professional corporation) Wilmington, Delaware 19899
80 Pine Street (302) 571-6600
New York, New York 10005 Attorneys for Plaintiff Manor Care, Inc.
(212) 701-3000
__________________________________
William W. Maycock Allen M. Terrell, Jr.
Jason S. Bell Jesse A. Finkelstein
Smith, Gambrell & Russell Raymond J. DiCamillo
1230 Peachtree Street, N.E. Richards, Layton & Finger
Suite 3100, Promenade II One Rodney Square
Atlanta, Georgia 30309-3592 P.O. Box 551
(404) 815-3500 (302) 658-6541
Wilmington, Delaware 19899
Attorneys for Defendant
SO ORDERED this ___ day
Of _______________, 1997.
______________________________
Vice Chancellor
-3-
<PAGE>
EXHIBIT 10.29
September 3, 1997
Vitalink Pharmacy Services, Inc.
TeamCare, Inc.
1250 E. Diehl Road
Naperville, IL 60563
ATTN: Donna L. DeNardo, President
RE: Liquidated Damages Calculation in Pharmaceutical Supply Agreements
Dear Ms. DeNardo:
Pursuant to the requirements of Section 10 of the Pharmaceutical
Supply Agreements (as that term is defined in the Omnibus Reconciliation
Services Agreement, dated as of March 1, 1997, by and between GranCare, Inc.
("GranCare") and Vitalink Pharmacy Services, Inc. ("Vitalink")) this letter
clarifies the calculation of damages that may become payable under said Section
10 in the event that ownership or control of a GranCare health care facility
subject to a Pharmaceutical Supply Agreement (other than a Replacement Facility
(as defined in paragraph 2 below)) is transferred (a "Transferred Facility"),
the transferee ceases to obtain pharmaceutical supplies and services from
Vitalink with respect to the Transferred Facility; and GranCare's obligation to
pay "damages" under Section 10 of the Pharmaceutical Supply Agreement is thereby
triggered (a "Supply Termination Event"). For purposes of this letter of
clarification, the term "Vitalink" shall mean and include TeamCare, Inc. and any
subsidiaries or affiliates (as defined in Rule 12b-2 under the Securities Act of
1934) of Vitalink and TeamCare. Upon the occurrence of a Supply Termination
Event, the amount of such "damages" shall be calculated as follows:
<PAGE>
Vitalink Pharmacy Services
September 3, 1997
Page 2
1. The net revenues realized by Vitalink from the provision of
pharmacy services to the Transferred Facility pursuant to a
Pharmaceutical Supply Agreement over the 12 calendar months (or if
such Transferred Facility was served for less than 12 months, over the
number of whole months actually served (or in the case of partial
months, rounded to the nearest whole month based on the number of
actual days elapsed in accordance with established mathematical
convention)) immediately preceding the calendar month in which the
Supply Termination Event occurs ("LTM Net Pharmaceutical Revenues")
shall be multiplied by Vitalink's Percentage EBITDA Margin (as defined
below), the product so obtained being hereinafter referred to as
"EBITDA Earnings Amount". The "Percentage EBITDA Margin" shall be
Vitalink's consolidated EBITDA divided by Vitalink's consolidated net
revenue, in each case derived from Vitalink's most recent audited
financial statements. The EBITDA Earnings Amount shall then be
divided by 12 (or if such Transferred Facility was served for less
than 12 months, over the number of whole months actually served (or in
the case of partial months, rounded to the nearest whole month based
on the number of actual days elapsed in accordance with established
mathematical convention)), and the quotient so obtained (the "Monthly
Liquidated Damages Payment") shall be the monthly amount paid by
GranCare to Vitalink until the first to occur of (i) the expiration of
the remaining term of the Pharmaceutical Supply Agreement or (ii) the
month in which a Replacement Facility is substituted by GranCare. The
<PAGE>
Vitalink Pharmacy Services
September 3, 1997
Page 3
Monthly Liquidated Damages Payment shall be payable commencing on the
tenth business day of the month immediately succeeding the month
during which Vitalink shall actually cease to provide pharmaceutical
supplies to the Transferred Facility.
2. GranCare shall have the option at any time after the
occurrence of a Supply Termination Event to substitute an alternative
health care facility (a "Replacement Facility") for a Transferred
Facility and suspend paying further Monthly Liquidated Damages
Payments (except as provided elsewhere herein), and the provision of
pharmaceutical supplies to any Replacement Facility shall be pursuant
to the terms and conditions of a Pharmaceutical Supply Agreement
except as otherwise provided herein.
Within 30 calendar days following each annual anniversary of
the actual commencement of service by Vitalink to any Replacement
Facility, the parties shall calculate the EBITDA Earnings Amount
derived by Vitalink from the provision of service to such Replacement
Facility for such preceding 12 month period by multiplying the net
revenues realized by Vitalink from the provision of pharmacy services
to such Replacement Facility pursuant to a Pharmaceutical Supply
Agreement for such 12-month period by the same Percentage EBITDA
Margin utilized to calculate the amount of the Monthly
<PAGE>
Vitalink Pharmacy Services
September 3, 1997
Page 4
Liquidated Damages Payments with respect to the Transferred Facility
such Replacement Facility replaced (the "Replacement Earnings"). In
the event that Replacement Earnings for any 12 month period are less
than 90% of the EBITDA Earnings Amount calculated with respect to the
subject Transferred Facility, then GranCare shall, within thirty days
of receiving written notice from Vitalink setting forth in appropriate
detail the calculation of the amount of the Replacement Earnings with
respect to such Replacement Facility, pay to Vitalink an amount equal
to the excess of (i) an amount equal to 90% of the EBITDA Earnings
Amount attributable to the Transferred facility such Replacement
Facility replaced over (ii) the actual amount of such Replacement
Earnings ("Shortfall Payment"). On March 1/st/ of each year during the
term of the Pharmaceutical Supply Agreements, Vitalink shall determine
the aggregate amount of all Shortfall Payments made by GranCare during
the immediately preceding 12 calendar months (i.e., March 1 of the
prior year through February 28 of the then current year; the "LTM
Shortfall Payment"). In the event that the Replacement Earnings of one
or more Replacement Facilities, during such preceding 12 calendar
month period exceed 110% of the EBITDA Earnings Amount attributable to
the Transferred Facility any such Replacement Facility replaced (the
"Excess Replacement Earnings"), then Vitalink shall pay to GranCare by
March 10 of each year the sum of all Excess Replacement Earnings
realized by Vitalink not to exceed the LTM Shortfall Payment. Each of
the
<PAGE>
Vitalink Pharmacy Services
September 3, 1997
Page 5
calculations required in this letter shall be provided to GranCare in
reasonable detail and shall be certified by Vitalink's President,
Chief Financial Officer or Treasurer.
3. In the event that a Replacement Facility is served for a
period of less than 12 months, the calculation of the required
Shortfall Payment, if any, shall be an amount equal to the excess, if
any, of (i) the sum of the Monthly Liquidated Damages Payments for
each month less than 12 that the Replacement Facility was served by
Vitalink multiplied by 90% over (ii) the Replacement Earnings realized
by Vitalink from the provision of pharmacy services to such
Replacement Facility during such period.
4. The termination of the Pharmaceutical Supply Agreement with
respect to any Replacement Facility or the transfer of any Replacement
Facility shall not constitute a Supply Termination Event. However,
upon the actual termination of the provision of services pursuant to a
Pharmaceutical Supply Agreement with respect to any Replacement
Facility, GranCare shall recommence the Monthly Liquidated Damages
Payments in the immediately succeeding month based upon the EBITDA
Earnings Amount of the Transferred Facility that such Replacement
Facility replaced, subject to any subsequent suspension thereof
<PAGE>
Vitalink Pharmacy Services
September 3, 1997
Page 6
which may thereafter result from GranCare substituting alternative
Replacement Facilities.
5. In the event it is determined that a Facility (as defined in
the Pharmaceutical Supply Agreements) has improperly terminated a
Pharmaceutical Supply Agreement based on an incorrect assertion that
Provider (as defined in the Pharmaceutical Supply Agreements) breached
its obligations pursuant to Section 12 of the Pharmaceutical Supply
Agreements, the amount of damages that GranCare shall be obligated to
pay to Vitalink shall be calculated based on the same methodology set
forth in paragraph 1 hereof with respect to the actual period of time
during which such Facility shall have "covered" by obtaining pharmacy
services from an alternative source and, in the case of partial
months, rounded to the nearest whole month based on the number of
actual days elapsed in accordance with established mathematical
convention. The parties hereto expressly acknowledge that the
foregoing provision is being included to provide internal consistency
within the Pharmaceutical Supply Agreement, and as result (i) the
final sentence of paragraph 12 will be ignored for all purposes and
(ii) the phrase "net revenue lost by Provider" in the penultimate
sentence of said paragraph 12 shall be deemed to have been replaced
with a reference to "liquidated damages."
<PAGE>
Vitalink Pharmacy Services
September 3, 1997
Page 7
6. GranCare shall be entitled to review during normal business
hours Vitalink's financial records pertaining to its provision of
services to any Transferred Facility or Replacement Facility pursuant
to a Pharmaceutical Supply Agreement in connection with making any of
the calculations contained in this letter. Notwithstand-ing the
provisions of paragraph 13 of the Pharmaceutical Supply Agreements, in
the event of a dispute between the parties hereto over any of the
calculations set forth in this letter of clarification, the parties
shall appoint a mutually acceptable "Big Six" accounting firm, or some
other mutually acceptable arbitrator with appropriate finance and
accounting expertise, to arbitrate the differences between the parties
hereto. The decision of any such accounting firm or other arbitrator
shall be final and binding, and the cost of such proceeding shall be
equally split between the parties hereto. In the event the parties
are unable to agree upon an accounting firm or other arbitrator, the
provisions of paragraph 13 of the Pharmaceutical Supply Agreements
shall be followed.
7. When references to "GranCare" and "Vitalink" are made herein,
such references shall include each respective party's successors and
assigns.
<PAGE>
Vitalink Pharmacy Services
September 3, 1997
Page 8
8. Except as expressly set forth herein, no other terms or
provisions of any Pharmaceutical Supply Agreement are being modified
or amended by this letter of clarification and such Agreements are
hereby ratified and confirmed.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Vitalink Pharmacy Services
September 3, 1997
Page 9
GRANCARE, INC.
By:/s/ Scott Athans
-------------------------
M. Scott Athans,
President
ACKNOWLEDGED AND AGREED:
VITALINK PHARMACY SERVICES, INC.
By:/s/ Donna L. DeNardo
-------------------------------
Donna L. DeNardo,
President
TEAMCARE, INC.
By:/s/ Donna L. DeNardo
-------------------------------
Donna L. DeNardo,
President
<PAGE>
EXHIBIT 10.30
Final Draft
[Vitalink letterhead]
August 29, 1997
GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346
Attention: M. Scott Athans,
President and Chief Executive Officer
Re: Preferred Provider Arrangement
Dear Mr. Athans:
As you know, pursuant to the terms of those certain Pharmaceutical Supply
Agreements ("PSA's") described in that certain Omnibus Reconciliation Services
Agreement, dated March 1, 1997 (the "ORSA"), Vitalink Pharmacy Services, Inc.
and/or certain affiliates of Vitalink including, without limitation, TeamCare,
Inc. (Vitalink and all such affiliates being referred to herein collectively as
("Vitalink") has the contractual right to provide to all of GranCare's
"Facilities" (as defined in the ORSA) all of their pharmaceutical goods and
services. In recognition of the fact that Vitalink has chosen not to provide
such goods and services to a number of the Facilities at this time, and in
anticipation of the closing of your announced merger with Living Centers of
America, Inc., Vitalink hereby authorizes GranCare to contract with American
Pharmaceutical Services, Inc. ("APS") to provide all pharmaceutical goods and
services to such Facilities; provided, however, that if during the term of the
PSA's Vitalink, either itself or through a joint venture, chooses to provide all
or some of the pharmaceutical goods and services to any Facility then being
serviced by APS, then Vitalink shall give GranCare 30 days prior written notice
of Vitalink's intent to commence service to such Facility (a "Service
Commencement Notice") which service shall be pursuant to the a PSAs to be
executed by Vitalink and GranCare relating to such Facility and upon the end of
such 30 day period GranCare shall cease obtaining such goods and services from
APS for the applicable Facility and Vitalink, or the joint venture with which it
is a joint venturer, shall begin providing the same, whereupon such Facility
shall be a "Newly Served Facility" (as defined in the ORSA) for purposes of
establishing the pricing applicable to such Facility's PSA.
Furthermore, in the event that Vitalink has chosen not to provide all or
some of the pharmaceutical goods and services to any Facility, and APS also
chooses not to provide the same, then such Facility may contract with any other
institutional pharmacy for the provision of those pharmaceutical goods and
services not being provided by
<PAGE>
Vitalink or APS; provided, however, that all contracts between a Facility and
any institutional pharmacy other than Vitalink must include a provision which
gives such Facility the right to terminate such contracts, with or without
cause, upon no more than 60 days prior written notice. Following receipt of a
Service Commencement Notice from Vitalink, or the joint venture with which it is
a joint venturer, of the desire by Vitalink, or the joint venture with which it
is a joint venturer, to begin providing all or some of the pharmaceutical goods
and services to a Facility (which goods and services shall be described in the
Service Commencement Notice with particularity in the event that Vitalink elects
to provide some but less than all of such Facility's pharmaceutical goods and
services), such Facility shall promptly give the required termination notice to
the institutional pharmacy then providing the such goods and services to the
In the event that Vitalink provides GranCare a Service Commencement Notice
as set forth herein and GranCare fails to give or cause the appropriate Facility
to give APS or any other institutional pharmacy then providing such Facility
with pharmaceutical supplies and services the termination notice required herein
and/or APS or such other institutional pharmacy otherwise fails to terminate
services as required herein, then the parties hereto acknowledge and agree that
the failure to permit Vitalink to commence providing service to such Facility
shall constitute a Supply Termination Event (as defined in that certain Letter
of Clarification of even date herewith between Vitalink and GranCare and
Vitalink shall be entitled to liquidated damages pursuant to the appropriate
provisions contained in such letter.
If you agree and accept the terms and provisions set forth above,please
acknowledge in the space provided below.
Vitalink Pharmacy Services, Inc.
/s/ Donna L. DeNardo
---------------------------------
Donna L. DeNardo, President
ACKNOWLEDGED AND AGREED:
GranCare, Inc.
/s/ M. Scott Athans
- ------------------------------------
M. Scott Athans, President and Chief
Executive Officer
<PAGE>
EXHIBIT 10.31
AMENDMENT TO AMS PROPERTIES, INC.
FACILITY LEASES
AMENDMENT dated as of October 31, 1997 between HEALTH AND RETIREMENT
PROPERTIES TRUST (known in Wisconsin as "Health and Rehabilitation Properties
REIT"), a real estate investment trust formed under the laws of the State of
Maryland ("HRP") and AMS PROPERTIES, INC., a Delaware corporation ("AMS
--- ---
Properties")
- ----------
W I T N E S S E T H:
WHEREAS, HRP, as landlord, and AMS Properties, as tenant, have entered into
a Master Lease Document, General Terms and Conditions dated as of December 28,
1990, as amended (the "Master Lease"), and have also executed Facility Leases
------------
which incorporate by reference the Master Lease (collectively, the "Facility
--------
Leases") relating to the health care facilities described on Exhibit A-2 to the
- ------
Master Lease;
WHEREAS, HRP and AMS Properties have agreed to amend the Facility Leases as
hereinafter provided;
NOW, THEREFORE, in consideration of the foregoing, and of other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, HRP and AMS Properties agree as follows:
SECTION 1. AMENDMENTS TO FACILITY LEASES
1.1 Paragraphs 4 and 5 of the Facility Lease for each Leased Property is
hereby amended in full to read as follows:
4. Fixed Term. The Fixed Term of this Lease is twenty-two (22) years
----------
and thirty four (34) days, commencing on December 28, 1990 (the
"Commencement Date"), and ending on January 31, 2013.
-----------------
5. Extended Terms. Subject to the provisions of Section 2.4 of the
--------------
Master Lease, Tenant is hereby granted the right to renew the Lease for two
(2) 10-year consecutive optional renewal terms for a maximum term if all
such options are exercised of twenty (20) years after the expiration of the
Fixed Term.
1.2 The first sentence of Paragraph 6 of the Facility Lease for each
Leased Property listed on Schedule 1 hereto is hereby amended to provide that
----------
the annual amount of initial Minimum Rent and the amount of each monthly
installment of initial Minimum Rent for such Leased Property are the respective
amounts set forth on Schedule 1 hereto.
----------
<PAGE>
-2-
SECTION 2. EFFECT ON FACILITY LEASES
1.3 Except as specifically provided above, the Facility Leases shall
remain in full force and effect and each is hereby ratified and confirmed.
1.4 The amendments set forth herein (i) do not constitute an amendment,
waiver or modification of any term, condition or covenant of any Facility Lease,
or any of the instruments or documents referred to therein, other than as
specifically set forth herein, and (ii) shall not prejudice any rights which HRP
or its successors and assigns may now or hereafter have under or in connection
with Facility Leases, as amended hereby, or any of the instruments or documents
referred to therein.
SECTION 3. EFFECTIVENESS
This Amendment shall become effective as of the date first above indicated
when a counterpart to this Amendment shall have been executed by each of the
parties hereto.
SECTION 4. COSTS, EXPENSES AND TAXES
AMS Properties agrees to pay all costs and expenses of HRP in connection
with the preparation, reproduction, execution and delivery of this Amendment,
including the reasonable fees and expenses of Sullivan & Worcester LLP, special
counsel to HRP with respect thereto.
SECTION 5. GOVERNING LAW
THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL SUBSTANTIVE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
SECTION 6. NO LIABILITY OF TRUSTEES
THE DECLARATION OF TRUST OF HRP, DATED OCTOBER 9, 1986, A COPY OF WHICH,
TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE
OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND,
PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST" REFERS TO THE
TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR
PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HRP
SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY
OBLIGATION OF, OR CLAIM AGAINST, HRP. ALL PERSONS DEALING WITH HRP, IN ANY WAY,
SHALL LOOK ONLY TO THE ASSETS OF HRP FOR THE PAYMENT OF ANY SUM OR THE
PERFORMANCE OF ANY OBLIGATION.
<PAGE>
-3-
IN WITNESS WHEREOF, the parties have executed this amendment as a sealed
instrument as of the date first above written.
LANDLORD:
HEALTH AND RETIREMENT
PROPERTIES TRUST,
a Maryland real estate
investment trust
By: /s/ David J. Hegarty
-------------------------
Name:
Title:
TENANT:
AMS PROPERTIES, INC.
By: /s/ M. Henry Day, Jr.
----------------------------
Name: M. Henry Day, Jr.
Title: Assistant Secretary
<PAGE>
SCHEDULE 1 TO AMENDMENT
-----------------------
Schedule of Revised Minimum Rent Amounts
----------------------------------------
<TABLE>
<CAPTION>
Amount of
Aggregate Monthly
Facility Name State Yearly Installment of
- ------------- ----- Minimum Rent Minimum Rent
----------- --------------
<S> <C> <C> <C>
Flagship CA $751,478 $62,623.17
Lancaster CA 606,825 50,568.75
Pacific Gardens CA 602,330 50,194.17
Tarzana CA 661,377 55,114.75
Thousand Oaks CA 666,301 55,525.08
Van Nuys CA 257,210 21,434.17
Ceders Health Care CO 822,093 68,507.75
Cherrelyn Manor CO 1,067,690 88,974.17
Greentree Health Care WI 332,343 27,695.25
Pine Manor WI 341,679 28,473.25
Sunny Hill Health Care WI 365,010 30,417.50
The Virginia WI 888,125 74,010.42
Woodland WI 1,587,861 132,321.75
Christopher East WI 821,109 68,425.75
$9,771,431.00 $814,285.92
============= ===========
</TABLE>
<PAGE>
EXHIBIT 10.32
COLLATERAL PLEDGE AGREEMENT
THIS AGREEMENT is made as of this 31st day of October, 1997, by and between
Paragon Health Network, Inc., a Delaware corporation ("Paragon") and Health and
Retirement Properties Trust ("HRPT").
R E C I T A L S
WHEREAS, GranCare, Inc. ("GranCare") has incurred certain obligations to
HRPT pursuant to that Non-Binding Letter of Intent dated September 26, 1997
between GranCare and HRPT (the "Letter of Intent") including an obligation to
cause to be executed an unconditional and unlimited guaranty of payment and
performance of certain obligations of AMS Properties, Inc. ("AMS") GCI Health
Care Centers, Inc. ("GCIHCC") and GranCare to HRPT by GranCare, Paragon and all
subsidiaries of GranCare and Paragon having an ownership interest directly or
through one or more subsidiaries in either AMS or GCIHCC (the "Paragon
Guaranty");
WHEREAS, GranCare, Paragon and HRPT have agreed that Paragon shall secure
its obligations under the Paragon Guaranty with $15,000,000 in cash (the "Cash
Collateral"); and
WHEREAS, the obligations of HRPT and the rights of Paragon with respect to
the Cash Collateral are evidenced by this Agreement; and
WHEREAS, Paragon and HRPT have agreed that HRPT shall return the Cash
Collateral to Paragon upon the payment and performance in full of the
obligations of Paragon under the Paragon Guaranty (the "Obligations") after the
Termination Date (as defined in the Paragon Guaranty);
NOW, THEREFORE, in consideration of the premises, the direct benefits to be
realized by HRPT from the Cash Collateral, and the mutual covenants hereinafter
set forth, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Pledge of Cash Collateral.
-------------------------
(1) Paragon hereby pledges, assigns, and grants to HRPT security title to and a
continuing security interest in, the Cash Collateral at all times to secure
the performance and payment of the Obligations. Paragon may not withdraw
and shall not be entitled to receive any of the Cash Collateral prior to
the payment in full of the Obligations after the Termination Date (as
defined in the Paragon Guaranty) (such date being hereafter referred to as
the "Termination Date") without the prior written consent of HRPT. Paragon
shall not be entitled to the payment of interest on other investment
proceeds in respect of the Cash Collateral.
(2) Paragon hereby warrants and represents that on the date hereof and at all
times prior to the termination of this Agreement, (i) Paragon had and will
have the right and authority to transfer any interest in the Cash
Collateral, subject only to the terms of this Agreement, and (ii) the Cash
Collateral was not and will not be subject to any liens, claims,
<PAGE>
-2-
encumbrances, security interests or other interest, however described, in
favor of any third person or entity.
(3) HRPT hereby acknowledges receipt of the Cash Collateral. HRPT further
acknowledges and agrees that on the Business Day following the Termination
Date it shall return the Cash Collateral (in United States Dollars)(net of
any amount applied to the Obligations pursuant to Section 4 below), without
interest or accretion, all of which may be retained by and shall be the
property of HRPT, to Paragon or to such person or entity as Paragon shall
direct in writing.
2. Obligations of Paragon and HRPT.
-------------------------------
(1) Paragon shall pay to HRPT, upon demand, all costs of collection and
enforcement incurred or paid by HRPT in exercising its rights and remedies
under this Agreement.
(2) Paragon shall, at its own expense, do, make, procure, execute, and deliver
all acts, things, writings, and assurances and execute and deliver all
assignments, endorsements, powers, hypothecations, and other documents as
HRPT at any time, and from time to time, may request in writing to protect,
evidence or assure its interests and rights in the Cash Collateral under
this Agreement.
(3) Paragon shall defend the Cash Collateral and the proceeds thereof and
HRPT's interest therein at all times against the claims and demands of
third parties claiming through or with respect to Paragon or Paragon's
interest in the Cash Collateral.
3. Events of Default. The occurrence of any "Event of Default" as defined in
-----------------
the Paragon Guaranty shall constitute an event of default ("Event of Default")
hereunder.
4. Remedies. Upon the occurrence of an Event of Default, HRPT, at its
--------
discretion, and without demand, may apply to the Obligations, to the extent due
and payable, any or all of the Cash Collateral and shall be entitled to all
rights and remedies of HRPT available under applicable state or federal law.
5. Obligations Absolute. The obligation of Paragon under this Agreement shall
--------------------
be direct and immediate and not be conditional or contingent upon the pursuit of
any other remedies against GranCare, AMS or GCIHCC or any other person or
entity, nor against other security or liens available to HRPT, its successors,
assigns, or agents. Paragon hereby waives any right to require that an action be
brought against any other person or entity or to require that resort be had to
any security or to any balance of any deposit account or credit on the books of
HRPT in favor of any other person or entity.
6. Termination. This Agreement, and the security interest granted to HRPT in
-----------
the Cash Collateral, shall terminate on the Termination Date. Effective on the
Termination Date, the security interest hereunder and all rights of HRPT in and
to the Cash Collateral shall terminate and cease to be of force and effect, and
all obligations of Paragon hereunder shall terminate.
<PAGE>
-3-
7. Power of Attorney. Paragon hereby appoints HRPT as Paragon's true and
-----------------
lawful attorney-in-fact to execute all documents and instruments and take all
actions, in Paragon's name or otherwise, as HRPT shall reasonably deem necessary
or expedient in connection with the Cash Collateral, and following the
occurrence and during the continuance of an Event of Default to cause the
proceeds of the Cash Collateral to be received by HRPT and/or to be made
available to HRPT for the purpose of applying the same for the purposes herein
specified. The power of attorney contained herein is irrevocable and is coupled
with an interest. Said power of attorney shall terminate upon the termination of
this Agreement as hereinabove provided.
8. Indemnity. Paragon hereby indemnifies HRPT and holds HRPT harmless from and
---------
against all claims, losses, costs, damages, fees, and expenses whatsoever,
including, without limitation, reasonable attorneys' fees if collected by an
attorney or upon advice therefrom, with respect to the exercise of the foregoing
power of attorney during the continuance of an Event of Default, or exercise of
its rights against the Cash Collateral, or the proper exercise of the other
rights and privileges granted to HRPT hereunder, including, without limitation,
the right to realize upon, possess, or dispose of the Cash Collateral, and
Paragon hereby releases HRPT from any and all claims and liability whatsoever
associated with the proper exercise of the foregoing powers, including, without
limitation, any claims that Paragon may have or may hereafter have arising under
the Uniform Commercial Code of the Commonwealth of Massachusetts for impairment
of collateral. Any funds reasonably expended by HRPT to maintain the priority or
enforceability of the Cash Collateral shall be added to and become a part of the
Obligations of Paragon secured hereby, and the amount thereof shall be
immediately due and payable by Paragon to HRPT.
9. General.
-------
(1) No waiver by HRPT of any power or right hereunder or of any Event of
Default by Paragon hereunder shall be binding upon HRPT unless in writing
signed by HRPT, and no failure or delay by HRPT to exercise any power or
right hereunder or binding waiver of any Event of Default hereunder shall
operate as a waiver of any other or further exercise of such power or any
other Event of Default. This Agreement, together with all documents
referred to herein, constitutes the entire agreement between Paragon and
HRPT and may not be modified except by a writing executed by HRPT and
delivered by HRPT to Paragon.
(2) If any paragraph or part thereof shall for any reason be held or adjudged
to be invalid, illegal, or unenforceable by any court of competent
jurisdiction, such paragraph or part thereof so adjudicated invalid,
illegal, or unenforceable shall be deemed separate, distinct, and
independent, and the remainder of this agreement shall remain in full force
and effect and shall not be affected by such holding or adjudication.
(3) The rights and obligations of the parties hereunder shall inure to the
benefit of and bind their respective heirs, executors, administrators,
legal representatives, successors, and assigns.
<PAGE>
-4-
(4) This Agreement shall be governed by and construed in accordance with the
laws of the Commonwealth of Massachusetts.
(5) All notices and demands required or permitted hereunder or by law shall be
in writing or by telegraph and shall be mailed or delivered to the party to
whom notice is intended to be given at such address as is specified below,
or such other address as shall be subsequently designated in writing by
such party to the other party hereto for purposes of notice.
If to HRPT:
Health and Retirement Properties Trust
400 Centre Street
Newton, MA 02158
Attention: David J. Hegarty
If to Paragon:
Paragon Health Network, Inc.
One Ravinia Drive
Suite 1500
Atlanta, GA 30346
Attention: General Counsel
Each such notice or demand shall be deemed effective upon personal
delivery or upon deposit in the U.S. mail, first-class postage prepaid and
addressed as provided above.
(6) This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original but all of which shall constitute but one and
the same document.
(7) The pronouns used in this Agreement shall be construed as masculine,
feminine, or neuter as the occasion may require.
(8) Captions are for reference only and in no way limit the terms of this
Agreement.
(9) All references herein to any document, instrument, or agreement shall be
deemed to refer to such document, instrument, or agreement as the same may
be amended, modified, restated, supplemented, or replaced from time to
time.
10. NO LIABILITY OF TRUSTEES. THE DECLARATION OF TRUST OF HRPT, DATED OCTOBER
------------------------
9, 1986, A COPY OF WHICH TOGETHER WITH ALL AMENDMENTS THERETO (THE
"DECLARATION") IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND
TAXATION OF THE STATE OF MARYLAND,
<PAGE>
-5-
PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST" REFERS TO THE
TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR
PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HRPT
SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY
OBLIGATION OF, OR CLAIM AGAINST, HRPT. ALL PERSONS DEALING WITH HRPT, IN ANY
WAY, SHALL LOOK ONLY TO THE ASSETS OF HRPT FOR THE PAYMENT OF ANY SUM OR THE
PERFORMANCE OF ANY OBLIGATION.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, by and
through their duly authorized officers as of the day and year first above
written.
PLEDGOR:
PARAGON HEALTH NETWORK, INC.
By: /s/ M. Henry Day, Jr.
-----------------------------------------
Name: M. Henry Day
Title: Vice President and Assistant Secretary
PLEDGEE:
HEALTH AND RETIREMENT PROPERTIES TRUST
By: /s/ David Hegarty
---------------------------------------
Name: David Hegarty
Title: President
<PAGE>
EXHIBIT 10.33
GUARANTY BY GRANCARE, INC.
GUARANTY dated as of October 31, 1997 made by GRANCARE, INC., a
Delaware corporation (the "Guarantor") and HEALTH AND RETIREMENT PROPERTIES
---------
TRUST, a Maryland real estate investment trust (with its successor and assigns,
"HRP").
---
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, pursuant to and subject to the terms and conditions of a Third
Amended and Restated Agreement and Plan of Merger dated as of September 17, 1997
among the Guarantor, LCA Acquisition Sub, Inc., a Delaware corporation ("LCA
---
Acquisition") and a wholly-owned subsidiary of Paragon Health Network, Inc., a
- -----------
Delaware corporation (f/k/a Living Centers of America, Inc.) ("Paragon"),
-------
paragon and Apollo Management, L.P. on behalf of one or more of its managed
investment funds, Guarantor shall become a wholly-owned subsidiary of Paragon
through the merger of LCA Acquisition with and into the Guarantor and those
certain other transactions defined as the "Transactions" in the Joint Proxy
Statement dated September 26, 1997 by the Guarantor and GranCare (the
"Transactions");
------------
WHEREAS, the Guarantor has requested that HRP consent to the Transactions
and to make certain modifications to the GranCare Documents in connection
therewith;
WHEREAS, HRP is willing to so consent and agree, subject to the terms and
conditions of a certain Restructure and Asset Exchange Agreement dated as of
even date herewith (the "Restructure Agreement") among Guarantor, and AMS
---------------------
Properties, Inc. and GCI Health Care Centers, Inc., each a Delaware corporation
and a wholly-owned subsidiary of the Guarantor ("AMS Properties"and "GCIHCC,"
-------------- ------
respectively), and HRP;
WHEREAS, it is a condition to the effectiveness of the Restructure
Agreement that, among other things, the Guarantor deliver this Guaranty in favor
of HRP;
WHEREAS, by virtue of the Transactions and the related modifications to the
GranCare Documents contemplated by the Restructure Agreement, the GranCare
Companies will benefit substantially from, among other things, increased access
to capital;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Guarantor hereby agrees with HRP as follows:
1. Defined Terms. Unless otherwise defined herein, terms which are defined in
-------------
the Restructure Agreement and used herein are so used as so defined. In
addition, the following terms shall have the meanings set forth below:
"Applicable Law" shall mean any law of any governmental authority,
--------------
whether domestic or foreign, including without limitation all federal and
state laws, to which the
<PAGE>
-2-
Person in question is subject or by which it or any of its property is
bound, and including without limitation any: (a) administrative, executive,
judicial, legislative or other action, code, consent decree, constitution,
decree, directive, enactment, finding, guideline, injunction,
interpretation, judgment, law, order, ordinance, policy statement,
proclamation, promulgation, regulation, requirement, rule, rule of law,
rule of public policy, settlement agreement, statute, or writ, of any
governmental authority, domestic or foreign, whether or not having the
force of law; (b) common law or other legal or quasi-legal precedent; or
(c) arbitrator's, mediator's or referee's award, decision, finding or
recommendation, or, in any case, any particular section, part or provision
thereof
"GranCare Documents" shall mean, collectively, any agreement, note,
------------------
lease, master lease, mortgage, security agreement, pledge agreement,
assignment, guaranty or other agreement or instrument now or hereafter
executed by one or more of the GranCare Companies with, in favor of or for
the benefit of, HRP or any Affiliate thereof (including, without
limitation, any and all other documents executed in connection with,
relating to, evidencing or creating collateral or security in favor of or
for the benefit of HRP or any Affiliate thereof), and any agreement, note,
mortgage, security agreement, pledge agreement, assignment, guaranty or
other agreement or instrument hereafter executed by one or both of the
GranCare Companies in connection with any extension, renewal, refunding or
refinancing thereof, as any of the same may hereafter from time to time be
amended, modified or supplemented.
"GranCare Companies" shall mean, collectively, AMS Properties and
------------------
GCIHCC, and their respective successors and assigns.
"Default Rate" shall mean 4% per annum above the prime rate or base
------------
rate on corporate loans at large U.S. money center commercial banks as
published in The Wall Street Journal or, if publication of such rate shall
-----------------------
be suspended or terminated, the annual rate of interest, determined daily
and expressed as a percentage, from time to time announced by one of the
five largest national-chartered banking institutions having their principal
office in New York, New York and selected by HRP at the time such
publication is suspended or terminated. Each change in the Interest Rate
shall take effect simultaneously with the date of publication or
announcement, as applicable, of each corresponding change in such prime
rate or base rate.
"Event of Default" shall have the meaning set forth in any GranCare
----------------
Document.
"Material Adverse Effect" means a material adverse effect on (a) the
-----------------------
business, operations, property or condition (financial or otherwise) of the
Guarantor, or of the Guarantor and its Subsidiaries taken as a whole, (b)
the ability of the Guarantor to perform its obligations under this
Guaranty, or (c) the validity or enforceability of this Guaranty, or the
rights of HRP hereunder.
"Obligations" shall mean the payment and performance of each and every
-----------
obligation and liability of any GranCare Company to HRP under any GranCare
<PAGE>
-3-
Document, whether now existing or hereafter arising or created, joint or
several, direct or indirect, absolute or contingent, due or to become due,
matured or unmatured, liquidated or unliquidated, arising by contract,
operation of law or otherwise, and including, without limitation, (i) all
principal, premium or prepayment fee and interest under any promissory note
payable to HRP by any GranCare Company, (ii) all rent under any lease with
HRP as landlord, and (iii) all fees and charges, and all costs and expenses
payable under any GranCare Document.
"Subsidiary" shall mean any corporation of which more than fifty
----------
percent of the outstanding capital stock having ordinary voting power to
elect a majority of the Board of Directors of such corporation
(irrespective of whether or not at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon
the occurrence of any contingency) is at the time directly or indirectly
owned by Guarantor, or Guarantor and one or more other Subsidiaries, or by
one or more Subsidiaries.
2. Guaranty. The Guarantor hereby unconditionally and irrevocably guarantees
--------
to HRP the prompt and complete payment and performance by the GranCare Companies
(and each of them), when due (whether at stated maturity, by acceleration or
otherwise), of the Obligations. The Guarantor further agrees to pay any and all
reasonable expenses (including, without limitation, all reasonable fees and
disbursements of counsel to HRP) which may be paid or incurred by HRP in
enforcing any of its rights under this Guaranty. This Guaranty is a guaranty of
payment and not of collectibility and is absolute and in no way conditional or
contingent. The Guarantor's liability hereunder is direct and unconditional and
may be enforced after nonpayment or nonperformance by any GranCare Company of
any Obligation without requiring HRP to resort to any other Person (including
without limitation such GranCare Company) or any other right, remedy or
collateral. This Guaranty shall remain in full force and effect until the
Obligations are paid in full following the termination of all GranCare Documents
(the "Termination Date").
----------------
3. Costs and Expenses of Collection. The Guarantor agrees, as principal
--------------------------------
obligor and not as a guarantor only, to pay to HRP forthwith upon demand, in
immediately available funds, all costs and expenses (including, without
limitation, all court costs and all fees and disbursements of counsel to HRP)
incurred or expended by HRP in connection with the enforcement of this Guaranty,
together with interest on such amounts from the time such amounts become due
until payment at the Default Rate. It shall be a condition of the obligations of
Guarantor to pay any fees and expenses payable by it under this Guaranty that
HRP shall have, or shall have caused to have, provided the Guarantor with a
writing describing such fees and/or expenses in reasonable detail.
4. Right of Setoff. Regardless of the adequacy of any collateral or other
---------------
means of obtaining repayment of the Obligations, HRP is hereby authorized,
without notice to the Guarantor or compliance with any other condition precedent
now or hereafter imposed by Applicable Law (all of which are hereby expressly
waived to the extent permitted by Applicable Law) and to the fullest extent
permitted by Applicable Law, to set off and apply any securities, deposits or
other property belonging to the Guarantor now or hereafter held by HRP against
the obligations of the Guarantor under this Guaranty, whether or not HRP shall
have made any demand under this
<PAGE>
-4-
Guaranty, at any time and from time to time after the occurrence of a Event of
Default under and as defined in any GranCare Document, in such manner as HRP in
its sole discretion may determine, and the Guarantor hereby grants HRP a
continuing security interest in such securities, deposits and property for the
payment and performance of such obligations.
5. Subrogation and Contribution. Until the Obligations shall have been paid
----------------------------
and performed in full after the Termination Date, the Guarantor irrevocably and
unconditionally suspends and subordinates any and all rights to which it may be
entitled, by operation of law or otherwise, to be subrogated, with respect to
any payment made by the Guarantor hereunder, to the rights of HRP against any
GranCare Company, or otherwise to be reimbursed, indemnified or exonerated by
any GranCare Company in respect thereof or to receive any payment, in the nature
of contribution or for any other reason, from any other guarantor of the
Obligations with respect to any payment made by the Guarantor hereunder. Until
the Obligations shall have been paid and performed in full, the Guarantor waives
any defense it may have based upon any election of remedies by HRP which impairs
the Guarantor's subrogation rights or the Guarantor's rights to proceed against
any GranCare Company for reimbursement (including without limitation any loss of
rights the Guarantor may suffer by reason of any rights, powers or remedies of
such GranCare Company in connection with any anti-deficiency laws or any other
laws limiting, qualifying or discharging any indebtedness to HRP). Until the
Obligations shall have been paid, performed and satisfied in full, the Guarantor
further suspends and subordinates any right to enforce any remedy which HRP now
has or may in the future have against any GranCare Company, any other guarantor
or any other Person and any benefit of, or any right to participate in, any
security whatsoever now or in the future held by HRP.
6. Effect of Bankruptcy Stay. If acceleration of the time for payment or
-------------------------
performance of any of the Obligations is stayed upon the insolvency, bankruptcy
or reorganization of any GranCare Company or any other Person or otherwise, all
such amounts otherwise subject to acceleration shall nonetheless be payable by
the Guarantor under this Guaranty forthwith upon demand.
7. Receipt of GranCare Documents, etc. The Guarantor confirms, represents and
----------------------------------
warrants to HRP that (i) it has received true and complete copies of all
existing GranCare Documents from the GranCare Companies (giving effect to the
Closing under the Restructure Agreement), has read the contents thereof and
reviewed the same with legal counsel of its choice; (ii) no representations or
agreements of any kind have been made to the Guarantor which would limit or
qualify in any way the terms of this Guaranty; (iii) this Guaranty is executed
at the GranCare Companies' request and not at the request of HRP; (iv) HRP has
made no representation to the Guarantor as to the creditworthiness of any
GranCare Company; and (v) the Guarantor has established adequate means of
obtaining from each GranCare Company on a continuing basis information regarding
such GranCare Company's financial condition. The Guarantor agrees to keep
adequately informed from such means of any facts, events, or circumstances which
might in any way affect the Guarantor's risks under this Guaranty, and the
Guarantor further agrees that HRP shall have no obligation to disclose to the
Guarantor any information or documents acquired by HRP in the course of its
relationship with the GranCare Companies.
<PAGE>
-5-
8. Amendments, etc. with Respect to the Obligations. The obligations of the
------------------------------------------------
Guarantor under this Guaranty shall remain in full force and effect without
regard to, and shall not be released, altered, exhausted, discharged or in any
way affected by any circumstance or condition (whether or not any GranCare
Company shall have any knowledge or notice thereof), including without
limitation (a) any amendment or modification of or supplement to any GranCare
Document, or any obligation, duty or agreement of the GranCare Companies or any
other Person thereunder or in respect thereof; (b) any assignment or transfer in
whole or in part of any of the Obligations; any furnishing, acceptance, release,
nonperfection or invalidity of any direct or indirect security or guaranty for
any of the Obligations; (c) any waiver, consent, extension, renewal, indulgence,
settlement, compromise or other action or inaction under or in respect of any
GranCare Document, or any exercise or nonexercise of any right, remedy, power or
privilege under or in respect of any such instrument (whether by operation of
law or otherwise); (d) any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation or similar proceeding with respect to any
GranCare Company or any other Person or any of their respective properties or
creditors or any resulting release or discharge of any Obligation (including
without limitation any rejection of any lease pursuant to Section 365 of the
Federal Bankruptcy Code); (e) any new or additional financing arrangements
entered into by any GranCare Company or by any other Person on behalf of or for
the benefit of any GranCare Company; (f) the merger or consolidation of any
GranCare Company with or into any other Person or of any other Person with or
into any GranCare Company; (g) the voluntary or involuntary sale or other
disposition of all or substantially all the assets of any GranCare Company or
any other Person; (h) the voluntary or involuntary liquidation, dissolution or
termination of any GranCare Company or any other Person; (i) any invalidity or
unenforceability, in whole or in part, of any term hereof or of any GranCare
Document, or any obligation, duty or agreement of any GranCare Company or any
other Person thereunder or in respect thereof; (j) any provision of any
applicable law or regulation purporting to prohibit the payment or performance
by any GranCare Company or any other Person of any Obligation; (k) any failure
on the part of any GranCare Company or any other Person for any reason to
perform or comply with any term of any GranCare Document or any other agreement;
or (l) any other act, omission or occurrence whatsoever, whether similar or
dissimilar to the foregoing. The Guarantor authorizes each GranCare Company,
each other guarantor in respect of the Obligations and HRP at any time in its
discretion, as the case may be, to alter any of the terms of any of the
Obligations.
9. Guarantor as Principal. If for any reason the GranCare Companies, or any of
----------------------
them, or any other Person is under no legal obligation to discharge any
Obligation, or if any other moneys included in the Obligations have become
unrecoverable from the GranCare Companies, or any of them, or any other Person
by operation of law or for any other reason, including, without limitation, the
invalidity or irregularity in whole or in part of any Obligation or of any
GranCare Document, the legal disability of any GranCare Company or any other
obligor in respect of Obligations, any discharge of or limitation on the
liability of any GranCare Company or any other Person or any limitation on the
method or terms of payment under any Obligation, or of any GranCare Document,
which may now or hereafter be caused or imposed in any manner whatsoever
(whether consensual or arising by operation of law or otherwise), this Guaranty
shall
<PAGE>
-6-
nevertheless remain in full force and effect and shall be binding upon the
Guarantor to the same extent as if the Guarantor at all times had been the
principal obligor on all Obligations.
10. Waiver of Demand, Notice, Etc. The Guarantor hereby waives, to the extent
-----------------------------
not prohibited by applicable law, all presentments, demands for performance,
notice of nonperformance, protests, notices of protests and notices of dishonor
in connection with the Obligations or any GranCare Document, including but not
limited to (a) notice of the existence, creation or incurring of any new or
additional obligation or of any action or failure to act on the part of any
GranCare Company, HRP, any endorser or creditor of any GranCare Company or any
other Person; (b) any notice of any indulgence, extensions or renewals granted
to any obligor with respect to the Obligations; (c) any requirement of diligence
or promptness in the enforcement of rights under any GranCare Document, or any
other agreement or instrument directly or indirectly relating thereto or to the
Obligations; (d) any enforcement of any present or future agreement or
instrument relating directly or indirectly thereto or to the Obligations; (e)
notice of any of the matters referred to in Section 9 above; (f) any defense of
---------
any kind which the Guarantor may now have with respect to his liability under
this Guaranty; (g) any right to require HRP, as a condition of enforcement of
this Guaranty, to proceed against any GranCare Company or any other Person or to
proceed against or exhaust any security held by HRP at any time or to pursue any
other right or remedy in HRP's power before proceeding against the Guarantor;
(h) any defense that may arise by reason of the incapacity, lack of authority,
death or disability of any other Person or Persons or the failure of HRP to file
or enforce a claim against the estate (in administration, bankruptcy, or any
other proceeding) of any other Person or Persons; (i) any defense based upon an
election of remedies by HRP; (j) any defense arising by reason of any "one
action" or "anti-deficiency" law or any other law which may prevent HRP from
bringing any action, including a claim for deficiency, against the Guarantor,
before or after HRP's commencement of completion of any foreclosure action,
either judicially or by exercise of a power of sale; (k) any defense based upon
any lack of diligence by HRP in the collection of any Obligation; (l) any duty
on the part of HRP to disclose to the Guarantor any facts HRP may now or
hereafter know about any GranCare Company or any other obligor in respect of
Obligations; (m) any defense arising because of an election made by HRP under
Section 1111(b)(2) of the Federal Bankruptcy Code; (n) any defense based on any
borrowing or grant of a security interest under Section 364 of the Federal
Bankruptcy Code; (o) and any defense based upon or arising out of any defense
which any GranCare Company or any other Person may have to the payment or
performance of the Obligations (including but not limited to failure of
consideration, breach of warranty, fraud, payment, accord and satisfaction,
strict foreclosure, statute of frauds, bankruptcy, infancy, statute of
limitations, lender liability and usury). Guarantor acknowledges and agrees that
each of the waivers set forth herein on the part of the Guarantor is made with
Guarantor's full knowledge of the significance and consequences thereof and
that, under the circumstances, the waivers are reasonable. If any such waiver is
determined to be contrary to Applicable Law such waiver shall be effective only
to the extent no prohibited by such Applicable Law.
11. Reinstatement. This Guaranty shall continue to be effective, or be
-------------
reinstated, as the case may be, if at any time payment, or any part thereof, of
any of the Obligations is rescinded or must otherwise be restored or returned by
HRP upon the insolvency, bankruptcy, dissolution,
<PAGE>
-7-
liquidation or reorganization of any GranCare Company or upon or as a result of
the appointment of a receiver, intervenor or conservator of, or trustee or
similar officer for, any GranCare Company or any substantial part of its
property, or otherwise, all as though such payments had not been made.
12. Payments. The Guarantor hereby agrees that the Obligations will be paid to
--------
HRP without set-off or counterclaim in U.S. Dollars at the office of HRP located
at 400 Centre Street, Newton, Massachusetts 02158, or to such other location as
HRP shall notify the Guarantor.
13. Covenants. The Guarantor hereby covenants and agrees with HRP that, from
and after the date of this Guaranty until the Obligations are paid in full and
all GranCare Documents have been terminated:
(1) Legal Existence. The Guarantor shall do or cause to be done all things
---------------
necessary to preserve and keep in full force and effect its corporate existence
(subject as provided in Section 13.(b) hereof).
--------------
(2) Merger; Sale of Assets, Etc. HRP agrees that, notwithstanding anything
---------------------------
to the contrary in any GranCare Document, the Guarantor and any of its
Affiliates (specifically excluding AMS Properties and GCIHCC), or any successors
of any of the foregoing, may, without any consent or approval of HRP, enter into
mergers, consolidations, acquisitions, asset sales, sales of minority or
majority interests in the Guarantor or such Affiliate or any other transactions
(including, without limitation, any change of control, recapitalization or other
restructuring of the Guarantor or any of such Affiliates or successors);
provided, however, that so long as the Guarantor is a direct or indirect
- -------- -------
shareholder of AMS Properties or GCIHCC, the Guarantor (i) shall not liquidate,
wind-up or dissolve itself (or suffer any liquidation or dissolution) and (ii)
may not merge or consolidate with any Person, or convey, transfer or lease
substantially all of its assets unless:
(1) giving effect to such transaction, no Event of Default, or an
event or condition that with the giving of notice or lapse of time or both
would become an Event of Default, would occur under and as defined in any
GranCare Document; and
(2) the successor formed by such consolidation or the survivor of
such merger or the Person that acquires by conveyance, transfer or lease
substantially all of the assets of the Guarantor, as the case may be, shall
be a corporation organized and existing under the laws of the United States
or any State thereof (including the District of Columbia), and, if the
Guarantor is not such corporation, (i) such corporation shall have executed
and delivered to HRP its assumption of the due and punctual performance and
observance of each covenant and condition of this Guaranty to the same
extent and with the same effect as though such corporation was a party
hereto and was named and defined as the "Guarantor" herein and (ii) shall
have caused to be delivered to HRP an opinion of outside counsel to such
corporation to the effect that all agreements or instruments effecting such
assumption are enforceable in accordance with their terms and comply with
the terms hereof.
<PAGE>
-8-
(3) Severability. Any provision of this Guaranty which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
14. Additional Guaranties. This Guaranty shall be in addition to any other
---------------------
guaranty or other security for the Obligations, and it shall not be prejudiced
or rendered unenforceable by the invalidity of any such other guaranty or
security.
15. Paragraph Headings. The paragraph headings used in this Guaranty are for
------------------
convenience of reference only and are not to affect the construction hereof or
be taken into consideration in the interpretation hereof.
16. No Waiver; Cumulative Remedies, Documentation of Expenses. HRP shall not by
---------------------------------------------------------
any act (except by a written instrument pursuant to Paragraph 17 hereof), delay,
------------
indulgence, omission or otherwise, be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Default or in any breach of any of the
terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of HRP, any right, power or privilege hereunder shall
operate as a waiver thereof. No single or partial exercise of any right, power
or privilege hereunder shall preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. A waiver by HRP of any
right or remedy hereunder on any one occasion shall not be construed as a bar to
any right or remedy which HRP would otherwise have on any future occasion. The
rights and remedies herein provided are cumulative, may be exercised singly or
concurrently and are not exclusive of any rights or remedies provided by law.
17. Waivers and Amendments; Successors and Assigns. None of the terms or
----------------------------------------------
provisions of this Guaranty may be waived, amended, supplemented or otherwise
modified except by a written instrument executed by the Guarantor and HRP,
provided that any provision of this Guaranty may be waived by HRP in a letter or
agreement executed by HRP or by telecopy from HRP. This Guaranty shall be
binding upon the successors and assigns of the Guarantor and shall inure to the
benefit of HRP and its successors and assigns.
18. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION; GOVERNING LAW. THE GUARANTOR
------------------------------------------------------------
HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO A JURY TRIAL
IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY REASON OF THIS
GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND
THEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS GUARANTY, THE GUARANTOR (1) ACCEPTS
FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY,
THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR
PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
<PAGE>
-9-
GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING
MAY BE BROUGHT; (2) IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED BY
ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE
BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED; (3) TO THE EXTENT
THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION,
AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIM THAT IT
IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY
IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS
IMPROPER; AND (4) AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION,
SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF
MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF
THE FEDERAL RULES OF CIVIL PROCEDURE.
THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
19. Notices. All notices under this Guaranty shall be in writing, and shall be
-------
delivered by hand, by a nationally recognized commercial overnight delivery
service, by first class mail or by telecopy, delivered, addressed or
transmitted, if to HRP, at 400 Centre Street, Newton, Massachusetts 02158,
Attention: President (telecopy no. 617-332-2261), with a copy to Sullivan &
Worcester LLP, One Post Office Square, Boston, Massachusetts 02109, Attention:
Harry E. Ekblom, Esq. (telecopy no. 617-338-2880), and if to the Guarantor, at
its address or telecopy number set out below its signature in this Guaranty.
Such notices shall be effective: in the case of hand deliveries, when received;
in the case of an overnight delivery service, on the next business day after
being placed in the possession of such delivery service, with delivery charges
prepaid; in the case of mail, three days after deposit in the postal system,
first class postage prepaid; and in the case of telecopy notices, when
electronic indication of receipt is received. Either party may change its
address and telecopy number by written notice to the other delivered in
accordance with the provisions of this Section.
20. Termination. The obligations of Guarantor hereunder shall automatically
-----------
terminate upon the indefeasible satisfaction in full of all Obligations after
the Termination Date.
21. Existing Guaranties. This Guaranty amends, restates and consolidates the
-------------------
Guaranties dated as of December 28, 1990 and June 30, 1992, each as amended, by
the Guarantor in favor of HRP.
<PAGE>
-10-
IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly
executed and delivered as of the date first above written.
GRANCARE, INC.
By /s/ M. Henry Day, Jr.
-----------------------------
Name: M. Henry Day, Jr.
Title: Assistant Secretary
Address for Notices:
GranCare, Inc.
Suite 1500
One Ravinia Drive
Atlanta GA 30346
Attn: General Counsel
Signature page to Guaranty by GranCare, Inc.
dated as of October 31, 1997.
<PAGE>
EXHIBIT 10.34
GUARANTY BY PARAGON HEALTH NETWORK, INC.
GUARANTY dated as of October 31, 1997 made by PARAGON HEALTH NETWORK,
INC. (f/k/a "Living Centers of America, Inc."), a Delaware corporation (the
"Guarantor") and HEALTH AND RETIREMENT PROPERTIES TRUST, a Maryland real estate
---------
investment trust (with its successor and assigns, "HRP").
---
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, GranCare, Inc., a Delaware corporation ("GranCare") and the other
--------
GranCare Companies (as hereinafter defined) have entered into certain lease and
loan financings with HRP governed by the GranCare Documents (as hereinafter
defined);
WHEREAS, pursuant to and subject to the terms and conditions of a Third
Amended and Restated Agreement and Plan of Merger dated as of September 17, 1997
among the Guarantor, LCA Acquisition Sub, Inc., a Delaware corporation and a
wholly-owned subsidiary of the Guarantor ("LCA Acquisition"), GranCare and
---------------
Apollo Management, L.P. on behalf of one or more of its managed investment
funds, GranCare shall become a wholly-owned subsidiary of the Guarantor through
the merger of LCA Acquisition with and into GranCare and those certain other
transactions defined as the "Transactions" in the Joint Proxy Statement dated
September 26, 1997 by the Guarantor and GranCare (the "Transactions");
------------
WHEREAS, the Guarantor and GranCare have requested that HRP consent to the
Transactions and to make certain modifications to the GranCare Documents in
connection therewith;
WHEREAS, HRP is willing to so consent and agree, subject to the terms and
conditions of a certain Restructure and Asset Exchange Agreement dated as of
even date herewith (the "Restructure Agreement") among AMS Properties, Inc. and
---------------------
GCI Health Care Centers, Inc., each a Delaware corporation and a wholly-owned
subsidiary of GranCare ("AMS Properties"and "GCIHCC," respectively), and HRP;
-------------- ------
WHEREAS, it is a condition to the effectiveness of the Restructure
Agreement that, among other things, the Guarantor deliver this Guaranty in favor
of HRP;
WHEREAS, by virtue of the Transactions and the related modifications to the
GranCare Documents contemplated by the Restructure Agreement, the GranCare
Companies will benefit substantially from, among other things, increased access
to capital;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Guarantor hereby agrees with HRP as follows:
<PAGE>
-2-
1. Defined Terms. Unless otherwise defined herein, terms which are defined in
-------------
the Restructure Agreement and used herein are so used as so defined. In
addition, the following terms shall have the meanings set forth below:
"Applicable Law" shall mean any law of any governmental authority,
--------------
whether domestic or foreign, including without limitation all federal and
state laws, to which the Person in question is subject or by which it or
any of its property is bound, and including without limitation any: (a)
administrative, executive, judicial, legislative or other action, code,
consent decree, constitution, decree, directive, enactment, finding,
guideline, injunction, interpretation, judgment, law, order, ordinance,
policy statement, proclamation, promulgation, regulation, requirement,
rule, rule of law, rule of public policy, settlement agreement, statute, or
writ, of any governmental authority, domestic or foreign, whether or not
having the force of law; (b) common law or other legal or quasi-legal
precedent; or (c) arbitrator's, mediator's or referee's award, decision,
finding or recommendation, or, in any case, any particular section, part or
provision thereof
"GranCare Documents" shall mean, collectively, any agreement, note,
------------------
lease, master lease, mortgage, security agreement, pledge agreement,
assignment, guaranty or other agreement or instrument now or hereafter
executed by one or more of the GranCare Companies with, in favor of or for
the benefit of, HRP or any Affiliate thereof (including, without
limitation, any and all other documents executed in connection with,
relating to, evidencing or creating collateral or security in favor of or
for the benefit of HRP or any Affiliate thereof), and any agreement, note,
mortgage, security agreement, pledge agreement, assignment, guaranty or
other agreement or instrument hereafter executed by one or more of the
GranCare Companies in connection with any extension, renewal, refunding or
refinancing thereof, as any of the same may hereafter from time to time be
amended, modified or supplemented.
"GranCare Companies" shall mean, collectively, GranCare, AMS
------------------
Properties and GCIHCC, and their respective successors and assigns.
"Consolidated Financials" shall mean, for any fiscal year or other
-----------------------
accounting period of the Guarantor and its consolidated Subsidiaries,
annual audited and quarterly unaudited financial statements prepared on a
consolidated basis, including the Guarantor's consolidated balance sheet
and the related statements of income and cash flows, all in reasonable
detail, and setting forth in comparative form the corresponding figures for
the corresponding period in the preceding fiscal year, and prepared in
accordance with GAAP consistently applied throughout the periods presented.
"Default Rate" shall mean 4% per annum above the prime rate or base
------------
rate on corporate loans at large U.S. money center commercial banks as
published in The Wall Street Journal or, if publication of such rate shall
be suspended or terminated, the annual rate of interest, determined daily
and expressed as a percentage, from time to time announced by one of the
five largest national-chartered banking institutions having their principal
office in New York, New York and selected by HRP at the time such
publication
<PAGE>
-3-
is suspended or terminated. Each change in the Interest Rate shall take
effect simultaneously with the date of publication or announcement, as
applicable, of each corresponding change in such prime rate or base rate.
"Event of Default" shall have the meaning set forth in any GranCare
----------------
Document.
"Financial Officer's Certificate" shall mean a certificate of the
-------------------------------
chief financial officer, treasurer or other executive officer of the
Guarantor, duly authorized, accompanying the financial statements required
to be delivered by such Person pursuant to Section 14, in which such
officer shall (a) certify that such statements have been properly prepared
in accordance with GAAP and are true, correct and complete in all material
respects and fairly present the consolidated financial condition of the
Guarantor at and as of the dates thereof and the results of its and their
operations for the periods covered thereby, and (b) certify that such
officer has reviewed the GranCare Documents and has no knowledge of any
material default by the Guarantor or any Subsidiary thereof in the
performance or observance of any of the provisions of any GranCare Document
or of any condition or event which constitutes an Event of Default under
any GranCare Document or which with the passage of time or the giving of
notice or both would become such an Event of Default.
"Material Adverse Effect" means a material adverse effect on (a) the
-----------------------
business, operations, property or condition (financial or otherwise) of the
Guarantor and its Subsidiaries taken as a whole, (b) the ability of the
Guarantor to perform its obligations under this Guaranty, or (c) the
validity or enforceability of this Guaranty, or the rights of HRP
hereunder.
"Obligations" shall mean the payment and performance of each and every
-----------
obligation and liability of any GranCare Company to HRP under any GranCare
Document, whether now existing or hereafter arising or created, joint or
several, direct or indirect, absolute or contingent, due or to become due,
matured or unmatured, liquidated or unliquidated, arising by contract,
operation of law or otherwise, and including, without limitation, (i) all
principal, premium or prepayment fee and interest under any promissory note
payable to HRP by any GranCare Company, (ii) all rent under any lease with
HRP as landlord, and (iii) all fees and charges, and all costs and expenses
payable under any GranCare Document.
"Subsidiary" shall mean any corporation of which more than fifty
----------
percent of the outstanding capital stock having ordinary voting power to
elect a majority of the Board of Directors of such corporation
(irrespective of whether or not at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon
the occurrence of any contingency) is at the time directly or indirectly
owned by Guarantor, or Guarantor and one or more other Subsidiaries, or by
one or more Subsidiaries.
2. Guaranty. The Guarantor hereby unconditionally and irrevocably guarantees
--------
to HRP the prompt and complete payment and performance by the GranCare Companies
(and each of them),
<PAGE>
-4-
when due (whether at stated maturity, by acceleration or otherwise), of the
Obligations. The Guarantor further agrees to pay any and all reasonable expenses
(including, without limitation, all reasonable fees and disbursements of counsel
to HRP) which may be paid or incurred by HRP in enforcing any of its rights
under this Guaranty. This Guaranty is a guaranty of payment and not of
collectibility and is absolute and in no way conditional or contingent. The
Guarantor's liability hereunder is direct and unconditional and may be enforced
after nonpayment or nonperformance by any GranCare Company of any Obligation
without requiring HRP to resort to any other Person (including without
limitation such GranCare Company) or any other right, remedy or collateral. This
Guaranty shall remain in full force and effect until the Obligations are paid in
full following the termination of all GranCare Documents (the "Termination
-----------
Date").
- ----
3. Costs and Expenses of Collection. The Guarantor agrees, as principal
--------------------------------
obligor and not as a guarantor only, to pay to HRP forthwith upon demand, in
immediately available funds, all costs and expenses (including, without
limitation, all court costs and all reasonable fees and disbursements of counsel
to HRP) incurred or expended by HRP in connection with the enforcement of this
Guaranty, together with interest on such amounts from the time such amounts
become due until payment at the Default Rate. It shall be a condition of the
obligations of Guarantor to pay any fees and expenses payable by it under this
Guaranty that HRP shall have, or shall have caused to have, provided the
Guarantor with a writing describing such fees and/or expenses in reasonable
detail.
4. Right of Setoff. Regardless of the adequacy of any collateral or other
---------------
means of obtaining repayment of the Obligations, HRP is hereby authorized,
without notice to the Guarantor or compliance with any other condition precedent
now or hereafter imposed by Applicable Law (all of which are hereby expressly
waived to the extent permitted by Applicable Law) and to the fullest extent
permitted by Applicable Law, to set off and apply any securities, deposits or
other property belonging to the Guarantor now or hereafter held by HRP against
the obligations of the Guarantor under this Guaranty, whether or not HRP shall
have made any demand under this Guaranty, at any time and from time to time
after the occurrence of a Event of Default under and as defined in any GranCare
Document, in such manner as HRP in its sole discretion may determine, and the
Guarantor hereby grants HRP a continuing security interest in such securities,
deposits and property for the payment and performance of such obligations.
5. Subrogation and Contribution. Until the Obligations shall have been paid
----------------------------
and performed in full after the Termination Date, the Guarantor irrevocably and
unconditionally suspends and subordinates any and all rights to which it may be
entitled, by operation of law or otherwise, to be subrogated, with respect to
any payment made by the Guarantor hereunder, to the rights of HRP against any
GranCare Company, or otherwise to be reimbursed, indemnified or exonerated by
any GranCare Company in respect thereof or to receive any payment, in the nature
of contribution or for any other reason, from any other guarantor of the
Obligations with respect to any payment made by the Guarantor hereunder. Until
the Obligations shall have been paid and performed in full, the Guarantor waives
any defense it may have based upon any election of remedies by HRP which impairs
the Guarantor's subrogation rights or the Guarantor's rights to proceed against
any GranCare Company for reimbursement (including without limitation any loss of
rights the Guarantor may suffer by reason of any rights, powers or remedies of
such
<PAGE>
-5-
GranCare Company in connection with any anti-deficiency laws or any other laws
limiting, qualifying or discharging any indebtedness to HRP). Until the
Obligations shall have been paid, performed and satisfied in full after the
Termination Date, the Guarantor further suspends and subordinates any right to
enforce any remedy which HRP now has or may in the future have against any
GranCare Company, any other guarantor or any other Person and any benefit of, or
any right to participate in, any security whatsoever now or in the future held
by HRP.
6. Effect of Bankruptcy Stay. If acceleration of the time for payment or
-------------------------
performance of any of the Obligations is stayed upon the insolvency, bankruptcy
or reorganization of any GranCare Company or any other Person or otherwise, all
such amounts otherwise subject to acceleration shall nonetheless be payable by
the Guarantor under this Guaranty forthwith upon demand.
7. Receipt of GranCare Documents, etc. The Guarantor confirms, represents and
----------------------------------
warrants to HRP that (i) it has received true and complete copies of all
existing GranCare Documents from the GranCare Companies (giving effect to the
Closing under the Restructure Agreement), has read the contents thereof and
reviewed the same with legal counsel of its choice; (ii) no representations or
agreements of any kind have been made to the Guarantor which would limit or
qualify in any way the terms of this Guaranty; (iii) this Guaranty is executed
at the GranCare Companies' request and not at the request of HRP; (iv) HRP has
made no representation to the Guarantor as to the creditworthiness of any
GranCare Company; and (v) the Guarantor has established adequate means of
obtaining from each GranCare Company on a continuing basis information regarding
such GranCare Company's financial condition. The Guarantor agrees to keep
adequately informed from such means of any facts, events, or circumstances which
might in any way affect the Guarantor's risks under this Guaranty, and the
Guarantor further agrees that HRP shall have no obligation to disclose to the
Guarantor any information or documents acquired by HRP in the course of its
relationship with the GranCare Companies.
8. Amendments, etc. with Respect to the Obligations. The obligations of the
------------------------------------------------
Guarantor under this Guaranty shall remain in full force and effect without
regard to, and shall not be released, altered, exhausted, discharged or in any
way affected by any circumstance or condition (whether or not any GranCare
Company shall have any knowledge or notice thereof), including without
limitation (a) any amendment or modification of or supplement to any GranCare
Document, or any obligation, duty or agreement of the GranCare Companies or any
other Person thereunder or in respect thereof; (b) any assignment or transfer in
whole or in part of any of the Obligations; any furnishing, acceptance, release,
nonperfection or invalidity of any direct or indirect security or guaranty for
any of the Obligations; (c) any waiver, consent, extension, renewal, indulgence,
settlement, compromise or other action or inaction under or in respect of any
GranCare Document, or any exercise or nonexercise of any right, remedy, power or
privilege under or in respect of any such instrument (whether by operation of
law or otherwise); (d) any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation or similar proceeding with respect to any
GranCare Company or any other Person or any of their respective properties or
creditors or any resulting release or discharge of any Obligation (including
without limitation any rejection of any lease pursuant to Section 365 of the
Federal Bankruptcy Code); (e) any new or additional financing arrangements
entered into by any GranCare Company or by any other Person on behalf of or for
the benefit of any GranCare Company; (f) the merger or
<PAGE>
-6-
consolidation of any GranCare Company with or into any other Person or of any
other Person with or into any GranCare Company; (g) the voluntary or involuntary
sale or other disposition of all or substantially all the assets of any GranCare
Company or any other Person; (h) the voluntary or involuntary liquidation,
dissolution or termination of any GranCare Company or any other Person; (i) any
invalidity or unenforceability, in whole or in part, of any term hereof or of
any GranCare Document, or any obligation, duty or agreement of any GranCare
Company or any other Person thereunder or in respect thereof; (j) any provision
of any applicable law or regulation purporting to prohibit the payment or
performance by any GranCare Company or any other Person of any Obligation; (k)
any failure on the part of any GranCare Company or any other Person for any
reason to perform or comply with any term of any GranCare Document or any other
agreement; or (l) any other act, omission or occurrence whatsoever, whether
similar or dissimilar to the foregoing. The Guarantor authorizes each GranCare
Company, each other guarantor in respect of the Obligations and HRP at any time
in its discretion, as the case may be, to alter any of the terms of any of the
Obligations.
9. Guarantor as Principal. If for any reason the GranCare Companies, or any of
----------------------
them, or any other Person is under no legal obligation to discharge any
Obligation, or if any other moneys included in the Obligations have become
unrecoverable from the GranCare Companies, or any of them, or any other Person
by operation of law or for any other reason, including, without limitation, the
invalidity or irregularity in whole or in part of any Obligation or of any
GranCare Document, the legal disability of any GranCare Company or any other
obligor in respect of Obligations, any discharge of or limitation on the
liability of any GranCare Company or any other Person or any limitation on the
method or terms of payment under any Obligation, or of any GranCare Document,
which may now or hereafter be caused or imposed in any manner whatsoever
(whether consensual or arising by operation of law or otherwise), this Guaranty
shall nevertheless remain in full force and effect and shall be binding upon the
Guarantor to the same extent as if the Guarantor at all times had been the
principal obligor on all Obligations.
10. Waiver of Demand, Notice, Etc. The Guarantor hereby waives, to the extent
-----------------------------
not prohibited by applicable law, all presentments, demands for performance,
notice of nonperformance, protests, notices of protests and notices of dishonor
in connection with the Obligations or any GranCare Document, including but not
limited to (a) notice of the existence, creation or incurring of any new or
additional obligation or of any action or failure to act on the part of any
GranCare Company, HRP, any endorser or creditor of any GranCare Company or any
other Person; (b) any notice of any indulgence, extensions or renewals granted
to any obligor with respect to the Obligations; (c) any requirement of diligence
or promptness in the enforcement of rights under any GranCare Document, or any
other agreement or instrument directly or indirectly relating thereto or to the
Obligations; (d) any enforcement of any present or future agreement or
instrument relating directly or indirectly thereto or to the Obligations; (e)
notice of any of the matters referred to in Section 9 above; (f) any defense of
---------
any kind which the Guarantor may now have with respect to his liability under
this Guaranty; (g) any right to require HRP, as a condition of enforcement of
this Guaranty, to proceed against any GranCare Company or any other Person or to
proceed against or exhaust any security held by HRP at any time or to pursue any
other right or remedy in HRP's power before proceeding against the Guarantor;
(h) any defense that may arise by reason of the incapacity, lack of authority,
death or disability of any other Person or
<PAGE>
-7-
Persons or the failure of HRP to file or enforce a claim against the estate (in
administration, bankruptcy, or any other proceeding) of any other Person or
Persons; (i) any defense based upon an election of remedies by HRP; (j) any
defense arising by reason of any "one action" or "anti-deficiency" law or any
other law which may prevent HRP from bringing any action, including a claim for
deficiency, against the Guarantor, before or after HRP's commencement of
completion of any foreclosure action, either judicially or by exercise of a
power of sale; (k) any defense based upon any lack of diligence by HRP in the
collection of any Obligation; (l) any duty on the part of HRP to disclose to the
Guarantor any facts HRP may now or hereafter know about any GranCare Company or
any other obligor in respect of Obligations; (m) any defense arising because of
an election made by HRP under Section 1111(b)(2) of the Federal Bankruptcy Code;
(n) any defense based on any borrowing or grant of a security interest under
Section 364 of the Federal Bankruptcy Code; (o) and any defense based upon or
arising out of any defense which any GranCare Company or any other Person may
have to the payment or performance of the Obligations (including but not limited
to failure of consideration, breach of warranty, fraud, payment, accord and
satisfaction, strict foreclosure, statute of frauds, bankruptcy, infancy,
statute of limitations, lender liability and usury). Guarantor acknowledges and
agrees that each of the waivers set forth herein on the part of the Guarantor is
made with Guarantor's full knowledge of the significance and consequences
thereof and that, under the circumstances, the waivers are reasonable. If any
such waiver is determined to be contrary to Applicable Law such waiver shall be
effective only to the extent no prohibited by such Applicable Law.
11. Reinstatement. This Guaranty shall continue to be effective, or be
-------------
reinstated, as the case may be, if at any time payment, or any part thereof, of
any of the Obligations is rescinded or must otherwise be restored or returned by
HRP upon the insolvency, bankruptcy, dissolution, liquidation or reorganization
of any GranCare Company or upon or as a result of the appointment of a receiver,
intervenor or conservator of, or trustee or similar officer for, any GranCare
Company or any substantial part of its property, or otherwise, all as though
such payments had not been made.
12. Payments. The Guarantor hereby agrees that the Obligations will be paid to
--------
HRP without set-off or counterclaim in U.S. Dollars at the office of HRP located
at 400 Centre Street, Newton, Massachusetts 02158, or to such other location as
HRP shall notify the Guarantor.
13. Representations and Warranties. The Guarantor represents and warrants that:
------------------------------
(1) Corporate Existence. The Guarantor is a corporation duly
-------------------
incorporated and validly existing under the laws of the jurisdiction of its
incorporation, and is duly licensed or qualified as a foreign corporation
in all states wherein the nature of its property owned or business
transacted by it makes such licensing or qualification necessary, except
where the failure to be licensed or to so qualify could not have a Material
Adverse Effect.
(2) No Violation. The execution, delivery and performance of this
------------
Guaranty and each other Restructure Document to which the Guarantor is a
party will not contravene any provision of law, statute, rule or regulation
to which the Guarantor or any GranCare Company is subject or any judgment,
decree, franchise, order or permit applicable to the
<PAGE>
-8-
Guarantor, or conflict or be inconsistent with or result in any breach of,
any of the terms, covenants, conditions or provisions of, or constitute a
default under, or result in the creation or imposition of (or the
obligation to create or impose) any lien or security interest upon any of
the property or assets of the Guarantor pursuant to the terms of any
agreement or instrument to which the Guarantor is party or by which its
assets are bound, or violate any provision of the respective corporate
charters or bylaws of the Guarantor.
(3) Corporate Authority and Power. The execution, delivery and
-----------------------------
performance of this Guaranty and each other Restructure Document to which
the Guarantor is a party is within the corporate powers of the Guarantor
and has been duly authorized by all necessary corporate action.
(4) Enforceability. This Guaranty and each other Restructure Document
--------------
to which the Guarantor is a party have been duly executed and delivered by
the Guarantor, and this Guaranty and each such Restructure Document
constitutes the valid and binding obligation of the Guarantor enforceable
against the Guarantor in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and except as enforceability may be subject to
general principles of equity, whether such principles are applied in a
court of equity or at law.
(5) Governmental Approvals. No order, permission, consent, approval,
----------------------
license, authorization, registration or validation of, or filing with, or
exemption by, any governmental authority is required to authorize, or is
required in connection with, the execution, delivery and performance of
this Guaranty or any other Restructure Document to which the Guarantor is a
party, or the taking of any action contemplated hereby or thereby.
(6) Litigation. The Guarantor has no notice or knowledge of any
----------
action, suit or proceeding pending or threatened against or affecting it at
law or in equity or before or by any governmental department, court,
commission, board, bureau, agency or instrumentality, domestic or foreign,
or before any arbitrator of any kind that would, if adversely determined,
have a Material Adverse Effect.
(7) Financial Statements. The consolidated financial statements of
--------------------
the Guarantor contained in the joint proxy statement dated September 26,
1997 filed in connection with the Transactions, fairly present, in
accordance with GAAP, the consolidated financial condition of the Guarantor
and its Subsidiaries as of their dates of presentation, and the
consolidated results of their operations and their consolidated cash flows
for the respective fiscal period then ended.
14. Covenants. The Guarantor hereby covenants and agrees with HRP that, from
---------
and after the date of this Guaranty until the Obligations are paid in full and
all GranCare Documents have been terminated:
<PAGE>
-9-
(1) Notices. The Guarantor shall promptly give notice to HRP of any
-------
Default or Event of Default under any GranCare Document.
(2) Financial Statements. The Guarantor shall furnish the following
--------------------
statements to HRP:
(1) within forty-five (45) days after each of the first three
quarters of any Fiscal Year, the Consolidated Financials for such fiscal
quarter, in each case accompanied by the Financial Officer's Certificate;
(2) within ninety (90) days after the end of each Fiscal Year, the
Consolidated Financials for such Fiscal Year, in each case certified by
Ernst & Young LLP or any other independent certified public accountant of
national reputation, and accompanied by the Financial Officer's
Certificate;
(3) promptly after the sending or filing thereof, copies of all
reports which the Guarantor sends to its security holders generally, and
copies of all periodic reports which the Guarantor files with the SEC or
any stock exchange on which its shares are listed or traded;
(4) at any time and from time to time upon not less than thirty (30)
days notice from HRP, the Guarantor will furnish to HRP any Consolidated
Financials or any other financial reporting information required to be
filed by HRP with any securities and exchange commission, the SEC or any
successor agency, or any other governmental authority, or required pursuant
to any order issued by any court governmental authority or arbitrator in
any litigation to which HRP is a party, for purposes of compliance
therewith; and
(5) promptly upon notice from HRP, such other information concerning
the business, financial condition and affairs of the Guarantor as HRP may
reasonably request from time to time.
HRP may at any time, and from time to time, provide any lender to HRP with
copies of any of the foregoing statements.
(3) Reports. The Guarantor shall promptly provide to HRP such
-------
certificates, reports and other documents required of the Guarantor hereunder
and the Guarantor shall cause each GranCare Company to provide such
certificates, reports and other documents required of it under the GranCare
Documents.
(4) Legal Existence. The Guarantor shall do or cause to be done all things
---------------
necessary to preserve and keep in full force and effect its corporate existence
(subject as provided in Section 14.(f) hereof).
--------------
<PAGE>
-10-
(5) Compliance. The Guarantor shall , and shall cause each of its
----------
Subsidiaries to, comply in all material respects with all Applicable Laws in
respect of the conduct of its business and the ownership of its property
(including, without limitation, applicable statutes, rules, regulations, orders
and restrictions relating to environmental, safety and other similar standards
or controls), except where the failure to comply, either individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
(6) Merger; Sale of Assets, Etc. HRP agrees that, notwithstanding anything
---------------------------
to the contrary in any GranCare Document, the Guarantor and any of its
Affiliates (specifically excluding AMS Properties and GCIHCC), or any successors
of any of the foregoing, may, without any consent or approval of HRP, enter into
mergers, consolidations, acquisitions, asset sales, sales of minority or
majority interests in the Guarantor or such Affiliate or any other transactions
(including, without limitation, any change of control, recapitalization or other
restructuring of the Guarantor or any of such Affiliates or successors);
provided, however, that the Guarantor (i) shall not liquidate, wind-up or
- -------- -------
dissolve itself (or suffer any liquidation or dissolution) and (ii) may not
merge or consolidate with any Person, or convey, transfer or lease substantially
all of its assets unless:
(1) giving effect to such transaction, no Event of Default, or an
event or condition that with the giving of notice or lapse of time or both
would become an Event of Default, would occur under and as defined in any
GranCare Document; and
(2) the successor formed by such consolidation or the survivor of
such merger or the Person that acquires by conveyance, transfer or lease
substantially all of the assets of the Guarantor, as the case may be, shall
be a corporation organized and existing under the laws of the United States
or any State thereof (including the District of Columbia), and, if the
Guarantor is not such corporation, (i) such corporation shall have executed
and delivered to HRP its assumption of the due and punctual performance and
observance of each covenant and condition of this Guaranty to the same
extent and with the same effect as though such corporation was a party
hereto and was named and defined as the "Guarantor" herein and (ii) shall
have caused to be delivered to HRP an opinion of outside counsel to such
corporation to the effect that all agreements or instruments effecting such
assumption are enforceable in accordance with their terms and comply with
the terms hereof.
(7) Ownership of Stock of Tenant Entities. The Guarantor shall at all
-------------------------------------
times, either directly or indirectly through one or more wholly-owned
Subsidiaries that have each executed and delivered to HRP a guaranty in
substantially the form of the Guaranty dated as of even date herewith by
GranCare in favor of HRP, be the beneficial and record owner of all the shares
of the outstanding capital stock of AMS Properties and GCIHCC.
15. Severability. Any provision of this Guaranty which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition
<PAGE>
-11-
or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. Additional Guaranties. This Guaranty shall be in addition to any other
---------------------
guaranty or other security for the Obligations, and it shall not be prejudiced
or rendered unenforceable by the invalidity of any such other guaranty or
security.
17. Paragraph Headings. The paragraph headings used in this Guaranty are for
------------------
convenience of reference only and are not to affect the construction hereof or
be taken into consideration in the interpretation hereof.
18. No Waiver; Cumulative Remedies, Documentation of Expenses. HRP shall not by
---------------------------------------------------------
any act (except by a written instrument pursuant to Paragraph 19 hereof), delay,
indulgence, omission or otherwise, be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Default or in any breach of any of the
terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of HRP, any right, power or privilege hereunder shall
operate as a waiver thereof. No single or partial exercise of any right, power
or privilege hereunder shall preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. A waiver by HRP of any
right or remedy hereunder on any one occasion shall not be construed as a bar to
any right or remedy which HRP would otherwise have on any future occasion. The
rights and remedies herein provided are cumulative, may be exercised singly or
concurrently and are not exclusive of any rights or remedies provided by law.
19. Waivers and Amendments; Successors and Assigns. None of the terms or
----------------------------------------------
provisions of this Guaranty may be waived, amended, supplemented or otherwise
modified except by a written instrument executed by the Guarantor and HRP,
provided that any provision of this Guaranty may be waived by HRP in a letter or
agreement executed by HRP or by telecopy from HRP. This Guaranty shall be
binding upon the successors and assigns of the Guarantor and shall inure to the
benefit of HRP and its successors and assigns.
20. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION; GOVERNING LAW. THE GUARANTOR
------------------------------------------------------------
HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO A JURY TRIAL
IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY REASON OF THIS
GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND
THEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS GUARANTY, THE GUARANTOR (1) ACCEPTS
FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY,
THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR
PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING
MAY BE BROUGHT; (2)
<PAGE>
-12-
IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED BY ANY SUCH COURT IN ANY
SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS
IN THE MANNER HEREINAFTER PROVIDED; (3) TO THE EXTENT THAT IT MAY LAWFULLY DO
SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR
OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIM THAT IT IS NOT
PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY IS
EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS
IMPROPER; AND (4) AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION,
SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF
MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF
THE FEDERAL RULES OF CIVIL PROCEDURE.
THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
21. Notices. All notices under this Guaranty shall be in writing, and shall be
-------
delivered by hand, by a nationally recognized commercial overnight delivery
service, by first class mail or by telecopy, delivered, addressed or
transmitted, if to HRP, at 400 Centre Street, Newton, Massachusetts 02158,
Attention: President (telecopy no. 617-332-2261), with a copy to Sullivan &
Worcester LLP, One Post Office Square, Boston, Massachusetts 02109, Attention:
Harry E. Ekblom, Esq. (telecopy no. 617-338-2880), and if to the Guarantor, at
its address or telecopy number set out below its signature in this Guaranty.
Such notices shall be effective: in the case of hand deliveries, when received;
in the case of an overnight delivery service, on the next business day after
being placed in the possession of such delivery service, with delivery charges
prepaid; in the case of mail, three days after deposit in the postal system,
first class postage prepaid; and in the case of telecopy notices, when
electronic indication of receipt is received. Either party may change its
address and telecopy number by written notice to the other delivered in
accordance with the provisions of this Section.
22. Termination. The obligations of Guarantor hereunder shall automatically
-----------
terminate upon the indefeasible satisfaction in full of all Obligations after
the Termination Date.
<PAGE>
-13-
IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly
executed and delivered as of the date first above written.
PARAGON HEALTH NETWORK, INC. (f/k/a
"Living Centers of America, Inc.")
By /s/ Boyd P. Gentry
----------------------------------
Name: Boyd P. Gentry
Title: Vice President and Treasurer
Address for Notices:
Paragon Health Network, Inc.
c/o GranCare, Inc.
Suite 1500
One Ravinia Drive
Atlanta GA 30346
Attn: General Counsel
<PAGE>
EXHIBIT 10.35
RESTRUCTURE AND ASSET EXCHANGE AGREEMENT
AGREEMENT dated as of October 31, 1997 among HEALTH AND RETIREMENT
PROPERTIES TRUST (f/k/a "Health and Rehabilitation Properties Trust") (known in
Wisconsin as "Health and Retirement Properties REIT"), a real estate investment
trust formed under the laws of the State of Maryland ("HRP"), GRANCARE, INC.
---
(f/k/a "New GranCare, Inc."), a Delaware corporation ("GranCare"), AMS
--------
PROPERTIES, INC., a Delaware corporation ("AMS Properties"), and GCI HEALTH CARE
--------------
CENTERS, INC., a Delaware corporation ("GCIHCC;" and together with GranCare and
------
AMS Properties, collectively, the "GranCare Parties")
----------------
W I T N E S S E T H
WHEREAS, HRP, HostMasters, Inc., a California corporation ("HMI"),
---
GranCare, Inc., a California corporation ("Old GranCare"), American Medical
------------
Services, Inc., a Wisconsin corporation ("AMS") and AMS Properties have entered
---
into an Acquisition Agreement, Agreement to Lease and Mortgage Loan Agreement
dated as of December 28, 1990, as amended (as so amended, the "Acquisition
-----------
Agreement"), under which, inter alia, (A) HRP has leased 18 nursing properties
- --------- ----- ----
located in Wisconsin, California, Colorado and Illinois to AMS Properties
pursuant to the several Facility Leases (as amended, the "AMS Properties
--------------
Facility Leases"), each incorporating a Master Lease Document General Terms and
- ---------------
Conditions dated as of December 28, 1990 (as amended, the "AMS Properties Master
---------------------
Lease") between HRP, as landlord, and AMS Properties, as tenant, and (B) HRP has
- -----
made a mortgage loan to AMS Properties in the original principal amount of
$11,500,000, the payment of which is currently evidenced by a Promissory Note
dated as of October 1, 1994 by AMS Properties to HRP (the "Mortgage Note") and
-------------
is secured, inter alia by Mortgage and Security Agreements dated as of March 31,
----------
1995 (collectively, the "Mortgages") by AMS Properties in favor of HRP
---------
encumbering the GranCare Wisconsin Properties (as hereinafter defined);
WHEREAS, (a) in May 1991, the AMSHC Exchange (as defined in the Acquisition
Agreement) took place, whereby Old GranCare, which previously had been a wholly-
owned subsidiary of HMI, became the sole stockholder of HMI and AMS; and (b) in
December 1993, AMS, which previously had owned all the outstanding common stock
of AMS Properties, and AMS Rehab, Inc., a Delaware corporation and a wholly-
owned subsidiary of Old GranCare, each merged into AMS Properties, with AMS
Properties as the surviving corporation;
WHEREAS, HRP has leased 7 nursing and/or residential living properties
located in Arizona, California and South Dakota to GCIHCC pursuant to the
several Facility Leases (as amended, the "GCIHCC Facility Leases"), each
----------------------
incorporating a Master Lease Document General Terms and Conditions dated as of
June 30, 1992 (as amended, the "GCIHCC Master Lease") between HRP, as landlord,
-------------------
and GCIHCC, as tenant;
WHEREAS, Old GranCare transferred all of its skilled nursing, home health
care, assisted living and contract management businesses (including, without
limitation, such capital stock), and related assets, to GranCare, with Old
GranCare thereafter distributing GranCare
<PAGE>
-2-
common stock to Old GranCare shareholders (collectively, the "Distribution"),
------------
pursuant to an Agreement and Plan of Distribution dated as of September 3, 1996
between Old GranCare and GranCare;
WHEREAS, immediately following the Distribution, Old GranCare merged with
and into Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink"),
--------
with Vitalink as the surviving corporation, pursuant to an Amended and Restated
Agreement and Plan of Merger dated as of September 3, 1996 between Vitalink and
Old GranCare; and
WHEREAS, GranCare proposes to merge with LCA Acquisition Sub, Inc., a
Delaware corporation ("Acquisition Sub"), and a wholly-owned Subsidiary of
---------------
Paragon Health Network, Inc., a Delaware corporation (f/k/a Living Centers of
America, Inc.) ("Paragon"), with GranCare as the surviving corporation (the
-------
"GranCare Merger"), pursuant to an Amended and Restated Agreement and Plan of
- ----------------
Merger dated as of September 17, 1997 among GranCare, Paragon, Acquisition Sub
and Apollo Management, L.P. on behalf of one of more of its managed investment
funds (the "Merger Agreement"); and
----------------
WHEREAS, GranCare has requested that HRP agree to (a) restructure certain
terms of the AMS Properties Facility Leases and the GCIHCC Facility Leases, (b)
permit the otherwise prohibited prepayment of the Mortgage Note, (c) waive the
provisions of (i) Section 9.15A of the Acquisition Agreement and (ii) any other
agreement or document entered into by GranCare, Old GranCare, GCIHCC or AMS
Properties in favor of HRP or any Affiliate (collectively, the "HRP Parties")
-----------
which either requires consent or approval of one or more of the HRP Parties in
order to permit the consummation of Transactions (as hereinafter defined), (d)
cure any default arising as a result of the consummation of the Transactions
without the consent of any of the HRP Parties, and (e) release Vitalink from its
obligations under a Limited Guaranty dated as of February 12, 1997 (the "Limited
-------
Guaranty") in favor of HRP; and HRP is, subject to the terms and provisions
- --------
hereof, willing to so agree;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto agree as follows:
SECTION 1. DEFINITIONS.
-----------
Capitalized terms used in this Agreement shall have the meanings set forth
in the preambles or the caption hereto, or as set forth below or in the Section
referenced below. Terms defined in the singular shall have a comparable meaning
when used in the plural, and vice versa, and the reference to any gender shall
be deemed to include all genders. References to "hereof", "herein" or similar
terms are intended to refer to this Agreement as a whole and not a particular
section, and references to "this Section" are intended to refer to the entire
section and not a particular subsection thereof.
1.1 "Affiliate", "Affiliated" shall mean, with respect to any Person, any
--------- ----------
other Person at the time directly or indirectly controlling, controlled by or
under direct or indirect common control with such Person.
<PAGE>
-3-
1.2 "Agreement" shall mean this Restructure and Asset Exchange Agreement,
---------
together with the Exhibits and Schedules attached hereto, as it and they may be
amended from time to time as herein provided.
1.3 "Applicable Laws" shall mean and include all applicable Federal, state
---------------
or local statutes, laws, ordinances, rules and regulations, licensing
requirements or conditions, whether now existing or hereafter arising, relating
to Hazardous Substances.
1.4 "Authority" shall mean any governmental or quasi-governmental
---------
authority, whether administrative, executive, judicial, legislative or other, or
any combination thereof, including without limitation any federal, state,
territorial, county, municipal or other government or governmental or quasi-
governmental agency, arbitrator, authority, board, body, branch, bureau, central
bank or comparable agency or entity, commission, corporation, court, department,
instrumentality, master, mediator, panel, referee, system or other political
unit or subdivision or other Entity of any of the foregoing, whether domestic or
foreign.
1.5 "Business Day" shall mean any day other than a Saturday, Sunday or any
------------
other day on which banking institutions in The Commonwealth of Massachusetts are
authorized by law or executive action to close.
1.6 "Cash Collateral Pledge" shall have the meaning given such term in
----------------------
Section 5.2.
- -----------
1.7 "Code" shall mean the Internal Revenue Code of 1986, as amended, and
----
the rules and regulations thereunder.
1.8 "Continuing Properties" shall mean the properties listed on Schedule
--------------------- --------
1.8.
- ---
1.9 "Contracts" shall mean, with respect to any GranCare Exchange
---------
Property, all service contracts, equipment leases and other arrangements or
agreements to which AMS Properties or any predecessor is a party affecting the
ownership, repair, maintenance or operation of such GranCare Exchange Property,
to the extent AMS Properties' interest therein is assignable or transferable.
1.10 "Contractual Obligation" shall have the meaning given such term in
----------------------
Section 6.4.
- ------------
1.11 "Documents" shall mean, with respect to any GranCare Exchange
---------
Property, all books, records and files relating to the leasing, maintenance,
management or operation of such GranCare Exchange Property.
1.12 "Entity" shall mean any corporation, firm, unincorporated
------
organization, association, partnership, limited liability company, trust (inter
vivos or testamentary), estate of a deceased, insane or incompetent individual,
business trust, joint stock company, joint venture or other organization, entity
or business, whether acting in an individual, fiduciary or other capacity, or
any Authority.
<PAGE>
-4-
1.13 "Exchange Closing" shall have the meaning given such term in Section
---------------- -------
3.1.
- ---
1.14 "Exchange Closing Date" shall have the meaning given such term in
---------------------
Section 3.1.
- -----------
1.15 "Exchange Properties" shall mean, collectively, the GranCare
-------------------
Exchange Properties and the HRP Exchange Properties.
1.16 "Exchange Properties Escrow Agreement" shall have the meaning given
------------------------------------
such term in Section 5.6.
-----------
1.17 "Exchange Transaction" shall have the meaning given such term in
--------------------
Section 3.1.
- -----------
1.18 "GranCare Exchange Properties" shall mean the GranCare North
----------------------------
Carolina Properties and the GranCare Wisconsin Properties.
1.19 "GranCare Guaranty" shall have the meaning given such term in
-----------------
Section 5.4.
- -----------
1.20 "GranCare North Carolina Properties" shall mean the real property
----------------------------------
and related improvements and personal property, located in Wilson, Concord and
Winston-Salem, North Carolina, and as otherwise described on Schedule 1.20
-------------
hereto.
1.21 "GranCare Wisconsin Properties" shall mean the real property and
-----------------------------
related improvements and personal property, located in Milwaukee and Pewaukee,
Wisconsin, and as otherwise described on Schedule 1.21 hereto.
-------------
1.22 "Hazardous Substances" shall mean hazardous substances (as defined
--------------------
by the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), as now in effect or as hereafter from time to time amended),
- --------
hazardous wastes (as defined by the Resource Conservation and Recovery Act
("RCRA"), as now in effect or as hereafter from time to time amended), any
- ------
hazardous waste, hazardous substance, pollutant or contaminant, oils,
radioactive materials, asbestos in any form or condition, or any pollutant or
contaminant or hazardous, dangerous or toxic chemicals, materials or substances
within the meaning of any other applicable Federal, state or local law,
regulation, ordinance or requirements relating to or imposing liability or
standards of conduct concerning any hazardous, toxic or dangerous waste,
substance or materials, all as now in effect or hereafter from time to time
amended.
1.23 "Healthcare Facilities" shall have the meaning given such term in
---------------------
Section 6.8.
- -----------
1.24 "HRP Exchange Properties" shall mean the real property and related
-----------------------
improvements and personal property, located in Milwaukee, Wisconsin, San Diego
and Palm Springs, California, and Nashville, Illinois, and as otherwise
described on Schedule 1.24 hereto.
-------------
1.25 "Intangible Property" shall mean, with respect to any GranCare
-------------------
Exchange Property, all transferable or assignable permits, certificates of
occupancy, operating permits, sign
<PAGE>
-5-
permits, development rights and approvals, certificates, licenses, warranties
and guarantees, rights to deposits, the Contracts, and all other transferable
intangible property, miscellaneous rights, benefits and privileges of any kind
or character with respect to such GranCare Exchange Property held by the
parties.
1.26 "Lease Amendment" shall have the meaning given such term in Section
--------------- -------
5.5.
- ---
1.27 "Legal Restriction" shall have the meaning given such term in Section
----------------- -------
6.4.
- -----
1.28 "Lien" shall mean any mortgage, pledge, hypothecation, assignment,
----
deposit arrangement, encumbrance, lien (statutory or other), or preference,
priority or other security agreement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any lease that should be capitalized in accordance with generally
accepted accounting principles, and the filing of a financing statement under
the Uniform Commercial Code or comparable law of any jurisdiction).
1.29 "New Facility Leases" shall have the meaning given such term in
-------------------
Section 5.6.
- -----------
1.30 "Notices and Applications" shall have the meaning given such term in
------------------------
Section 6.10.
- ------------
1.31 "Paragon Guaranty" shall have the meaning given such term in Section
---------------- -------
5.2.
- ---
1.32 "Permitted Encumbrances" (a) with respect to any GranCare Exchange
----------------------
Property, shall mean those Liens disclosed on Schedule 1.32 hereto, and (b) with
-------------
respect to the HRP Exchange Properties, shall mean those Liens disclosed on
Schedule 1.32 hereto and any Lien created after the date hereof other than
- -------------
through the act or omission of HRP.
1.33 "Person" shall mean any natural individual or any Entity.
------
1.34 "Personal Property" shall mean, with respect to any GranCare Exchange
-----------------
Property, all appliances, machinery, devices, fixtures, appurtenances,
equipment, furniture, furnishings and articles of tangible personal property of
every kind and nature whatsoever owned by the parties and located in or at, or
used in connection with the ownership, operation or maintenance of such GranCare
Exchange Property.
1.35 "Post Closing Consents" shall have the meaning given such term in
---------------------
Section 6.5.
- -----------
1.36 "Real Property" shall mean the real property described in Schedules
------------- ---------
1.20, 1.21 and 1.24.
- ---- ---- ----
1.37 "Restructure Documents" shall mean, collectively, this Agreement and
---------------------
each document, agreement and instrument delivered pursuant to Section 5 hereof.
---------
1.38 "Restructuring Closing" shall have the meaning given such term in
---------------------
Section 4.
- ----------
<PAGE>
-6-
1.39 "Restructuring Closing Date" shall have the meaning given such term
--------------------------
in Section 4.
----------
1.40 "Subordination Agreement" shall have the meaning given such term in
-----------------------
Section 5.3.
- -----------
1.41 "Tax" (and "Taxable", which shall mean subject to Tax), shall mean,
--- -------
with respect to any Person, (a) all taxes (domestic or foreign), including
without limitation any income (net, gross or other including recapture of any
tax items such as investment tax credits), alternative or add-on minimum tax,
gross income, gross receipts, gains, sales, use, leasing, lease, user, ad
valorem, transfer, recording, franchise, profits, property (real or personal,
tangible or intangible), fuel, license, withholding on amounts paid to or by
such Person, payroll, employment, unemployment, social security, excise,
severance, stamp, occupation, premium, environmental or windfall profit tax,
custom, duty or other tax, or other like assessment or charge of any kind
whatsoever, together with any interest, levies, assessments, charges, penalties,
addition to tax or additional amount imposed by any Taxing Authority, (b) any
joint or several liability of such Person with any other Person for the payment
of any amounts of the type described in (a), and (c) any liability of such
Person for the payment of any amounts of the type described in (a) as a result
of any express or implied obligation to indemnify any other Person.
1.42 "Taxing Authority" shall mean any Authority responsible for the
----------------
imposition of any Tax.
1.43 "Title Company" shall mean First American Title Insurance Company.
-------------
1.44 "Transaction Documents" shall mean, collectively, this Agreement, each
---------------------
other Restructure Document, and all documents, instruments and agreement listed
on Schedule 1.44 hereto as in effect from time to time.
-------------
1.45 "Transactions" shall have the meaning given that term in the
------------
Preliminary Prospectus for Living Centers of America, Inc. and GranCare, Inc.
included in their Joint Proxy Statement dated September 26, 1997
SECTION 2. MODIFICATIONS TO TRANSACTION DOCUMENTS
--------------------------------------
Effective as of the date first set forth above, subject to the satisfaction
of the conditions to effectiveness set forth in Section 5 hereof:
---------
1.46 Termination of Acquisition Agreement. The Acquisition Agreement is
------------------------------------
hereby terminated in its entirety and GranCare and its Affiliates shall have no
further or continuing obligations thereunder. Wherever any Transaction Document
refers to the Acquisition Agreement for a definition of any term, such reference
shall be deemed to be a reference to such term as defined in the AMS Properties
Master Lease, as in effect from time to time.
<PAGE>
-7-
1.47 Amendment of AMS Properties Master Lease. The AMS Properties Master
----------------------------------------
Lease is hereby amended as follows:
1.47.1 Article 1 of the AMS Properties Master Lease is amended by
amending the definitions "Guarantor" and "Transaction Documents" in full to read
as follows:
Guarantor: GranCare, GCIHCC and Paragon, in each case together with
---------
their respective successors and assigns, and any other Person that becomes
a guarantor of Tenant's obligations under the applicable Lease after
October 31, 1997.
Transaction Documents: collectively, any agreement, note, lease,
---------------------
master lease, mortgage, security agreement, pledge agreement, assignment,
guaranty or other agreement or instrument now or hereafter executed by any
or all of Tenant or any Guarantor in favor of, for the benefit of, or with,
Landlord (including, without limitation, the GCIHCC Transaction Documents),
and any agreement, note, mortgage, security agreement, pledge agreement,
assignment, guaranty or other agreement or instrument hereafter executed in
connection with any extension, renewal, refunding or refinancing thereof,
as any of the same may hereafter from time to time be amended, amended and
restated, modified or supplemented.
1.47.2 Article 1 of the AMS Properties Master Lease is further
amended by adding the following definitions thereto to read as follows:
Cash Collateral Pledge: The Cash Collateral Pledge Agreement dated as
----------------------
of October 31, 1997, between Paragon and Landlord, as amended, amended and
restated, modified or supplemented from time to time.
GCIHCC: GCI Health Care Centers, Inc., a Delaware corporation.
------
GCIHCC Leased Properties: collectively, the "Collective Leased
------------------------
Properties" as such term is defined in the GCIHCC Master Lease.
GCIHCC Lease: any "Lease" as such term is defined in the GCIHCC Master
------------
Lease.
GCIHCC Master Lease: the Master Lease Document dated as of June 30,
-------------------
1992 between HRP, as Landlord, and GCIHCC, as Tenant, as amended, amended
and restated, modified or supplemented from time to time.
GCIHCC Transaction Documents: the "Transaction Documents" as such term
----------------------------
is defined in the GCIHCC Master Lease.
Guaranty: any guaranty in favor of Landlord of Tenant's obligations
--------
under the applicable Lease, including, without limitation, (a) the Amended
and Restated Guaranty
<PAGE>
-8-
dated as of October 31, 1997 by GranCare in favor of Landlord, (b) the
Guaranty dated as of October 31, 1997 by Paragon in favor of Landlord, and
(c) the Guaranty, Cross Default and Cross Collateralization Agreement,
dated as of June 30, 1992, from Tenant and GCIHCC in favor of Landlord, in
each case as amended and as the same may be may hereafter be amended,
amended and restated, modified or supplemented from time to time.
Paragon: Paragon Health Network, Inc., a Delaware corporation (f/k/a
-------
Living Centers of America, Inc.)
Voting Trust Agreement: The Amended and Restated Voting Trust
----------------------
Agreement dated as of June 30, 1992 from Tenant to HRPT Advisors, Inc., as
voting trustee, as amended, modified or supplemented from time to time.
1.47.3 Section 12.1 of the AMS Properties Master Lease is amended by
amending paragraphs (d), (h) and (p) thereof in full to read as follows:
(d) Tenant shall default in due performance or observance of any term,
covenant or agreement on its part to be performed or observed pursuant to
Section 7.1, 9.1 or any of Sections 24.10 through 24.18; or
----------- --- ----- -----
(h)(A) any obligation of Tenant or any Guarantor (other than GranCare
or Paragon), or of any Subsidiary thereof, in respect of any indebtedness
for borrowed money or for the deferred purchase price of any material
property or services (excluding (1) trade accounts payable in the ordinary
course of business on customary trade terms and (2) indebtedness or
obligations under the Transaction Documents) (hereinafter, "Indebtedness
------------
for Borrowed Money") or any guaranty relating thereto shall be declared to
------------------
be or shall become due and payable prior to the stated maturity thereof, or
such Indebtedness for Borrowed Money shall not be paid as and when the same
becomes due and payable, or there shall occur and be continuing any default
under any instrument, agreement or evidence of indebtedness relating to any
such Indebtedness for Borrowed Money the effect of which is to permit the
holder or holders of such instrument, agreement or evidence of
indebtedness, or a trustee, agent or other representative on behalf of such
holder or holders, to cause such Indebtedness for Borrowed Money to become
due prior to its stated maturity; or (B) any obligation of GranCare or
Paragon, or of any Subsidiary thereof (other than Tenant or GCIHCC), in
respect of any Indebtedness for Borrowed Money exceeding $1,000,000 in
aggregate principal amount, or any guaranty relating thereto, shall be
declared to be or shall become due and payable prior to the stated maturity
thereof, or the holder or holders of any instrument, agreement or evidence
of indebtedness relating to any such Indebtedness for Borrowed Money, or a
trustee, agent or other representative on behalf of such holder or holders,
shall accelerate prior to the stated maturity date or, if no stated
maturity date, demand payment of such Indebtedness for Borrowed Money, and
such declaration, acceleration or demand shall not have been rescinded
within thirty (30) days of the date such declaration, acceleration or
demand was made; or
<PAGE>
-9-
(p) Paragon shall cease at any time to be, either directly or
indirectly through one or more wholly-owned Subsidiaries that are each
Guarantors, the beneficial and record owner of less than all of the shares
of the outstanding capital stock of Tenant and GCIHCC; or
1.47.4 Section 12.1 of the AMS Properties Master Lease is further
amended by adding new paragraph (q) thereto to read as follows:
(q) Tenant shall have failed to extend the term of the Voting Trust
Agreement in accordance with the applicable provisions thereof prior to the
thirtieth day prior to the end of the then term of the Voting Trust
Agreement;
1.47.5 Section 21.4 of the AMS Properties Master Lease is amended in
full to read as follows:
21.4 Tenant's Option to Purchase the Collective Leased Properties.
------------------------------------------------------------
Provided,
(a) no Default involving the nonpayment of Rent shall have occurred
and be continuing, the Leases for each of the Collective Leased Properties
shall be in full force and effect (other than Leases that have been
terminated in accordance with the provisions hereof, other than after the
occurrence of an Event of Default), and other than as expressly permitted
by Article 17, Tenant shall not have assigned the Leases for any of the
----------
Collective Leased Properties or subleased all or any portion of the
Collective Leased Properties; and
(b) no default involving the nonpayment of "Rent" under and as
defined in the GCIHCC Master Lease shall have occurred and be continuing,
the GCIHCC Leases for each of the GCIHCC Leased Properties shall be in full
force and effect (other than GCIHCC Leases that have been terminated in
accordance with the provisions hereof, other than after the occurrence of
an Event of Default under the GCIHCC Master Lease), and other than as
expressly permitted by Article 17 thereof, GCIHCC shall not have assigned
the GCIHCC Leases for any of the GCIHCC Leased Properties or subleased all
or any portion of the GCIHCC Leased Properties;
Tenant shall have the option, exercisable on not less than twelve (12)
months prior Notice to Landlord, to purchase all, but not less than all,
the Collective Leased Properties (other than those Collective Leased
Properties whose Leases have been terminated in accordance with the
provisions of Article 10 or Article 11) upon the expiration of the Fixed
---------- ----------
Term or any Extended Term, each for a purchase price equal to the greater
of (i) ninety percent (90%) of the Fair Market Value Purchase Price of such
Collective Leased Property as of the expiration of the Fixed Term or such
Extended Term, as the case may be, or (ii)(1) if such option is exercised
at the end of the Fixed Term, one hundred fifty percent (150%) of the
Adjusted Purchase Price, (2) if such option is exercised at the end
<PAGE>
-10-
of the first Extended Term, two hundred percent (200%) of the Adjusted
Purchase Price or (3) if such option is exercised at the end of the second
Extended Term, three hundred percent (300%) of the Adjusted Purchase Price;
provided however that in each case GCIHCC shall simultaneously exercise its
--------
option to purchase all, but not less than all of the GCIHCC Leased
Properties (other than those GCIHCC Leased Properties whose GCIHCC Leases
have been terminated in accordance with the provisions of Article 10 or
Article 11 of the GCIHCC Master Lease) in accordance with Section 21.4 of
the GCIHCC Master Lease. Such purchase by Tenant shall be made in
accordance with the provisions of Article 15.
----------
1.47.6 The AMS Properties Master Lease is further amended by adding
an new Article 24 thereto to read as follows:
ARTICLE 24.
ADDITIONAL COVENANTS OF TENANT
------------------------------
Tenant agrees that during the Term of the Lease (as defined therein)
and for as long thereafter as any amount payable hereunder or under any
Transaction Document remains unpaid:
1.48 Business of Tenant.
------------------
Tenant shall engage in no business, trade or activity other than the
operation of the Leased Properties, the leasing and operation of the
Collective Leased Properties.
1.49 Maintenance of Existence and Licenses.
-------------------------------------
(1) Tenant will maintain its existence and comply with all
applicable statutes, rules and regulations as to which the failure to
comply may have a material adverse effect upon the operation,
business, prospects, property or assets of, or in the condition
(financial or otherwise), of Tenant, and Tenant will maintain its
properties in good operating condition, and continue to conduct its
business as presently conducted.
(2) Tenant will obtain and maintain in full force and effect all
permissions, consents, approvals, licenses, authorizations, and
permits necessary for it to use and operate in accordance with all
applicable laws each Property or Facility owned, leased or operated by
it for the purposes for which such Facility or Property was used
immediately prior to October 31, 1997.
1.50 Taxes and Other Liens.
---------------------
Tenant will pay all taxes, assessments, governmental charges or
levies, or claims for labor, supplies, rent and other obligations made
against it which, if unpaid, might become a lien or charge against Tenant,
or on its property, except liabilities being
<PAGE>
-11-
contested in good faith and by proper proceedings as to which appropriate
reserves have been established in accordance with GAAP.
1.51 Estoppel Certificates
---------------------
At any time and from time to time, upon not less than ten (10) days
prior Notice by Landlord, Tenant shall furnish to Landlord an Officer's
Certificate certifying that the applicable Lease is unmodified and in full
force and effect (or that the applicable Lease is in full force and effect
as modified and setting forth the modifications), the date to which the
Rent has been paid, that Tenant is not in default in the performance or
observance of any of the terms of the applicable Lease and that no event
exists which with the giving of notice, lapse of time, or both, would
constitute a Default or an Event of Default, or if a Default or an Event of
Default shall exist, specifying in reasonable detail such Default or an
Event of Default, and the steps being taken to remedy the same, and such
additional information as Landlord may reasonably request. Any such
certificate furnished pursuant to this Section 24.4 may be relied upon by
------------
Landlord and any prospective purchaser or mortgagee of the applicable
Leased Property.
1.52 Financial Statements, Etc.
-------------------------
Tenant shall furnish the following statements to Landlord:
(1) within forty-five (45) days after each of the first three
quarters of any Fiscal Year, year-to-date income statements of Tenant,
on a property by property basis, accompanied by the Financial
Officer's Certificate;
(2) within ninety (90) days after the end of each Fiscal Year,
the most recent Consolidated Financials of Tenant for such year,
accompanied by the Financial Officer's Certificate;
(3) at any time and from time to time upon not less than twenty
(20) days Notice from Landlord, Tenant will furnish to Landlord any
Consolidated Financials or any other financial reporting information
required to be filed by Landlord with any securities and exchange
commission, the SEC or any successor agency, or any other governmental
authority, or required pursuant to any order issued by any court
governmental authority or arbitrator in any litigation to which
Landlord is a party, for purposes of compliance therewith; and
(4) promptly upon notice from Landlord, such other information
concerning the business, financial condition and affairs of Tenant as
Landlord may reasonably request from time to time.
Landlord may at any time, and from time to time, provide any Facility
Mortgagee with copies of any of the foregoing statements.
<PAGE>
-12-
1.53 Notice of Default.
-----------------
Within three (3) Business Days of becoming aware of the existence of
any condition or event which constitutes a Default, Tenant will provide
Landlord with written notice specifying the nature and period of existence
thereof and what action Tenant is taking or proposes to take with respect
thereto.
1.54 General Operations.
------------------
Tenant covenants and agrees to furnish to Landlord, promptly after
Landlord's request therefor, copies of
(1) all reports of surveys, statements of deficiencies, plans of
correction, and all material correspondence relating thereto,
including, without limitation, all reports and correspondence
concerning compliance with or enforcement of licensure,
Medicare/Medicaid, and accreditation requirements, including physical
environment and Life Safety Code survey reports; and
(2) such other confirmation as to the licensure and Medicare and
Medicaid participation of Tenant as Landlord may reasonably request
from time to time.
1.542 Annual Budgets.
--------------
Not less than thirty (30) days prior to commencement of any Fiscal
Year, proposed annual income and ordinary expense and capital improvement
budgets setting forth projected income and costs and expenses projected to
be incurred by Tenant in managing, owning, maintaining and operating the
Facility during the next succeeding Fiscal Year.
1.55 Inspection.
----------
Tenant will, upon three (3) Business Days' request of Landlord, permit
a representative of Landlord to inspect the Properties and Facilities and
make copies of its direct or indirect Subsidiaries' books and records, and
to discuss its affairs, finances and accounts with its officers and
accountants, all at such reasonable times and as often as Landlord may
reasonably request and, in each case, cause each of its direct and indirect
Subsidiaries to do so; provided that any inspection by Landlord or its
representatives will not unreasonably interfere with its or such
Subsidiary's use and operation of its Properties and Facilities.
1.56 Further Assurances.
------------------
<PAGE>
-13-
Tenant will, and will cause each of its direct or indirect
Subsidiaries to, execute and deliver to Landlord any writings and do all
things necessary, effectual or reasonably requested by Landlord to carry
into effect the provisions and intent of this Agreement.
1.57 Consolidation, Merger or Acquisition Involving Tenant.
-----------------------------------------------------
Tenant shall not at any time merge or consolidate with or into any
other Person, or make any acquisition of the business of any other Person.
1.59 Disposition of Assets by Tenant.
-------------------------------
Tenant shall not at any time sell, lease or otherwise dispose of any
of its assets to any Person, except that Tenant may (a) sell its inventory,
------
and obsolete or worn-out equipment, in the ordinary course of its business
and (b) sell or otherwise dispose of the HRP Exchange Properties.
1.59 Indebtedness.
------------
Tenant shall not at any time create, incur, assume or guarantee, or
permit to exist, or become or remain liable directly or indirectly upon,
any Indebtedness except the following:
(1) Indebtedness payable to Landlord;
(2) unsecured Indebtedness consisting of accounts payable,
accruals and similar items incurred in the ordinary course of business
in accordance with reasonable and customary trade practices, that are
neither owed to a Guarantor or a Subsidiary of a Guarantor nor
constitute Indebtedness for money borrowed or a Guarantee thereof;
(3) Indebtedness for taxes, assessments, governmental charges or
levies to the extent that payment thereof shall not at the time be
required to be made in accordance with the provisions of Article 8
---------
hereof or of the other applicable provisions of the Transaction
Documents;
(4) Indebtedness in respect of judgments or awards which have
been in force for less than the applicable appeal period, so long as
execution is not levied or in respect of which Tenant shall at the
time in good faith be prosecuting an appeal or proceedings for review,
and in respect of which execution thereof shall have been stayed
pending such appeal or review; provided that in each instance the
--------
applicable requirements of each Transaction Document are complied
with;
(5) Indebtedness for taxes, assessments, governmental charges or
levies, and claims for labor, materials and supplies, to the extent
that payment
<PAGE>
-14-
thereof shall not at the time be required to be made in accordance
with the provisions of Article 8 hereof or of the other applicable
provisions of the Transaction Documents;
(6) unsecured Indebtedness (including without limitation,
accrued and unpaid management fees and Indebtedness for Borrowed
Money) of Tenant (i) owed to a Guarantor or a Subsidiary of a
Guarantor (provided that the payment of such Indebtedness shall be
subject to the terms of a subordination agreement in form and
substance satisfactory to Landlord among Tenant as debtor, such
Guarantor or such Subsidiary as subordinate creditor and Landlord as
senior creditor); and
(7) Indebtedness of Tenant, (i) as guarantor of or co-borrower
with Paragon or any Subsidiary thereof, in respect of an $890 million
credit facility provided to Paragon by The Chase Manhattan Bank, as
agent bank (and successor or replacement indebtedness), (ii) as
guarantor of senior subordinated notes and senior subordinated
discount notes of Paragon (and/or its successors and subsidiaries)
yielding proceeds of approximately $500 million (and successor or
replacement indebtedness), and (iii) as guarantor of a residual
guaranty by Paragon in respect of a master lease arrangement providing
for the acquisition, development and construction of skilled nursing
and assisted living facilities for a total amount of not to exceed
$100,000,000 (and successor or replacement indebtedness); provided
--------
that (A) the enforcement of such Indebtedness against Tenant shall at
all times be subject to the terms of an intercreditor agreement in
substantially the form (to the extent applicable) of the Intercreditor
Agreement dated as of February 12, 1997 among Tenant, GCIHCC,
GranCare, First Union National Bank of North Carolina, as agent, and
Landlord, (B) the enforcement of security interests or liens securing
such Indebtedness are permitted by paragraph (g) of Section 24.13, and
------------- -------------
(C) giving effect thereto and to the application of the proceeds
thereof, no Event of Default would be created.
1.60 Encumbrances.
------------
Tenant shall not at any time create or suffer to exist any Lien on any
of its properties or assets, except:
(1) Permitted Encumbrances;
(2) Liens in favor of Landlord;
(3) Liens for taxes or assessments or governmental charges or
levies, if payment shall not at the time be required to be made in
accordance with Article 8 hereof and the other applicable provisions
---------
of the Transaction Documents;
<PAGE>
-15-
(4) Liens in respect of judgments or awards and liens of appeal
and similar bonds incident to the conduct of litigation, so long as
and to the extent that such judgments or awards, or the judgments or
awards secured by such bonds, are permitted as Indebtedness by Section
-------
24.12(d) or are otherwise permitted under the Transaction Documents;
--------
(5) Liens of carriers, warehousemen, mechanics, laborers and
materialmen and similar liens incurred in the ordinary course of
business for sums not yet due or being contested in good faith in
accordance with the applicable provisions of this Agreement and the
other Transaction Documents;
(6) Liens (other than liens created by Section 302(f) or Section
4068 of ERISA or Section 412(n) of the Code) incurred on pledges or
deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance, social security laws or
similar legislation, and other liens incidental to the conduct of the
business of Tenant which were not incurred in connection with the
borrowing of money or the obtaining of advances or credits and do not
in the aggregate materially detract from the value of any material
property of Tenant or materially impair the use thereof in the
operation of its business; and
(7) Security interests in its capital stock and in its personal
property (excluding collateral under the HRP Shares Pledge Agreement
and the Cash Collateral Pledge) securing the Indebtedness incurred in
compliance with clauses (i) and (ii) of Section 24.12(g); provided,
----------- ---- ---------------- --------
however, that (i) such security interest shall at all times be junior
-------
to the liens and security interests in favor of Landlord, and confined
solely to such assets, and (ii) that the enforcement of such junior
liens and security interests, and all claims secured thereby, shall at
all times be subject to the terms of an intercreditor agreement in
substantially the form (to the extent applicable) of the Intercreditor
Agreement dated as of February 12, 1997 among Tenant, GCIHCC,
GranCare, First Union National Bank of North Carolina, as agent, and
Landlord.
1.61 Dividends.
---------
Tenant will not declare, order, pay or make, directly or
indirectly, any Restricted Payment or set apart any sum or property
therefor, or agree to do so; provided, however, that Tenant may
-------- -------
declare and pay dividends on its common stock, so long as
(1) at the time of such proposed action, or immediately after
giving effect thereto, no Default shall have occurred and be
continuing; and
(2) giving effect to such proposed action, the capital surplus
of Tenant will at least equal the capital surplus of Tenant on
December 31, 1990, and the
<PAGE>
-16-
sum of all dividends paid or made by Tenant after December 8, 1990
will not exceed the Net Income of Tenant accumulated for the period,
considered as a single accounting period, from December 28, 1990 to
the end of the quarterly accounting period next preceding the date of
such proposed action for which Landlord has received financial
statements under Section 24.5(b) hereof.
1.62 Investments.
-----------
Tenant shall not at any time make, maintain or acquire any Investment
in any Person other than:
(1) Marketable direct full faith and credit obligations of, and
marketable obligations guaranteed by, the United States of America, or
any State thereof, which have a remaining maturity at the time of
purchase of no more than one year;
(2) Commercial paper maturing no more than 270 days from its
date of issue; provided, that such paper is accorded a rating in the
highest category by each of Moody's Investors Service, Inc. and
Standard & Poor's Corporation;
(3) Certificates of deposit which have a remaining term to
maturity at the time of purchase of no more than one year (or which
are subject to a repurchase agreement with one of the banks or trust
companies described in this paragraph (c) exercisable within one year
from the time of purchase) issued by banks or trust companies
organized under the laws of the United States of America or a State
thereof and which are member banks of the Federal Reserve System, and
have aggregate capital, surplus and undivided profits of at least
$100,000,000 and the long term obligations of which carry a rating of
"A" or better by Moody's Investors Service, Inc. or Standard & Poor's
Corporation;
(4) Bonds or debentures which have a remaining term to maturity
at the time of purchase of no more than one year, issued by a
corporation, other than an AMS Company or an Affiliate thereof,
organized under the laws of a State of the United States or the
District of Columbia; provided, that such obligations carry a rating
of "A" or better by Moody's Investors Service, Inc. or Standard &
Poor's Corporation; and
(5) any intercompany loans or advances by Tenant to any
Guarantor or any wholly-owned Subsidiary thereof that are incurred and
remain outstanding without violating the provisions of Section 24.17
-------------
hereof; provided that, (1) such intercompany loan shall not be
subordinated to any other Indebtedness of such Guarantor or such
debtor Subsidiary, as the case may be, and (2) no Default shall exist
giving effect to the creation of such intercompany loan.
<PAGE>
-17-
1.63 Transactions with Affiliates.
----------------------------
Tenant will not, directly or indirectly, pay any funds to or for the
account of, make any Investment in, lease, sell, transfer or otherwise
dispose of any assets, tangible or intangible, or engage in any other
transaction of any kind with any of its Affiliates, except (i) as permitted
by Sections 24.12 through 24.15 hereof or (ii) in connection with
transactions the terms of which are at least as favorable to Tenant as
those that could be obtained at that time from Persons that are not
Affiliates of Tenant.
1.64 Current Ratio.
-------------
Tenant will not permit its Current Ratio to be less than 1 to 1 at any
time.
1.65 Net Income.
----------
Tenant will not permit the sum of (i) its Net Income accumulated for
the period, considered as a single accounting period, from January 1, 1991
to the end of last fiscal quarter for which financial statements were, or
should have been, delivered pursuant to Section 24.5(b), and (ii) the cash
---------------
proceeds of any issuance by Tenant of its common stock to any Guarantor
(other than GCIHCC) during the period from January 1, 1991 to the end of
such fiscal quarter, to be less than $1.00 as of the end of such fiscal
quarter.
1.66 Definitions.
-----------
When used in this Article 24 the following terms shall have the
----------
respective meanings provided therefor and, unless otherwise specifically
indicated, shall be deemed to relate to Tenant:
(1) Consolidated Financials shall mean, for any Fiscal Year or
-----------------------
other accounting period of Tenant, annual and quarterly unaudited
financial statements prepared on a consolidated basis, including
Tenant's consolidated balance sheet, the related statements of income
and cash flows, all in reasonable detail, and setting forth in
comparative form the corresponding figures for the corresponding
period in the preceding Fiscal Year, and prepared in accordance with
generally accepted accounting principles, consistently applied
throughout the periods reflected.
(2) Current Ratio of any Person, at any time, shall mean all
-------------
current assets of such Person and its Subsidiaries at such time,
divided by the aggregate of all current liabilities of such Person and
its Subsidiaries at such time, in each case as determined in
accordance with GAAP.
(3) Financial Officer's Certificate shall mean a certificate of
-------------------------------
the financial officer of Tenant, duly authorized, accompanying the
financial statements required to be delivered by Tenant pursuant to
Section 24.5, in which
------------
<PAGE>
-18-
such officer shall (i) certify that such statements have been properly
prepared consistent with GAAP (without accompanying footnotes), and
are true, correct and complete in all material respects and fairly
present the consolidated financial condition of Tenant at and as of
the dates thereof and the results of its and their operations for the
periods covered thereby, (ii) certify that such officer has reviewed
the Leases and has no knowledge of any default by Tenant in the
performance or observance of any of the provisions of the Leases or
any other Transaction Document or of any condition or event which
constitutes an Event of Default under the Leases or any of the
Transaction Documents or which with the passage of time or the giving
of notice or both would become such an Event of Default, and (iii)
provide computations and schedules showing in reasonable detail
compliance, as at the date of each such financial statement, with
Sections 24.17 and 24.18 of the Master Lease Document.
-------------- -----
(4) Fiscal Year shall mean the twelve (12) month period from
-----------
October 1 to September 30, or such other fiscal year as may be adopted
from time to time by Paragon.
(5) GAAP shall mean generally accepted accounting principles
----
consistently applied.
(6) Guarantee shall mean any obligation, contingent or
---------
otherwise, of any Person directly or indirectly guaranteeing any
Indebtedness of any other Person and, without limiting the generality
of the foregoing, any obligation, direct or indirect, contingent or
otherwise of such Person (i) to purchase or pay (or advance or supply
funds for the purchase or payment of) such Indebtedness (whether
arising by virtue of partnership arrangements, by agreement to keep-
well, to purchase assets, goods, securities or services, to take-or-
pay, or to maintain or support financial statement conditions or
otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness of the payment thereof
or to protect such obligee against loss in respect thereof (in whole
or in part); provided that the term Guarantee shall not include
--------
endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding
meaning.
(7) Indebtedness shall mean all obligations of a Person,
------------
contingent or otherwise, which in accordance with GAAP should be
reflected on such Person's balance sheet as liabilities, specifically
including liabilities secured by any mortgage, pledge or lien existing
on property owned or acquired subject to such mortgage, pledge or
lien, whether or not the liability secured thereby shall have been
assumed, all obligations of lessees under capitalized leases, all
obligations under agreements, contingent or otherwise, to advance or
supply funds for investment purposes, all obligations created or
arising under any conditional sale or other title retention agreement,
device or arrangement, even though the rights
<PAGE>
-19-
and remedies of the seller or lender thereunder in the event of
default are limited to repossession of property, all non-competition
agreements, and all Guarantees
(8) Investments shall mean with respect to any Person (the
-----------
"investor") (i) any investment by the investor in any other Person,
--------
whether by means of share purchase, capital contribution, purchase or
other acquisition of a partnership or joint venture interest, loan,
time deposit, demand deposit or otherwise and (ii) any Guarantee by
the investor of any Indebtedness or other obligation of any other
Person.
(9) Net Income shall mean, for any period during which the
----------
amount thereof is to be determined for a specified Person, the net
income (or net deficit, if a negative figure) of such Person for such
period (taken as a cumulative whole, if such period shall include more
than one fiscal period, with deficits netted against net income)
determined in accordance with GAAP, exclusive of the write-up of any
assets.
(10) Restricted Payment shall mean, as to any Person (a) any
------------------
dividend or other distribution (including dividends payable solely in
shares of capital stock or rights to acquire capital stock) on any
shares of capital stock of such Person or (b) any payment on account
of the purchase, redemption, retirement or acquisition of (i) any
shares of the capital stock of such Person or (ii) any option,
warrant, convertible security or other right to acquire shares of the
capital stock of such Person.
1.66.2 Effective as of the Exchange Closing Date, each reference in
the AMS Properties Master Lease to the "Collective Leased Properties" shall be
deemed to be a reference to the Continuing Properties leased by AMS Properties.
1.67 Amendment of GCIHCC Master Lease. The GCIHCC Master Lease is hereby
--------------------------------
amended as follows:
1.67.1 Article 1 of the GCIHCC Master Lease is amended by amending
the definitions "Guarantor" and "Transaction Documents" in full to read as
follows:
Guarantor: GranCare, AMS Properties and Paragon, in each case
---------
together with their respective successors and assigns, and any other Person
that becomes a Guarantor of Tenant's obligations under the applicable Lease
after October 31, 1997.
Transaction Documents: collectively, any agreement, note, lease,
---------------------
master lease, mortgage, security agreement, pledge agreement, assignment,
guaranty or other agreement or instrument now or hereafter executed by any
or all of Tenant or any Guarantor in favor of, for the benefit of, or with,
Landlord (including, without limitation, the AMS Properties Transaction
Documents), and any agreement, note, mortgage, security agreement, pledge
agreement, assignment, guaranty or other agreement or
<PAGE>
-20-
instrument hereafter executed in connection with any extension, renewal,
refunding or refinancing thereof, as any of the same may hereafter from
time to time be amended, amended and restated, modified or supplemented.
1.67.2 Article 1 of the GCIHCC Master Lease is further amended by
adding the following definitions thereto to read as follows:
AMS Properties: AMS Properties, Inc., a Delaware corporation.
--------------
AMS Properties Lease: any "Lease" as such term is defined in the AMS
--------------------
Properties Master Lease.
AMS Properties Leased Properties: collectively, the "Collective Leased
--------------------------------
Properties" as such term is defined in the AMS Properties Master Lease.
AMS Properties Master Lease: the Master Lease Document dated as of
---------------------------
December 28, 1990 between HRP, as Landlord, and AMS Properties, as Tenant,
as amended, amended and restated, modified or supplemented from time to
time.
AMS Properties Transaction Documents: the "Transaction Documents" as
------------------------------------
such term is defined in the AMS Properties Master Lease.
Cash Collateral Pledge: The Cash Collateral Pledge dated as of
----------------------
October 31, 1997, between Paragon and Landlord, as amended, modified or
supplemented from time to time.
Paragon: Paragon Health Network, Inc., a Delaware corporation (f/k/a
-------
Living Centers of America, Inc.)
Voting Trust Agreement: The Amended and Restated Voting Trust
----------------------
Agreement dated as of June 30, 1992 from AMS Properties to HRPT Advisors,
Inc., as voting trustee, as amended, modified or supplemented from time to
time.
1.67.3 Section 3.1.1 of the GCIHCC Master Lease is amended by
amending paragraphs (b) and (c) thereof in full to read as follows:
(b) Computation of Minimum Rent for each Extended Term. The Minimum
--------------------------------------------------
Rent payable with respect to the Extended Term(s) for the applicable Lease
shall equal an annual sum (determined at the commencement of each Extended
Term for such Lease and subject to adjustment as set forth herein) equal to
the greatest of (a) the Minimum Rent payable for the immediately preceding
twelve (12) months for such Lease, (b) the product of (i) the Adjusted
Purchase Price for the applicable Leased Property, and (ii) a percentage
equal to 525 basis points above the yield (calculated on the basis of a
monthly equivalent yield) on 5-year United States Treasury securities at
the close of the Business Day which immediately precedes the commencement
of the Extended Term for which the
<PAGE>
-21-
Minimum Rent is being calculated, or (c) the Fair Market Rental for such
Lease, payable in advance in equal, consecutive monthly installments on the
first day of each calendar month of each Extended Term. The computation of
the yield referenced in the preceding sentence shall be made using the
information shown for such date quoted in The Wall Street Journal published
-----------------------
on the following day. If there is no such quotation, the next preceding day
for which there is a quotation shall be used. If The Wall Street Journal
-----------------------
shall not be available, Landlord shall choose the quotation from another
recognized source.
(c) Mid-Term Adjustments of Minimum Rent. During the Term of the
------------------------------------
applicable Lease, on the 5th, 15th, 25th and 35th anniversary of the
Commencement Date therefor, the Minimum Rent under such Lease shall be
adjusted to the annual sum equal to the greater of (a) the Minimum Rent
under such Lease for the immediately preceding twelve (12) months or (b)
the product of (i) the sum of the Adjusted Purchase Price for the
applicable Leased Property, and (ii) a percentage equal to 525 basis points
above the yield (calculated on the basis of a monthly equivalent yield) on
5-year United States Treasury securities at the close of the Business Day
immediately preceding such anniversary. The computation of the yield
referenced in the preceding sentence shall be made using the information
shown for such date quoted in The Wall Street Journal published on the
-----------------------
following day. If there is no such quotation, the next preceding day for
which there is a quotation shall be used. If The Wall Street Journal shall
-------------------
not be available, Landlord shall choose the quotation from another
recognized source.
1.67.4 Section 12.1 of the GCIHCC Master Lease is amended by amending
paragraphs (h) and (p) thereof in full to read as follows:
(h)(A) any obligation of Tenant or any Guarantor (other than GranCare
or Paragon), or of any Subsidiary thereof, in respect of any Indebtedness
for Borrowed Money or for the deferred purchase price of any material
property or services (excluding (1) trade accounts payable in the ordinary
course of business on customary trade terms and (2) indebtedness or
obligations under the Transaction Documents) (hereinafter, "Indebtedness
------------
for Borrowed Money") or any guaranty relating thereto shall be declared to
------------------
be or shall become due and payable prior to the stated maturity thereof, or
such Indebtedness for Borrowed Money shall not be paid as and when the same
becomes due and payable, or there shall occur and be continuing any default
under any instrument, agreement or evidence of indebtedness relating to any
such Indebtedness for Borrowed Money the effect of which is to permit the
holder or holders of such instrument, agreement or evidence of
indebtedness, or a trustee, agent or other representative on behalf of such
holder or holders, to cause such Indebtedness for Borrowed Money to become
due prior to its stated maturity; or (B) any obligation of GranCare or
Paragon, or of any Subsidiary thereof (other than Tenant or GCIHCC), in
respect of any Indebtedness for Borrowed Money exceeding $1,000,000 in
aggregate principal amount, or any guaranty relating thereto, shall be
declared to be or shall become due and payable prior to the stated maturity
thereof, or the holder or holders of any instrument, agreement or evidence
of indebtedness relating to any such Indebtedness for Borrowed Money, or a
<PAGE>
-22-
trustee, agent or other representative on behalf of such holder or holders,
shall accelerate prior to the stated maturity date or, if no stated
maturity date, demand payment of such Indebtedness for Borrowed Money, and
such declaration, acceleration or demand shall not have been rescinded
within thirty (30) days of the date such declaration, acceleration or
demand was made; or
(p) Paragon shall cease at any time to be, either directly or
indirectly through one or more wholly-owned Subsidiaries that are each
Guarantors, the beneficial and record owner of less than all of the shares
of the outstanding capital stock of Tenant and AMS Properties; or
1.67.5 Section 12.1 of the GCIHCC Master Lease is further amended by
adding new paragraph (q) thereto to read as follows:
(q) Tenant shall have failed to extend the term of the Voting Trust
Agreement in accordance with the applicable provisions thereof prior to the
thirtieth day prior to the end of the then term of the Voting Trust
Agreement;
1.67.6 Section 21.4 of the GCIHCC Master Lease is amended in full to
read as follows:
21.4 Tenant's Option to Purchase the Collective Leased Properties.
------------------------------------------------------------
Provided,
(a) no Default involving the nonpayment of Rent shall have
occurred and be continuing, the Leases for each of the Collective
Leased Properties shall be in full force and effect (other than Leases
that have been terminated in accordance with the provisions hereof,
other than after the occurrence of an Event of Default), and other
than as expressly permitted by Article 17, Tenant shall not have
----------
assigned the Leases for any of the Collective Leased Properties or
subleased all or any portion of the Collective Leased Properties; and
(b) no default involving the nonpayment of "Rent" under and as
defined in the AMS Properties Master Lease shall have occurred and be
continuing, the AMS Properties Leases for each of the AMS Properties
Leased Properties shall be in full force and effect (other than AMS
Properties Leases that have been terminated in accordance with the
provisions hereof, other than after the occurrence of an Event of
Default under the AMS Properties Master Lease), and other than as
expressly permitted by Article 17 of AMS Properties Master Lease, AMS
Properties shall not have assigned the AMS Properties Leases for any
of the AMS Properties Leased Properties or subleased all or any
portion of the AMS Properties Leased Properties;
<PAGE>
-23-
Tenant shall have the option, exercisable on not less than twelve (12)
months prior Notice to Landlord, to purchase all, but not less than all,
the Collective Leased Properties (other than those Collective Leased
Properties whose Leases have been terminated in accordance with the
provisions of Article 10 or Article 11) upon the expiration of the Fixed
---------- ----------
Term or any Extended Term, each for a purchase price equal to the greater
of (i) ninety percent (90%) of the Fair Market Value Purchase Price of such
Collective Leased Property as of the expiration of the Fixed Term or such
Extended Term, as the case may be, or (ii)(1) if such option is exercised
at the end of the Fixed Term, one hundred fifty percent (150%) of the
Adjusted Purchase Price, (2) if such option is exercised at the end of the
first Extended Term, two hundred percent (200%) of the Adjusted Purchase
Price or (3) if such option is exercised at the end of the second Extended
Term, three hundred percent (300%) of the Adjusted Purchase Price; provided
--------
however that in each case AMS Properties shall simultaneously exercise its
option to purchase all, but not less than all of the AMS Properties Leased
Properties (other than those AMS Properties Leased Properties whose AMS
Properties Leases have been terminated in accordance with the provisions of
Article 10 or Article 11 of the AMS Properties Master Lease) in accordance
with Section 21.4 of the AMS Properties Master Lease. Such purchase by
Tenant shall be made in accordance with the provisions of Article 15.
----------
1.67.7 Section 23.7(h) of the GCIHCC Master Lease is amended in full
to read as follows:
(h) Indebtedness of Tenant, (i) as guarantor of or co-borrower with
Paragon or any Subsidiary thereof, in respect of an $890 million credit
facility provided to Paragon by The Chase Manhattan Bank, as agent bank
(and successor or replacement indebtedness), (ii) as guarantor of senior
subordinated notes and senior subordinated discount notes of Paragon
(and/or its successors and subsidiaries) yielding proceeds of approximately
$500 million (and successor or replacement indebtedness) and (iii) as
guarantor of a residual guaranty by Paragon in respect of a master lease
arrangement providing for the acquisition, development and construction of
skilled nursing and assisted living facilities for a total amount of not to
exceed $100,000,000 (and successor or replacement indebtedness); provided
--------
that (A) the enforcement of such Indebtedness against Tenant, and of any
security interests or liens on the property or the capital stock of Tenant
securing such Indebtedness, shall at all times be subject to the terms of
an intercreditor agreement in substantially the form (to the extent
applicable) of the Intercreditor Agreement dated as of February 12, 1997
among Tenant, GCIHCC, GranCare, First Union National Bank of North
Carolina, as agent, and Landlord, and (B) giving effect thereto and to the
application of the proceeds thereof, no Event of Default would be created;
and
1.67.8 Section 23.5 of the GCIHCC Master Lease is amended in full to
read as follows:
23.5 General Operations.
------------------
<PAGE>
-24-
Tenant covenants and agrees to furnish to Landlord, promptly after
Landlord's request therefor, copies of
(a) all written reports of surveys, statements of deficiencies,
plans of correction, and all material correspondence relating thereto,
including, without limitation, all written reports and correspondence
concerning compliance with or enforcement of licensure,
Medicare/Medicaid, and accreditation requirements, including physical
environment and Life Safety Code survey reports; and
(b) such other confirmation as to the licensure and Medicare and
Medicaid participation of Tenant as Landlord may reasonably request
from time to time.
1.67.9 Section 23.13 of the GCIHCC Master Lease is amended by adding
new paragraph (e) thereto to read as follows:
(e) Guarantee shall mean any obligation, contingent or otherwise, of
---------
any Person directly or indirectly guaranteeing any Indebtedness of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise of such Person (i)
to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness (whether arising by virtue of partnership
arrangements, by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain or support financial
statement conditions or otherwise) or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness of the
payment thereof or to protect such obligee against loss in respect thereof
(in whole or in part); provided that the term Guarantee shall not include
--------
endorsements for collection or deposit in the ordinary course of business.
The term "Guarantee" used as a verb has a corresponding meaning.
1.68 Amendment of HRPT Shares Pledge Agreement. The HRPT Shares Pledge
-----------------------------------------
Agreement dated as of December 28, 1990, as amended and restated by an amendment
and restatement thereof dated as of June 30, 1992 (the "HRP Shares Pledge
-----------------
Agreement"), is hereby amended by deleting Section 14 (captioned "Partial
- ---------
Release; Re-Pledge") in its entirety.
1.69 Amendment of Guaranty, Cross Default and Cross Collateralization
----------------------------------------------------------------
Agreement. Clause (i)(B) of the definition of "Guaranteed Obligations" in
- ---------
Section 1 of the Guaranty, Cross Default and Cross Collateralization Agreement
dated as of June 30, 1992 among AMS Properties, GCIHCC and HRP, is amended in
full to read as follows:
; and (B) the leases dated as of December 28, 1990 and March 27, 1992, and
all other leases that incorporate by reference a master lease document
dated as of December 28, 1990, as amended, between HRP, as lessor, and AMS,
as lessee, relating to the real and personal property subject thereto and
being described more particularly therein, as each of such leases and the
master lease document may be amended, modified or supplemented
<PAGE>
-25-
from time to time (collectively, the "AMS Lease", and together with the GCI
---------
Lease, the "Leases");
------
1.70 Agreements of HRP. HRP hereby:
-----------------
(1) irrevocably and unconditionally releases Vitalink from its
obligations under the Vitalink Guaranty, and agrees to return to GranCare,
or its order, at the Restructuring Closing, all original counterparts of
the Vitalink Guaranty in its possession;
(2) consents to the reduction in the number of licensed beds in the
amount and at the facilities described on Schedule 2.6(b) hereto;
---------------
(3) consents to the creation of junior liens and security interests
in the personal property and capital stock of AMS Properties and GCIHCC
(excluding, however, all collateral under the HRP Shares Pledge Agreement
or the Cash Collateral Pledge) to secure guaranties by AMS Properties and
GCIHCC of (i) an $890 million credit facility to be provided to Paragon by
The Chase Manhattan Bank (and successor or replacement indebtedness) and
(ii) senior subordinated notes and senior subordinated discount notes of
Paragon (and/or its successors and subsidiaries) yielding proceeds of
approximately $500 million (and successor or replacement indebtedness);
provided that the enforcement of such junior liens and security interests,
--------
and all claims secured thereby, shall at all times be subject to the terms
of an intercreditor agreement in substantially the form (to the extent
applicable) of the Intercreditor Agreement dated as of February 12, 1997
among the GranCare Parties, First Union National Bank of North Carolina, as
administrative agent, and HRP;
(4) cancels (i) the obligations of GranCare to complete net
$25,000,000 in new mortgage and lease transactions ("Additional
----------
Financings") with HRP pursuant to Section 9.27 of the Acquisition Agreement
----------
or any similar provision of any Transaction Document, and (ii) the
obligations of GranCare to make any payments (or any portion of any
payment) in connection with the failure to complete any of the Additional
Financings;
(5) waives for all time any existing rights of first refusal (or any
similar right) with respect to any sale, purchase, lease, sale/leaseback or
other financing transaction by GranCare or any of its Affiliates (or
successors) with any real estate investment trust;
(6) consents to the consummation of the Transactions, and waives any
resulting default under Section 9.15A of the Acquisition Agreement or any
other Transaction Document or otherwise;
(7) consents to the prepayment of the Mortgage Note (without
additional premium or penalty other than the total consideration called for
herein) and agrees to release its mortgage and security interest in the
property securing the Mortgage Note on the Exchange Closing Date in
accordance with Section 3.1 below; and
-----------
<PAGE>
-26-
(8) agrees that Paragon and any of its Affiliates (specifically
excluding AMS Properties and GCIHCC), or any successors of any of the
foregoing, may, without any consent or approval of HRP, enter into mergers,
consolidations, acquisitions, asset sales, sales of minority or majority
interests in Paragon or such Affiliate or any other transactions
(including, without limitation, any change of control, recapitalization or
other restructuring of Paragon or any of such Affiliates or successors);
provided, however, that Paragon (i) shall not liquidate, wind-up or
-------- -------
dissolve itself (or suffer any liquidation or dissolution) and (ii) may not
merge or consolidate with any Person, or convey, transfer or lease
substantially all of its assets unless:
(1) giving effect to such transaction, no Event of Default (as
defined in any Transaction Document), or an event or condition
that with the giving of notice or lapse of time or both would
become an Event of Default, would occur under and as defined in
any Transaction Document; and
(2) the successor formed by such consolidation or the survivor of
such merger or the Person that acquires by conveyance, transfer
or lease substantially all of the assets of Paragon, as the case
may be, shall be a corporation organized and existing under the
laws of the United States or any State thereof (including the
District of Columbia), and, if Paragon is not such corporation,
(i) such corporation shall have executed and delivered to HRP its
assumption of the due and punctual performance and observance of
each covenant and condition of the Paragon Guaranty to the same
extent and with the same effect as though such corporation was a
party hereto and was named and defined as the "Guarantor" therein
and (ii) shall have caused to be delivered to HRP an opinion of
outside counsel to such corporation to the effect that all
agreements or instruments effecting such assumption are
enforceable in accordance with their terms and comply with the
terms hereof and of the Paragon Guaranty.
(9) waives any Default or Event of Default arising under the
Transaction Documents as the result of the ownership and/or operation of
the Southpointe nursing facility located in Milwaukee, Wisconsin by AMS
Properties, and, notwithstanding any provision to the contrary in any
Transaction Document, hereby consents to the sale, transfer or other
disposition of such facility by AMS Properties (including the transfer to
an Affiliate without consideration); provided that, following such
transfer, AMS Properties does not remain liable for any material
liabilities associated with such facility.
SECTION 25. LIKE-KIND EXCHANGE
------------------
1.71 Effective the day (the "Exchange Closing Date") that all the
---------------------
conditions to the occurrence of the Exchange Closing set forth in Section 3.2
-----------
below have been satisfied: (a) AMS Properties shall prepay in full the principal
amount of the Mortgage Note, together with all accrued and unpaid interest
thereon (but without prepayment premium) and (b) AMS Properties
<PAGE>
-27-
and HRP will exchange the GranCare Exchange Properties for the HRP Exchange
Properties (the "Exchange Transaction"), free and clear of any Liens of any
--------------------
nature whatsoever except Permitted Encumbrances. Upon the occurrence of the
Exchange Closing, the documents delivered to the Title Company in escrow
pursuant to Sections 5.6 and 5.7 hereto shall be released for recordation or to
------------ ---
the appropriate party pursuant to the terms of the Exchange Escrow Agreement
(the "Exchange Closing").
----------------
1.72 The Exchange Closing shall be subject to the satisfaction (or the
waiver by HRP) of the following conditions:
(1) The prior occurrence of the Restructuring Closing;
(2) Evidence of the receipt of all Post Closing Consents, and the
continued licensure of each GranCare Exchange Property in accordance with
the provisions hereof;
(3) Giving effect to the Exchange Closing, no Default or Event of
Default shall have occurred and be continuing, and, the representations
contained in each Restructure Document (modified to reflect the obtaining
of the Post Closing Consents) shall be true and correct at and giving
effect to the Exchange Closing as if made on and as of the Exchange
Closing;
(4) HRP shall have received a certificate of a senior executive
officer of GranCare and Paragon confirming satisfaction of the conditions
described in paragraph (b) and (c) above;
--------- - -
(5) Evidence satisfactory to HRP that (i) the hazardous waste
contamination with respect to the generator spill at the Wilson, North
Carolina property has been remediated in accordance with Applicable Law and
(ii) that the underground storage tank at the Winston-Salem, North Carolina
property has been registered in accordance with Applicable Law;
(6) Confirmation by the Title Company that it is prepared to issue a
title policy to HRP and AMS Properties insuring title to the Exchange
Properties free from Liens other than Permitted Encumbrances;
(7) HRP shall have received such opinions of healthcare counsel to
Paragon and GranCare as HRP shall have reasonably requested, each of which
opinions shall be in form and substance reasonably satisfactory to HRP; and
(8) The GranCare Parties shall have paid all costs, expenses and
taxes provided for in Section 7.3 hereof in connection with the Exchange
-----------
Closing.
1.73 Within ninety (90) days after the consummation of the Exchange
Transaction, HRP shall prepare a schedule (the "Section 1031 Schedule") that
---------------------
sets forth the "exchange groups" and "residual group" (each within the meaning
of Treas. Reg. Section 1.1031(j)-1),
<PAGE>
-28-
together with each asset included in the GranCare Exchange Properties and the
HRP Exchange Properties that belongs to the relevant exchange group or residual
group, and AMS Properties will provide HRP with such information as is necessary
for the preparation of such Section 1031 Schedule. Such Section 1031 Schedule
shall be prepared on the basis that, for purposes of Treas. Reg. Section
1.1031(j)-1, the Mortgage Note retired prior to the Exchange Closing pursuant
Section 3.1 hereof is not assumed by HRP as part of the Like-Kind Exchange under
- -----------
this Agreement, and further, the GranCare Exchange Properties are not conveyed
subject to the Mortgages. The Purchase Price to be set forth in each New
Facility Lease shall be allocated between the GranCare Exchange Properties as
mutually agreed between HRP and AMS Properties; however, to the extent no such
agreement is reached before the Exchange Closing Date, the Purchase Prices shall
based upon the aggregate purchase prices for the HRP Exchange Properties and
allocated among the GranCare Exchange Properties by HRP based upon the Section
1031 Schedule.
1.74 Each of AMS Properties and HRP shall report the transactions
contemplated hereby as a Like-Kind Exchange under Section 1031 of the Code,
consistent with the Section 1031 Schedule, and shall not take, and shall cause
their respective Affiliates, representatives, successors and assigns not to
take, any position on any federal, state or local Tax return or report,
inconsistent with such reporting position or the Section 1031 Schedule. Each of
AMS Properties and HRP shall promptly give the other notice of any disallowance
of or challenge to such reporting by any Taxing Authority.
1.75 Each of AMS Properties and HRP shall cooperate with the other,
including without limitation in preparing the Section 1031 Schedule and
executing all necessary agreements and documents, to the extent necessary for
HRP to treat the exchange of the GranCare Exchange Properties for the HRP
Exchange Properties as a Like-Kind Exchange pursuant to Section 1031 of the
Code.
1.76 Notwithstanding the provisions of this Section, the parties to this
Agreement will rely solely on their own advisors in determining the tax
consequences of the transactions contemplated by this Agreement and each party
is not relying, and will not rely, on any representations or assurances of any
other party regarding such consequences other than the representations,
warranties, covenants and agreements set forth in writing in this Agreement or
furnished pursuant to the provisions hereof.
1.77 The GranCare Parties shall use all reasonable efforts to obtain the
Post Closing Consents as soon as possible after the date hereof, and HRP agrees
to cooperate with all reasonable requests of the GranCare Parties in connection
with obtaining the Post Closing Consents. In the event that, for any reason
(other than the failure of HRP to cooperate as provided in the preceding
sentence), the Exchange Closing Date does not occur prior to April 29, 1998 (as
it may be extended as provided below, the "Post Closing Consent Date"), and for
-------------------------
as long thereafter as the Exchange Closing Date shall fail to occur (and without
limiting any other remedies that may be available to HRP; it being understood,
however, that the failure to obtain the Post Closing Consents by the Post
Closing Consent Date shall not, in and of itself, constitute an Event of Default
under the Transaction Documents), AMS Properties shall pay, as an
<PAGE>
-29-
Additional Charge under the AMS Properties Master Lease, an amount equal to
$20,000 per month, payable in arrears on the one month anniversary of the Post
Closing Consent Date and on the same day of each following month and on the
Exchange Closing Date (provided that the last monthly installment shall be
prorated as to any partial month). Notwithstanding the foregoing, however, if,
despite the GranCare Parties' reasonable efforts, the Post Closing Consents
applicable to any GranCare Exchange Property (the "Affected GranCare Exchange
--------------------------
Property") cannot be obtained prior to the Post Closing Consent Date, AMS
- --------
Properties may offer to substitute for the Affected GranCare Exchange Property
another skilled or intermediate care nursing facility of equal or greater value
and otherwise satisfactory to HRP. If HRP so approves such substitute facility
(the "Substitute Exchange Property"), (i) the parties hereto shall amend the
----------------------------
Restructure Documents and the Transaction Documents to reflect the substitution
of Substitute Exchange Property for the Affected GranCare Exchange Property,
(ii) AMS Properties shall use all reasonable efforts to obtain, as soon as
possible, all consents necessary to permit the exchange of the Substitute
Exchange Property and (iii) the Post Closing Consent Date shall be extended for
an additional period of ninety (90) days.
1.78 AMS Properties' obligation to pay Minimum Rent and Additional Rent
under the New Facility Leases during the period from November 1, 1997 to the
Exchange Closing Date shall be net of Minimum Rent and Additional Rent paid to
HRP under the AMS Properties Facility Leases of the HRP Exchange Properties for
such period.
SECTION 26. CLOSING.
-------
Section 2 of this Agreement shall become effective as of the date first set
---------
forth above, upon the satisfaction of the conditions set forth below at a
closing (the "Restructuring Closing") to be held at the offices of Sullivan &
---------------------
Worcester LLP, One Post Office Square, Boston, Massachusetts, or at such other
location as the GranCare Parties and HRP may agree, at 10:00 a.m. local time, on
a date (the "Restructuring Closing Date") which is the earlier to occur of (i)
--------------------------
November 30, 1997, and (ii) the date as of which all conditions precedent to the
Restructuring Closing herein set forth have either been satisfied or waived by
the party in whose favor such conditions run. In the event that the
Restructuring Closing shall not have occurred on or before December 15, 1997,
provided that no action for specific performance shall have been commenced by
HRP to enforce this Agreement, either party shall have the right, by the giving
of written notice, to terminate this Agreement.
SECTION 27. CONDITIONS TO CLOSING
---------------------
The occurrence of the Restructuring Closing is subject to the satisfaction
of the following conditions:
1.79 Restructure Payment. GranCare shall have paid HRP a non-refundable
-------------------
$10,000,000 restructure payment in immediately available funds.
1.80 Paragon Documents and Payment of Deposit. Paragon shall have: (a)
----------------------------------------
executed and delivered to HRP a Guaranty in the form of Exhibit A hereto (the
---------
"Paragon Guaranty") and a
----------------
<PAGE>
-30-
Cash Deposit Security Agreement in the form of Exhibit B hereto (the "Cash
--------- ----
Collateral Pledge"), and (b) paid HRP $15,000,000 in immediately available
- -----------------
funds, representing the Cash Collateral Deposit referenced in the Cash
Collateral Pledge.
1.81 Subordination Agreement. Paragon and GranCare, as subordinate
-----------------------
creditors, and AMS Properties and GCIHCC, as debtors, shall have entered into a
Subordination Agreement in the form of Exhibit C hereto (the "Subordination
--------- -------------
Agreement").
- ---------
1.82 GranCare Guaranty. GranCare shall have executed and delivered to HRP
-----------------
an Amended and Restated Guaranty in the form of Exhibit D hereto (the "GranCare
--------- --------
Guaranty").
- --------
1.83 Amendment to Facility Leases. AMS Properties and GCIHCC shall have
----------------------------
executed and delivered to HRP an Amendment to Facility Leases in the form of
Exhibit E hereto (the "Lease Amendment").
1.84 Exchange Transaction Documents--GranCare Exchange Properties. AMS
------------------------------------------------------------
Properties and GCIHCC shall have executed and delivered to HRP an Amendment to
Facility Leases in the form of Exhibit E hereto (the "Lease Amendment").
Exchange Transaction Documents--GranCare Exchange Properties. AMS Properties
shall have (i) executed and delivered an Exchange Properties Escrow Agreement
among AMS Properties, HRP and the Title Company, as escrow agent, in the form
furnished by HRP (the "Exchange Properties Escrow Agreement") to HRP, and (ii)
------------------------------------
delivered the following to the Title Company in escrow (pending the occurrence
of the Exchange Closing), in each case in form and substance reasonably
satisfactory to HRP:
(1) A good and sufficient statutory warranty deed, with respect to
each of the GranCare Exchange Properties, in proper statutory form for
recording, duly executed and acknowledged by AMS Properties, conveying good
and marketable title to such properties, free from all liens and
encumbrances other than the Permitted Encumbrances;
(2) A bill of sale and assignment agreement, in form and substance
reasonably satisfactory to HRP, duly executed and acknowledged by AMS
Properties, with respect to all of AMS Properties' right, title and
interest in, to and under the Personal Property, the Contracts, the
Documents and the Intangible Property with respect to the GranCare Exchange
Properties (excluding, however, all accounts receivable, inventory and
computers (including related hardware and software), and prepaid items);
(3) Transfer tax forms with respect to each of the GranCare Exchange
Properties;
(4) An owner's affidavit for each of the GranCare Exchange Properties
executed by AMS Properties;
(5) A FIRPTA affidavit, executed by AMS Properties;
(6) Copies of all title exception documents for each of the GranCare
Exchange Properties;
<PAGE>
-31-
(7) Counterparts of each New Facility Lease, duly executed by AMS
Properties;
(8) Title survey certificates for each of the GranCare Exchange
Properties; and
(9) Such other conveyance documents, certificates, deeds, affidavits
and other instruments as HRP may reasonably require.
1.85 Exchange Transaction Documents--HRP Exchange Properties. HRP shall
-------------------------------------------------------
have (i) executed and delivered the Exchange Properties Escrow Agreement to AMS
Properties and (ii) delivered the following to the Title Company, in escrow
(pending the occurrence of the Exchange Closing), in each case in form and
substance reasonably satisfactory to AMS Properties:
(1) A good and sufficient grant or special warranty deed, with
respect to each of the HRP Exchange Properties (other than the Palm
Springs, California property), in proper statutory form for recording, duly
executed and acknowledged by HRP, conveying HRP's title to such properties,
free from all liens and encumbrances created by or through HRP;
(2) An assignment of ground lease with respect to the HRP Exchange
Property at Palm Springs, California, in proper statutory form for
recording, duly executed and acknowledged by HRP, conveying HRP's interest
as ground lessee to such property, free from all liens and encumbrances
created by or through HRP;
(3) A bill of sale and assignment agreement, in form and substance
reasonably satisfactory to AMS Properties, duly executed and acknowledged
by HRP, with respect to any personal property with respect to the HRP
Exchange Properties in which HRP has an interest;
(4) Transfer Tax form with respect to each of the HRP Exchange
Properties;
(5) A FIRPTA affidavit, executed by HRP; and
(6) The New Facility Leases, duly executed by HRP.
1.86 The Transactions. The Transactions shall have been consummated
----------------
concurrently with Restructuring Closing.
1.87 No Default; Representations and Warranties. Giving effect to the
------------------------------------------
Transactions and the occurrence of the Restructuring Closing, no Default or
Event of Default shall have occurred and be continuing, and the representations
contained in each Restructure Document shall be true and correct at the
Restructuring Closing as if made on and as of such date;
<PAGE>
-32-
1.88 Officer's Certificates. HRP shall have received a certificate of a
----------------------
senior executive officer of GranCare and Paragon confirming satisfaction of the
conditions described in Sections 5.8 and 5.9 above.
------------ ---
1.89 Other Documents. HRP shall have received such other documents,
---------------
opinions and certificates (including without limitation, evidence of continued
licensure of each Facility leased or operated by AMS Properties or GCIHCC, an
opinion of counsel to Paragon and GranCare, and certificates of public officials
and of officers of Paragon, GranCare, AMS Properties and GCIHCC) as HRP shall
have reasonably requested, each of which shall be in form and substance
reasonably satisfactory to HRP.
1.90 Fees and Expenses. GranCare shall have paid all costs, expenses and
-----------------
taxes provided for in Section 7.3 hereof, as well as all fees and expenses
-----------
currently payable by GranCare, AMS Properties and GCIHCC under any Transaction
Document.
SECTION 28. REPRESENTATIONS AND WARRANTIES
Each of the GranCare Parties hereby jointly and severally represents and
warrants to HRP as follows:
1.91 Status of GranCare Parties. Each GranCare Party is a corporation duly
--------------------------
organized, and validly existing and in good standing under the laws of its
respective state of its incorporation and has all requisite power and authority
under the laws of such state and under its charter and by-laws to own the
properties owned by it, to lease the properties leased by it, to operate the
nursing or other facilities located thereon as heretofore operated, to enter
into and perform its obligations under the Transaction Documents to which it is
a party, and to transact the business in which it is engaged or proposes to
engage. Each GranCare Party has duly qualified and is in good standing as a
foreign corporation in each jurisdiction in which the nature of the business
conducted or to be conducted by it requires such qualification (except where the
failure to so qualify could not reasonably be expected to have a material
adverse effect on the financial condition and operations, or on the assets or
business of such GranCare Party).
1.92 Authorization. Each GranCare Party has taken all necessary corporate
-------------
and other action to authorize the execution, delivery and performance of each
Restructure Document to which it is a party.
1.93 Enforceability.
--------------
(1) This Agreement constitutes, and each other Restructure Document
when executed and delivered by each GranCare Party party thereto shall
constitute, the legal, valid and binding obligation and agreement of such
GranCare Party, in each case enforceable in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws of general application affecting
the rights and remedies of creditors.
<PAGE>
-33-
(2) Upon the due execution and delivery of the Restructure Documents
pursuant hereto, the Transaction Documents, as modified by the Restructure
Documents, shall constitute the legal, valid and binding obligation and
agreement of each GranCare Party party thereto, in each case enforceable in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws of
general application affecting the rights and remedies of creditors.
1.94 No Violations of Agreements, Etc. Neither the execution, delivery or
--------------------------------
performance of any Restructure Document by any GranCare Party, nor the
consummation of the Transactions and the other transactions contemplated hereby
(other than the Exchange Closing), nor compliance with the terms and provisions
thereof will result in any breach of the terms, conditions or provisions of, or
conflict with or constitute a default under, or result in the creation of any
lien, charge or encumbrance (other than Liens permitted by the Transaction
Documents) upon any property or assets of any GranCare Party pursuant to, the
terms of any indenture, mortgage, deed of trust, note, evidence of indebtedness
or any other agreement or instrument to which any GranCare Party may be a party
or by which such GranCare Party or any of its property may be bound
("Contractual Obligations"), or its charter and by-laws, or violate any
-----------------------
provisions of law or any order or regulation of any governmental commission,
bureau or administrative agency or any applicable order, writ, injunction,
judgment or decree of any court (collectively, "Legal Restrictions").
------------------
1.95 Governmental and Other Approvals. No order, permission, consent,
--------------------------------
approval, license, authorization, registration or validation of, or filing with,
or exemption by, any governmental agency, commission, board or public authority
is required to authorize, or is required in connection with the execution,
delivery and performance of any Restructure Document by any GranCare Party, or
the consummation of the Transactions and the Restructuring Closing other
transactions contemplated hereby, which has not been duly obtained or made on or
prior to the Restructuring Closing Date, except (i) those which are customarily
and routinely obtained after the closing of a transaction and that are
reasonably expected to be obtained in due course and (ii) the orders,
permissions, consents, approvals, licenses, authorizations, registrations and
filings described in Schedule 6.5 hereto (collectively, the "Post Closing
------------ ------------
Consents").
- --------
1.96 Compliance With Agreements, Etc. Upon the consummation of the
-------------------------------
Transactions and the other transactions contemplated hereby, each GranCare Party
will be in compliance in all material respects with the terms and provisions of
each Contractual Obligation to which it is or will be a party at such time or by
which it or its property is or will then be bound that is material to the
operations, business, prospects, property or assets of, liabilities (including,
without limitation, tax, ERISA and environmental liabilities) or the condition
(financial or otherwise) of Paragon or of the GranCare Parties taken as a whole,
and will not be in default under or with respect to any such Contractual
Obligation. Each GranCare Party will be in compliance with, and no default shall
have occurred under, each Legal Restriction that shall be applicable to it or
its respective properties upon the consummation of the Transactions and the
other transactions contemplated hereby, where the effect of such noncompliance
would be material to the operations, business, prospects, property or assets of,
liabilities (including, without limitation,
<PAGE>
-34-
tax, ERISA and environmental liabilities) or the condition (financial or
otherwise) of Paragon or of the GranCare Parties taken as a whole. No Event of
Default exists or will occur giving effect to the consummation of the
Transactions and the other transactions contemplated hereby.
1.97 Licenses, Permits, Etc. Giving effect to the consummation of the
----------------------
Transactions and the other transactions contemplated hereby, all licenses,
permits, consents, permissions, certifications and other approvals from all
federal, state and local governmental agencies necessary to provide the services
and the number of available beds provided by the Continuing Properties owned
and/or operated by the GranCare Parties immediately before consummation of the
Transactions and the other transactions contemplated hereby contemplated hereby,
shall continue to be in full force and effect, and shall not be subject to
revocation as a result of the consummation of the Transactions or any of the
other transactions contemplated hereby.
1.98 Licensed Beds.
-------------
(1) Schedule 1.8 hereto is a complete and accurate statement of the
------------
bed categories for which each healthcare facility (collectively, the
"Healthcare Facilities" individually, a "Healthcare Facility") located at a
--------------------- -------------------
Continuing Property that is not a GranCare Exchange Property will be
licensed as of the Restructuring Closing Date, the number of beds in each
category for which such Healthcare Facility will be licensed as of the
Restructuring Closing Date, and the number of Licensed Beds in each
category that will be available for use in such Healthcare Facility as of
the Restructuring Closing Date. Upon the Restructuring Closing, no beds
will be in use or available at such Healthcare Facility for use in any
category for which such Healthcare Facility is not licensed. No GranCare
Party has any reason to believe that the number of Licensed Beds in any
category may be reduced by any governmental agency.
(2) Schedule 1.8 hereto is a complete and accurate statement of the
------------
bed categories for which each Healthcare Facility located at a GranCare
Exchange Property will be licensed as of the Exchange Closing Date, the
number of beds in each category for which such Healthcare Facility will be
licensed as of the Exchange Closing Date, and the number of Licensed Beds
in each category that will be available for use in such Healthcare Facility
as of the Exchange Closing Date. Upon the Exchange Closing, no beds will be
in use or available at such Healthcare Facility for use in any category for
which such Healthcare Facility is not licensed. No GranCare Party has any
reason to believe that the number of Licensed Beds in any category may be
reduced by any governmental agency.
1.99 Licenses and Permits. Schedule 6.9 hereto, designated "Licenses and
-------------------- ------------
Permits", is a complete and accurate list of all licenses, permits, consents,
permissions, certifications and other approvals from all federal, state and
local governmental agencies issued to each Healthcare Facility with respect to
its operations that will be effective immediately prior to the Restructuring
Closing (with respect to each Continuing Property other than a GranCare Exchange
Property) and the Exchange Closing (with respect to each GranCare Exchange
Property), and no GranCare Party has any reason to believe that any such
license, permit or approval will not be in effect or
<PAGE>
-35-
will be conditioned or restricted upon the consummation of the Restructuring
Closing (with respect to each Continuing Property other than a GranCare Exchange
Property) or the Exchange Closing (with respect to each GranCare Exchange
Property), except such restrictions as are customary and reasonably expected to
be satisfied promptly following the Restructuring Closing or the Exchange
Closing, as the case may be.
1.100 Notices and Applications.
------------------------
(1) Except for the Post Closing Consents:
(1) all notices required to be given by the GranCare Parties to
consummate the Restructuring Closing and the Exchange Closing have
been given to the federal, state and local governmental agencies and
accrediting and certifying agencies having jurisdiction over each
Continuing Property ("Notices and Applications"); and
------------------------
(2) each GranCare Party has received all licenses, permits,
certifications, accreditations, approvals, permissions and consents
that are required to be received by it in order to consummate the
Transactions and the other transactions contemplated hereby and,
following the Restructuring Closing and the Exchange Closing, to allow
it to maintain the number of beds set forth in Schedule 1.8 and to
------------
maintain in good standing the licenses and permits set forth on
Schedule 6.9 (except for those licenses, permits, certifications,
------------
accreditations, approvals, permissions and consents that are
customarily and routinely received after the closing of a transaction,
and that are reasonably expected to be satisfied promptly after the
Restructuring Closing Date or the Exchange Closing Date, as the case
may be).
(2) To the best of the knowledge of each GranCare Party, no Person
with an "ownership or control interest" in any GranCare Party and no "agent
or managing employee" of any GranCare Party, each as defined by 42 C.F.R.
(S)(S) 420.201 and 455.101, has been convicted of a criminal offense
related to the involvement of such Person in the Medicare, Medicaid, or
Title XX services program under the Social Security Act, or has been
excluded from participation in the Medicare program, the Medicaid program,
or other state health care program.
(3) Each of AMS Properties and GCIHCC is and will be, following
consummation of the Transactions and the Restructuring Closing and Exchange
Closing, in substantial compliance with all Medicare (if applicable) and
Medicaid Conditions and Standards of Participation, and is and will be,
following consummation of the Transactions and the other transactions
contemplated hereby, in substantial compliance with the requirements for
licensure for each of the facilities to be operated by it.
1.101 Judgments; Litigation. There are no judgments presently outstanding
---------------------
and unsatisfied against any GranCare Party or its properties, and, except as set
forth in the Joint
<PAGE>
-36-
Proxy Statement dated September 26, 1997, no GranCare Party or any of its
properties is involved in any litigation at law or in equity, or in any
proceeding before any court, or by or before any governmental or administrative
agency, which litigation or proceeding could reasonably be expected to have a
materially adverse effect on the operations, business, prospects, property or
assets of, liabilities (including, without limitation, tax, ERISA and
environmental liabilities), or the condition (financial or otherwise) of Paragon
or of the GranCare Parties taken as a whole, or ownership by any GranCare Party
or HRP of, or any security interest or lien in HRP's favor in, any Continuing
Property and, to each GranCare Party's knowledge, no such material litigation or
proceeding is threatened against any GranCare Party or against its properties
(including any Continuing Property) and no investigation looking toward such a
material proceeding has begun or is contemplated.
1.102 Affiliates and Subsidiaries. The names of all Subsidiaries and
---------------------------
Affiliates of any GranCare Party or Paragon expected to derive revenue from any
Continuing Property (whether by way of management fees, the lending of money or
otherwise), other than the GranCare Party party to the Lease for such Continuing
Property, are set forth on Schedule 6.12 hereto.
-------------
1.103 Environmental Laws.
------------------
(1) Each GranCare Party has obtained all governmental approvals that
are required for the operation of its business under any Applicable Law,
except when the failure to so obtain a governmental approval would not have
a material adverse effect.
(2) Each GranCare Party is in compliance with all terms and
conditions of all required governmental approvals and is also in compliance
with all terms and conditions of all Applicable Laws, noncompliance with
which would have a material adverse effect.
(3) There is no civil, criminal or administrative action, suit,
demand, claim, hearing, notice of violation, investigation, proceeding,
notice or demand letter pending or, to the best knowledge of any GranCare
Party, threatened against any GranCare Party relating in any way to any
Applicable Laws, and there is no lien of any private entity or governmental
authority against any Continuing Property relating in any way to the
Applicable Laws.
(4) There has been no claim, complaint, notice, or request for
information received by any GranCare Party with respect to any site listed
on the National Priority List promulgated pursuant to CERCLA or any state
list of sites requiring investigation or cleanup with respect to
contamination by hazardous substances.
(5) To the best of any GranCare Party's knowledge, there has been no
release or threat of release of any hazardous substance at any Continuing
Property which would likely result in liability being imposed upon any
GranCare Party, which liability would have a material adverse effect.
<PAGE>
-37-
1.104 Disclosure. Neither this Agreement, any other Restructure Document
----------
nor any other document, certificate or written statement furnished to HRP by or
on behalf of any GranCare Party in connection with the Transactions or the
Restructuring Closing or Exchange Closing contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
required to be stated herein or therein or necessary in order to make the
statements contained herein or therein not misleading. To the best of the
knowledge of each GranCare Party, there is no fact or condition which materially
and adversely affects the operations, business, prospects, property or assets
of, liabilities (including, without limitation, tax, ERISA and environmental
liabilities), or the condition (financial or otherwise) of the GranCare Parties
that has not been set forth herein or in the Joint Proxy Statement dated
September 26, 1997.
SECTION 29. MISCELLANEOUS
-------------
1.105 Confirmation of Transaction Documents, Etc. Each of the Transaction
------------------------------------------
Documents, as amended hereby, remain in full force and effect and is hereby
ratified and confirmed, except as specifically set forth herein. The amendments
of the Transaction Documents set forth herein (a) do not constitute an
amendment, waiver or modification of any term, condition or covenant of any
Transaction Document, or any of the instruments or documents referred to
therein, other than as specifically set forth herein, and (ii) shall not
prejudice any rights which HRP or its successors and assigns may now or
hereafter have under or in connection with any Transaction Document, as amended
hereby or any of the instruments or documents referred to therein.
1.106 Claims. Without limiting any indemnification provision contained in
------
any Restructure Document or Transaction Document, the GranCare Parties hereby
jointly and severally agree to and do hereby indemnify, protect, defend and hold
harmless HRP, any shareholder of HRP, any lender to HRP and their respective
officers, directors, trustees, shareholders, managers and affiliates, any of
their respective successors or assigns, and each of them (individually an
"Indemnitee") from and against any and all liabilities, losses, damages, costs
----------
and expenses of any kind (including, without limitation, the reasonable fees and
disbursements of counsel for HRP in connection with any investigative,
administrative or judicial proceeding, whether or not HRP shall be designated a
party thereto) which may be incurred or suffered by any Indemnitee, relating to
or arising out of any Restructure Document or Transaction Document, or the
existence of any hazardous substance on, in, or under any Continuing Property,
or any violation or alleged violation of any Applicable Law, or in connection
with any Continuing Property, or in connection with the Southpointe nursing
facility in Milwaukee, Wisconsin (including, without limitation, any disposition
thereof) or involving the imposition of any lien under any Applicable Law;
provided that HRP shall not have the right to be indemnified hereunder for its
- --------
own gross negligence or willful misconduct as finally determined by a court of
competent jurisdiction. The covenants in this Section 7.2 shall survive the
-----------
termination of the Transaction Documents.
1.107 Costs and Expenses. GranCare, AMS Properties and GCIHCC hereby
------------------
jointly and severally agrees to pay all costs and expenses of HRP in connection
with the preparation,
<PAGE>
-38-
reproduction, execution and delivery, and administration, of this Agreement,
including the reasonable fees and expenses of Sullivan & Worcester LLP, special
counsel to HRP with respect thereto, and the payment of all recording fees, real
estate transfer taxes, title insurance premiums and other expenses related to
the satisfaction of the conditions to the Restructuring Closing and the Exchange
Closing.
1.108 No Counterclaims, Etc.; Release. Each GranCare Party acknowledges
-------------------------------
that immediately prior to its acceptance of this letter, it is obligated to pay
all indebtedness and obligations arising under the Transaction Documents without
a right of set-off, counterclaim or defense with respect thereto. In
consideration of HRP's agreements contained herein, GranCare does hereby release
and forever discharge HRP and its affiliates, officers, directors, agents,
attorneys, employees, successors and assigns, of and from all manner of actions,
causes of action, suits, judgments, claims and demands whatsoever, in law or in
equity, which have arisen from the beginning of time up and including the date
hereof, whether arising in connection with the transactions contemplated hereby
or by the Restructure Documents or the Transaction Documents, or otherwise.
1.109 Survival. The representations, warranties and indemnities contained
--------
in this Agreement shall survive the consummation of the Transactions and the
other transactions contemplated hereby, and any investigation by HRP of any
matters described in or related to the transactions contemplated by this
Agreement or any Transaction Document. Although HRP or its representatives may
have undertaken certain investigations with respect to the consummation of the
Transactions and the other transactions contemplated hereby, each GranCare Party
acknowledges that HRP is relying upon such representations, warranties,
covenants and indemnities in connection therewith.
1.110 Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of each party hereto and to their respective successors,
assigns, transferees, executors and administrators.
1.111 CONSENT TO JURISDICTION. ANY ACTION TO ENFORCE, ARISING OUT OF, OR
-----------------------
RELATING IN ANY WAY TO, ANY OF THE PROVISIONS OF THIS AGREEMENT OR ANY
RESTRUCTURE DOCUMENT OR TRANSACTION DOCUMENT MAY BE BROUGHT AND PROSECUTED IN
SUCH COURT OR COURTS LOCATED IN THE COMMONWEALTH OF MASSACHUSETTS AS IS PROVIDED
BY LAW; AND EACH OF THE ENTITIES CONSENTS TO THE JURISDICTION OF SAID COURT OR
COURTS LOCATED IN THE COMMONWEALTH OF MASSACHUSETTS AND TO SERVICE OF PROCESS BY
REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, OR IN ANY MANNER
PROVIDED BY LAW.
1.112 WAIVER OF JURY TRIAL. EXCEPT TO THE EXTENT PROHIBITED BY LAW WHICH
--------------------
CANNOT BE WAIVED, EACH PARTY HERETO HEREBY WAIVES TRIAL BY JURY IN CONNECTION
WITH ANY ACTION OR PROCEEDING OF ANY NATURE WHATSOEVER ARISING UNDER, OUT OF OR
IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER RESTRUCTURE DOCUMENT OR
TRANSACTION
<PAGE>
-39-
DOCUMENT AND IN CONNECTION WITH SUCH ACTION OR PROCEEDING, WHETHER ARISING UNDER
STATUTE (INCLUDING ANY FEDERAL OR STATE CONSTITUTION) OR UNDER THE LAW OF
CONTRACT, TORT OR OTHERWISE AND INCLUDING, WITHOUT LIMITATION, ANY CHALLENGE TO
THE LEGALITY, VALIDITY, BINDING EFFECT OR ENFORCEABILITY OF THIS PARAGRAPH OR
THIS AGREEMENT OR ANY OTHER RESTRUCTURE DOCUMENT OR TRANSACTION DOCUMENT.
1.113 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS.
1.114 NO LIABILITY OF TRUSTEES THE DECLARATION OF TRUST OF HRP, DATED
------------------------
OCTOBER 9, 1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE
"DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND
TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND RETIREMENT
PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS
TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER,
SHAREHOLDER, EMPLOYEE OR AGENT OF HRP SHALL BE HELD TO ANY PERSONAL LIABILITY,
JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, HRP. ALL PERSONS
DEALING WITH HRP, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HRP FOR THE
PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
<PAGE>
-40-
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
HEALTH AND RETIREMENT
PROPERTIES TRUST (f/k/a "Health and
Rehabilitation Properties Trust")
(known in Wisconsin as "Health and
Retirement Properties REIT")
By:/s/ David J. Hegarty
-----------------------------
Its: President
GRANCARE, INC.
(f/k/a New GranCare, Inc.)
By:/s/ M. Henry Day, Jr.
-----------------------------
Its: Assistant Secretary
AMS PROPERTIES, INC.
By: /s/ M. Henry Day, Jr.
-----------------------------
Its: Assistant Secretary
GCI HEALTH CARE CENTERS, INC.
By:/s/ M. Henry Day, Jr.
-----------------------------
Title Assistant Secretary
<PAGE>
SCHEDULE 1.8
CONTINUING PROPERTIES
---------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Facility Name Location Type of No. of No. of
Licensed Service Licensed Available
Beds Beds
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AMS Properties Facilities:
- -------------------------
- -----------------------------------------------------------------------------------------
Flagship Newport Beach, Skilled Care 167 151
CA
- -----------------------------------------------------------------------------------------
Lancaster Lancaster, Skilled Care 99 99
CA
- -----------------------------------------------------------------------------------------
Pacific Gardens Fresno, CA Skilled Care 180 180
- -----------------------------------------------------------------------------------------
Tarzana Los Angeles, CA Skilled Care 173 173
- -----------------------------------------------------------------------------------------
Thousand Oaks Thousand Oaks, Skilled Care 124 124
CA
- -----------------------------------------------------------------------------------------
Van Nuys Los Angeles, CA Skilled Care 58 58
- -----------------------------------------------------------------------------------------
Cedars HealthCare Center Lakewood, CO Skilled and 175 175
Intermediate Care
- -----------------------------------------------------------------------------------------
Cherrelyn HealthCare Center Littleton, CO Skilled and 230 230
Intermediate Care
- -----------------------------------------------------------------------------------------
Greentree Health and Clintonville, WI Skilled Care 66 66
Rehabilitation Center
- -----------------------------------------------------------------------------------------
Pine Manor Health Care Embarrass, WI Skilled Care 101 101
Center
- -----------------------------------------------------------------------------------------
Sunny Hill Health Care Madison, WI Skilled Care 73 73
- -----------------------------------------------------------------------------------------
The Virginia Waukesha, WI Skilled Care 102 102
- -----------------------------------------------------------------------------------------
Woodland Brookfield, WI Skilled Care 226 226
- -----------------------------------------------------------------------------------------
Christopher East Health Milwaukee, WI Skilled Care 215 215
and Rehabilitation Center
- -----------------------------------------------------------------------------------------
Northwest Health Care Milwaukee, WI Skilled Care 93 93
Center
- -----------------------------------------------------------------------------------------
River Hills West Pewaukee, WI Skilled Care 248 237
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Facility Name Location Type of No. of No. of
Licensed Service Licensed Available
Beds Beds
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Brian Centers - Wilson Wilson, NC Skilled Care; 119 119
Intermediate Care
- -----------------------------------------------------------------------------------------
Brian Centers - Cabarrus Concord, NC Skilled Care;
Intermediate Care 110 110
- -----------------------------------------------------------------------------------------
Brian Centers - Winston Winston-Salem, Skilled Care; 80 80
Salem NC Intermediate Care
- -----------------------------------------------------------------------------------------
GCI Health Care Centers, Inc. Facilities:
- ----------------------------------------
- -----------------------------------------------------------------------------------------
Village Green Nursing Phoenix, Arizona Skilled Care 127 125
Home
- -----------------------------------------------------------------------------------------
La Mesa Care Center Yuma, Arizona Skilled Care; 84; 44 81; 44
Intermediate Care
- -----------------------------------------------------------------------------------------
SunQuest Village of Yuma Yuma, Arizona supervisory care 80 80
- -----------------------------------------------------------------------------------------
La Sallette Health and Stockton, CA Skilled Care 120 116
Rehabilitation Center
- -----------------------------------------------------------------------------------------
Huron Nursing Home Huron, SD Skilled Care; 125; 38 125; 38
Intermediate Care
- -----------------------------------------------------------------------------------------
SunQuest Village of Huron, SD retirement 59 59
Huron apartments
- -----------------------------------------------------------------------------------------
Southridge Health Care Sioux Falls, SD Skilled Care; 109; 50 109; 50
Center Intermediate Care
- -----------------------------------------------------------------------------------------
</TABLE>
___________________
/1/ Not a licensed health care facility
<PAGE>
SCHEDULE 1.20
GRANCARE NORTH CAROLINA PROPERTIES
----------------------------------
<PAGE>
SCHEDULE 1.21
GRANCARE WISCONSIN PROPERTIES
-----------------------------
<PAGE>
SCHEDULE 1.24
HRP EXCHANGE PROPERTIES
-----------------------
<PAGE>
SCHEDULE 1.32
PERMITTED ENCUMBRANCES
----------------------
<PAGE>
SCHEDULE 1.44
CONTINUING TRANSACTION DOCUMENTS
--------------------------------
2. The Facility Leases dated as of December 28, 1990 or March 27, 1992 between
HRP, as landlord, and AMS Properties, as tenant;
3. A Master Lease Document General Terms and Conditions dated as of December
28, 1990 between HRP, as landlord, and AMS Properties, as tenant;
4. A Guaranty, dated as of December 28, 1990, from Old GranCare in favor of
HRP pursuant to which all obligations of AMS Properties are guaranteed; the
obligations and liabilities under such Guaranty having been assumed by New
GranCare pursuant to the Assumption Agreement;
5. A Guaranty, Cross Default and Cross Collateralization Agreement, dated as
of June 30, 1992, from AMS Properties and GCIHCC in favor of HRP;
6. Memoranda of Lease, each dated as of December 28, 1990 or March 27, 1992
recorded with the Registry of Deeds of the appropriate county with respect
to each Leased Property;
7. Precautionary UCC Financing Statements by AMS Properties, showing AMS
Properties, as lessee, and HRP, as lessor, filed with the appropriate State
and County UCC filing office with respect to each Leased Property;
8. Amended and Restated HRP Shares Pledge Agreement, dated as of June 30,
1992, between HRP and AMS Properties, pursuant to which AMS Properties has
pledged the HRP Shares to HRP to secure its obligations to HRP;
9. Amended and Restated Voting Trust Agreement, dated as of June 30, 1992 from
AMS Properties to HRPT Advisors, Inc., as voting trustee;
9.1 Voting Trust Certificate;
9.2 Stock Power;
10. A Security Agreement, dated as of December 28, 1990 from AMS Properties to
HRP, granting HRP a security interest in all now owned and hereafter
acquired tangible personal property and all accounts receivable, contract
rights and general intangibles of AMS Properties;
11. A Collateral Assignment of Contracts and Permits, dated as of December 28,
1990 from AMS Properties to HRP, assigning to HRP all contracts and permits
of AMS Properties;
12. UCC Financing Statements/Fixture Filings by AMS Properties, showing AMS
Properties, as debtor, and HRP, as secured party, filed with the
appropriate UCC filing office and
<PAGE>
-2-
registries of deeds to perfect the interests of HRP as a secured creditor
under the security instruments referred to above;
13. An Amended and Restated Renovation Funding Agreement dated as of January
13, 1992, between AMS Properties and HRP;
14. Renovation Loan Agreement, dated as of March 28, 1992, by and between AMS
Properties and HRP relating to certain renovations to be made at the
Christopher East Health Care Center, Milwaukee, Wisconsin;
15. Promissory Note, dated as of March 28, 1992, in the original principal
amount of $1,250,000, executed by AMS Properties and accepted by HRP;
16. Security Agreement, dated as of March 28, 1992, made by AMS Properties in
favor of HRP;
17. A Pledge Agreement dated as of December 28, 1990, as supplemented by a
Pledge Agreement Supplement dated as of December 29, 1993, from Old
GranCare (as successor to AMS) to HRP pursuant to which all shares of
capital stock of AMS Properties are pledged to HRP, together with
certificates relating to the AMS Properties shares and stock powers
relating to such shares; the obligations and liabilities under such Pledge
Agreement and Pledge Agreement Supplement having been assumed by New
GranCare pursuant to the Assumption Agreement;
18. A Subordination Agreement dated as of December 28, 1990 among GranCare as
subordinate creditor, AMS Properties as debtor, and HRP as senior creditor;
the obligations and liabilities under such Subordination Agreement having
been assumed by New GranCare pursuant to the Assumption Agreement;
19. A Subordination Agreement dated as of December 28, 1990 among HMI as
subordinate creditor, AMS Properties as debtor and HRP as senior creditor;
20. A Subordination Agreement dated as of December 28, 1990 among AMS Green
Tree as subordinate creditor, AMS Properties as debtor and HRP as senior
creditor;
21. A Subordination Agreement dated as of December 28, 1990 among Am-Cal as
subordinate creditor, AMS Properties as debtor and HRP as senior creditor;
22. Consent Letter dated March 31, 1995 by HRP and consented to by GranCare,
AMS Properties and GCIHCC re: Subleases;
23. Assignment of Sublease Documents dated March 31, 1995 between AMS
Properties and HRP;
24. Assignment of Leases and Rents dated March 31, 1995 by AMS Properties re:
Subleases;
<PAGE>
-3-
25. A Rescission Agreement and Amendment to Transaction Documents dated as of
October 1, 1994 among Old GranCare, AMS Properties, GCIHCC and HRP; and
26. The Assumption Agreement by New GranCare, Inc. in favor of HRP.
27. Letter Agreement dated April 25, 1992, from HRP to GranCare, accepted by
GranCare;
28. Closing Escrow Agreement, dated May 29, 1992, among HRP, Samaritan,
Samaritan Arizona, Samaritan California, Samaritan South Dakota and GCI and
the Title Company, as escrow agent, delivering various closing documents
and providing information and instructions regarding delivery and recording
of such documents;
29. Master Lease Document, dated as of June 30, 1992, between HRP as Landlord
and GCI as Tenant;
30. Facility Leases, each dated as of June 30, 1992, between HRP as Landlord
and GCI as Tenant, for each Facility;
31. Amended and Restated HRP Shares Pledge Agreement, dated as of June 30,
1992, between HRP and AMS, pursuant to which AMS has pledged the HRP Shares
to HRP to secure its obligations to HRP;
32. Amended and Restated Voting Trust Agreement, dated as of June 30, 1992 from
AMS to HRPT Advisors, Inc., as voting trustee;
32.1 Voting Trust Certificate
32.2 Stock Power;
33. Guaranty, Cross Default and Cross Collateralization Agreement, dated as of
June 30, 1992, from AMS and GCI, in favor of HRP;
34. A Guaranty, dated as of June 30, 1992 from GranCare in favor of HRP
pursuant to which all obligations of AMS are guaranteed; the obligations
and liabilities under such Guaranty having been assumed by New GranCare,
Inc. pursuant to the Assumption Agreement referenced below;
35. Security Agreement, dated as of June 30, 1992, from GCI to HRP, granting
HRP a security interest in all tangible and intangible personal property
and including all accounts receivable, contract rights and general
intangibles;
36. Assignment of Contracts, Licenses and Permits, dated as of June 30, 1992,
from GCI to HRP, assigning to HRP, all contracts, licences and permits used
in connection with the operation of the Facilities;
<PAGE>
-4-
37. Pledge Agreement, dated as of June 30, 1992 Date, from GranCare pursuant to
which all of the capital stock of GCI is pledged to HRP to secure the
obligations of GCI;
38. Stock power relating to pledged shares;
39. A Subordination Agreement dated as of June 30, 1992 among GranCare as
subordinate creditor, GCI as debtor, and HRP as senior creditor; the
obligations and liabilities under such Subordination Agreement having been
assumed by New GranCare pursuant to the Assumption Agreement;
40. Subordination Agreement, dated as of June 30, 1992, among AMS as
subordinated creditor, GCI, as debtor and HRP as senior creditor, pursuant
to which all obligations of GCI to the subordinated creditor are
subordinated;
41. Representation Letter and Indemnification Agreement, dated June 30, 1992,
from GranCare, AMS and GCI, with respect to, inter alia, the continued
----- ----
effectiveness of the representations and warranties made by GranCare and
GCI in, and the absence of any Defaults under, the Transaction Documents;
42. Consent Letter dated March 31, 1995 by HRP and consented to by GCI,
GranCare and AMS re: HealthQuest Subleases;
43. Assignment of Sublease Documents dated March 31, 1995 between GCI and HRP
re: HealthQuest Subleases;
44. Assignment of Leases and Rents dated March 31, 1995 by GCI re: HealthQuest
Subleases;
45. Rescission Agreement and Amendment to Transaction Documents dated as of
October 1, 1994 among GranCare, AMS, GCI and HRP;
46. Assumption Agreement by New GranCare, Inc. in favor of HRP (the "Assumption
----------
Agreement").
---------
<PAGE>
SCHEDULE 2.6(b)
PERMITTED REDUCTION IN NO. OF LICENSED BEDS
-------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Facility Name Location Reduction in No. of Total Beds,
Beds as Reduced
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
AMS Properties, Inc. Facilities:
- --------------------------------
- ----------------------------------------------------------------------------------
Tarzana Los Angeles, CA 19 173
- ----------------------------------------------------------------------------------
Cedars HealthCare Center Lakewood, CO 25 175
- ----------------------------------------------------------------------------------
Cherrelyn HealthCare Center Littleton, CO 15 230
- ----------------------------------------------------------------------------------
Greentree Health and Clintonville, WI 12 66
Rehabilitation Center
- ----------------------------------------------------------------------------------
Pine Manor Health Care Embarrass, WI 20 101
Center
- ----------------------------------------------------------------------------------
Christopher East Health and Milwaukee, WI 93 215
Rehabilitation Center
- ----------------------------------------------------------------------------------
Northwest Health Care Milwaukee, WI 25 93
Center
- ----------------------------------------------------------------------------------
River Hills West Pewaukee, WI 8 248
- ----------------------------------------------------------------------------------
GCI Health Care Centers, Inc. Facilities:
- -----------------------------------------
- ----------------------------------------------------------------------------------
La Sallette Health and Stockton, CA 2 120
Rehabilitation Center
- ----------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE 6.5
POST CLOSING CONSENTS
---------------------
Palm Springs Health Care Center
. Change of Ownership application to the California Department of
Healthcare Services
. Medicaid notification
. Medicare notification, including Civil Rights Compliance package
Park Manor HealthCare Center
. Change of Ownership application to the Division of Health and Social
Services
. Certificate of Need transfer notification
. Medicaid notification
. Medicare notification, including Civil Rights Compliance package
Brian Centers - Wilson
. Change of Ownership application to the Department of Human Resources,
Division of Licensing and Certification
. Request for a Certificate of Need exemption to the Department of Human
Resources, Division of Facility Services
. Medicaid notification
. Medicare notification, including Civil Rights Compliance package
Brian Centers - Cabarrus
. Change of Ownership application to the Department of Human Resources,
Division of Licensing and Certification
. Request for a Certificate of Need exemption to the Department of Human
Resources, Division of Facility Services
. Medicaid notification
. Medicare notification, including Civil Rights Compliance package
Brian Centers - Winston-Salem
. Change of Ownership application to the Department of Human Resources,
Division of Licensing and Certification
. Request for a Certificate of Need exemption to the Department of Human
Resources, Division of Facility Services
. Medicaid notification
. Medicare notification, including Civil Rights Compliance package
<PAGE>
SCHEDULE 6.9
LICENSES AND PERMITS
--------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Facility Name Location Licenses, Permits
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AMS Properties Facilities:
- -------------------------
- ------------------------------------------------------------------------------------------------------------------
Flagship Newport Beach, CA . Department of Health Services Skilled Nursing
Facility license
. Medicare certification
. Medi-Cal certification
- ------------------------------------------------------------------------------------------------------------------
Lancaster Lancaster, CA . Department of Health Services Skilled Nursing
Facility license
. Medicare certification
. Medi-Cal certification__
- ------------------------------------------------------------------------------------------------------------------
Pacific Gardens Fresno, CA . Department of Health Services Skilled Nursing
Facility license
. Medicare certification
. Medi-Cal certification
- ------------------------------------------------------------------------------------------------------------------
Tarzana Los Angeles, CA . Department of Health Services Skilled Nursing
Facility license
. Medicare certification
. Medi-Cal certification
- ------------------------------------------------------------------------------------------------------------------
Thousand Oaks Thousand Oaks, CA . Department of Health Services Skilled Nursing
Facility license
. Medicare certification
. Medi-Cal certification
- ------------------------------------------------------------------------------------------------------------------
Van Nuys Los Angeles, CA . Department of Health Services Skilled Nursing
Facility license
. Medi-Cal certification
- ------------------------------------------------------------------------------------------------------------------
Cedars HealthCare Center Lakewood, CO . Department of Health Nursing Care Facility
. Medicare certification
. Medicaid certification
- ------------------------------------------------------------------------------------------------------------------
Cherrelyn HealthCare Center Littleton, CO . Department of Health Nursing Care Facility
license
. Medicare certification
. Medicaid certification
- ------------------------------------------------------------------------------------------------------------------
Greentree Health and Clintonville, WI . Division of Health and Social Services Home
Rehabilitation Center for Skilled Care license
. Medicare certification
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Facility Name Location Licenses, Permits
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
. Medicaid certification
- -------------------------------------------------------------------------------------------------------------------
Pine Manor Health Care Center Embarrass, WI . Division of Health and Social Services
Home for Skilled Care license
. Medicaid certification
. Division of Health and Social Service
. Facility for the Developmentally
Disabled license
- -------------------------------------------------------------------------------------------------------------------
Sunny Hill Health Care Madison, WI . Division of Health and Social Services
Home for Skilled Care license
. Medicare certification
. Medicaid certification
- -------------------------------------------------------------------------------------------------------------------
The Virginia Waukesha, WI . Division of Health and Social Services
Home for Skilled Care license
. Medicare certification
. Medicaid certification
- -------------------------------------------------------------------------------------------------------------------
Woodland Brookfield, WI . Division of Health and Social Services
Home for Skilled Care license
. Medicare certification
. Medicaid certification
- -------------------------------------------------------------------------------------------------------------------
Christopher East Health and Milwaukee, WI . Division of Health and Social Services
Rehabilitation Center Home for Skilled Care license
. Medicare certification
. Medicaid certification
- -------------------------------------------------------------------------------------------------------------------
Northwest Health Care Center Milwaukee, WI . Division of Health and Social Services
license
. Medicare certification
. Medicaid certification
- -------------------------------------------------------------------------------------------------------------------
River Hills West Pewaukee, WI . Division of Health and Social Services
license
. Medicare certification
. Medicaid certification
. Division of Community Services day care
license
. CBRF license
- -------------------------------------------------------------------------------------------------------------------
Brian Centers - Wilson Wilson, NC . Department of Human Resources Nursing
Facility license
. Medicare certification
. Medicaid Certification
- -------------------------------------------------------------------------------------------------------------------
Brian Centers - Cabarrus Concord, NC . Department of Human Resources Nursing
Facility license
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Facility Name Location Licenses, Permits
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
. Medicare certification
. Medicaid Certification
- -------------------------------------------------------------------------------------------------------------------
Brian Centers - Winston Salem Winston-Salem, NC . Department of Human Resources Nursing
Facility license
. Medicare certification
. Medicaid Certification
- -------------------------------------------------------------------------------------------------------------------
GCI Health Care Centers, Inc. Facilities:
- -----------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Village Green Nursing Home Phoenix, Arizona . Department of Health Services Nursing
Care Institution license
. Medicare certifications
. AHCCCS (ALTCS) (Medical) certification
- --------------------------------------------------------------------------------------------------------------------
La Mesa Care Center Yuma, Arizona . Department of Health Services Nursing
Care Institution license
. Medicare certification
. AHCCCS (ALTCS) Medicaid) certification
- --------------------------------------------------------------------------------------------------------------------
SunQuest Village of Yuma Yuma, Arizona Department of Health Services Supervisory
Care Home license
- --------------------------------------------------------------------------------------------------------------------
La Sallette Health and Stockton, CA . Department of Health Services Skilled
Rehabilitation Center Nursing Facility license
. Medicare certification
. Medi-Cal certification
- --------------------------------------------------------------------------------------------------------------------
Huron Nursing Home Huron, SD . Department of Public Health Nursing
Home license
. Medicare certification
. Medicaid certification
- --------------------------------------------------------------------------------------------------------------------
SunQuest Village of Huron Huron, SD None
- --------------------------------------------------------------------------------------------------------------------
Southridge Health Care Center Sioux Falls, SD . Department of Public Health Nursing
home license
. Medicare certification
. Medicaid certification
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE 6.12
SUBSIDIARIES AND AFFILIATES
---------------------------
GranCare, Inc. (DE)
American Pharmaceutical Services, Inc. (DE)
American Rehability Management, Inc. (TN)
American Rehability Services, Inc. (UT)
American Senior Health Services, Inc. (DE)
APS Holding Company, Inc. (NV)
APS Pharmacy Management, Inc. (DE)
Hospice Associates of America, Inc. (DE)
Hospice Management Partners, Inc. (DE)
Therapy Management Innovations, Inc. (NV)
<PAGE>
EXHIBIT A
---------
FORM OF THE PARAGON GUARANTY
----------------------------
<PAGE>
EXHIBIT B
---------
FORM OF THE CASH COLLATERAL PLEDGE
----------------------------------
<PAGE>
EXHIBIT C
---------
FORM OF THE SUBORDINATION AGREEMENT
-----------------------------------
<PAGE>
EXHIBIT D
---------
FORM OF THE GRANCARE GUARANTY
-----------------------------
<PAGE>
EXHIBIT E
---------
FORM OF THE LEASE AMENDMENT
---------------------------
<PAGE>
EXHIBIT 10.36
SUBORDINATION AGREEMENT
This SUBORDINATION AGREEMENT dated as of October 31, 1997 (this
"Agreement") by and among (i) the corporations listed on the signature pages
---------
hereto as "DEBTORS" (together with their respective successors and assigns,
collectively,"Debtors"); (ii) HEALTH AND RETIREMENT PROPERTIES TRUST, a real
-------
estate investment trust formed under the laws of the State of Maryland (together
with its successors and assigns, "HRP" or "Senior Creditor"), and (iii) the
--- ---------------
corporations listed on the signature pages hereto as "SUBORDINATED CREDITORS"
(together with their respective successors and assigns, collectively, the
"Subordinated Creditors").
----------------------
W I T N E S S E T H:
- - - - - - - - - -
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, each Subordinated Creditor and each Debtor agrees with
Senior Creditor that, until the Senior Obligations (as hereinafter defined) are
paid in full as herein provided, each such party to this Agreement will comply
with such of the following provisions as are applicable to it:
1. Certain Definitions.
-------------------
1.1 Senior Obligations. The term "Senior Obligations" shall mean (a) each
------------------ ------------------
and every obligation and liability, now existing or hereafter arising, of
Debtors, or any of them, to Senior Creditor under any agreement, note, lease,
master lease, mortgage, security agreement, pledge agreement, assignment,
guaranty or other agreement or instrument now or hereafter executed by, on the
one hand, Senior Creditor, and, on the other, any Debtor, and any agreement,
note, mortgage, security agreement, pledge agreement, assignment, guaranty or
other agreement or instrument hereafter executed in connection with any
extension, renewal, refunding or refinancing thereof, as any of the same may
hereafter from time to time be amended, modified or supplemented (collectively,
the "Senior Documents"), in each case as and when the same shall become due and
----------------
payable, whether at maturity, by acceleration or otherwise, according to the
terms thereof, and the due and punctual performance and observance of all such
payments and other obligations (including, without limitation, all fees,
expenses and other amounts owing to Senior Creditor under the Senior Documents,
whether now owing or hereafter incurred, in each case regardless of the extent
to which such amounts are allowed as claims against any Debtor in any
Reorganization, as such term is defined below (including any interest thereon
accruing after the commencement of any Reorganization and any other interest
that would have accrued thereon but for the commencement of such
Reorganization)).
1.2 Subordinated Obligations. The term "Subordinated Obligations" shall
------------------------ ------------------------
mean any and all obligations and liabilities, direct or contingent, now existing
or hereafter arising, of any Debtor to any Subordinated Creditor; provided that
--------
Subordinated Obligations shall not include obligations of any Debtor to any
Subordinated Creditor for the payment of goods and services (excluding
management services) provided to the Debtor by the Subordinated Creditor in the
<PAGE>
-2-
ordinary course of business and upon terms no less favorable to the Debtor than
would have been the case if such goods and services had been provided to the
Debtor by a non-affiliate.
1.3 Other Definitions. As used herein:
-----------------
(1) the term "Default" shall mean (i) any event or condition which
-------
relates to the payment of money and which constitutes or which with the
giving of notice or the passage of time or both would constitute an Event
of Default under, and as defined in, any Senior Document and (ii) any Event
of Default, as defined in any Senior Document; and
(2) the term "Subordinated Agreements" shall mean, collectively, any
-----------------------
agreement or instrument executed in connection with, relating to or
evidencing any Subordinated Obligations.
1.4 Other capitalized terms used and not defined herein shall have the
meanings assigned to them in the Master Lease Document dated as of December 28,
1990, as amended (hereinafter, as the same may be amended, modified or
supplemented from time to time, the "AMS Properties Master Lease"), among Senior
---------------------------
Creditor, as Landlord, and AMS Properties, Inc., as tenant, and the Master Lease
Document dated as of June 30, 1992, as amended (hereinafter, as the same may be
amended, modified or supplemented from time to time, the "GCIHCC Master Lease"),
-------------------
among Senior Creditor, as Landlord, and GCI Health Care Centers, Inc., as
tenant.
2. Subordination. The payment of any and all Subordinated Obligations shall at
-------------
all times be junior and subordinate and subject in right of payment and exercise
of remedies to the prior payment in full of all Senior Obligations to the extent
and in the manner herein provided.
3. Prohibited Payments; No Breach. No Debtor shall make, and no Subordinated
------------------------------
Creditor shall demand, accept or receive, any direct or indirect payment (in
cash, property, by setoff or otherwise) of or on account of any Subordinated
Obligations, and no such payment shall be due, unless and until all Senior
Obligations shall have been paid in full as herein provided; provided, however,
-------- -------
that so long as no Default shall have occurred and be continuing or would occur
after giving effect to such payment, any Debtor may make, and any Subordinated
Creditor may accept, a payment in respect of any Subordinated Obligation under
any Subordinated Agreement. Any Debtor's failure to pay any amount in respect of
any Subordinated Obligations under any Subordinated Agreement by reason of the
operation of this Agreement shall not constitute a breach of or default with
respect to such Subordinated Agreement on the part of such Debtor.
4. No Transfer. Each Subordinated Creditor agrees that it will not assign,
-----------
transfer or otherwise dispose of any of the Subordinated Obligations except to a
person who agrees in advance, in a writing delivered to Senior Creditor, to
become a party to this Agreement, and subject in any case to the prior written
consent of Senior Creditor.
5. Insolvency, etc.
---------------
<PAGE>
-3-
5.1 In the event of (i) any insolvency or bankruptcy proceeding, or any
receivership, liquidation, reorganization or other similar proceeding in
connection therewith, relative to any Debtor or its property, or (ii) any
proceedings for voluntary liquidation, dissolution or other winding-up of any
Debtor and whether or not involving insolvency or bankruptcy, or (iii) any
assignment or receivership for the benefit of creditors, or (iv) any
distribution, division, marshaling or application of any of the properties or
assets (including, without limitation, properties or assets securing the
Subordinated Obligations) of any Debtor or the proceeds thereof, to creditors,
voluntary or involuntary, and whether or not involving legal proceedings (a
"Reorganization"), then and in any such event all Senior Obligations shall first
--------------
be indefeasibly paid in full as herein provided before any payment or
distribution of any character, whether in cash, securities or other property,
shall be made in respect of the Subordinated Obligations, and in furtherance
thereof,
(1) any payment or distribution of any character, whether in cash,
securities or other property, which would otherwise (but for the
terms hereof) be payable or deliverable by Debtors in respect of
the Subordinated Obligations (including any payment or
distribution in respect of the Subordinated Obligations by reason
of any other indebtedness of Debtors being subordinated to the
Subordinated Obligations or by reason of any properties or assets
of Debtors securing the Subordinated Obligations), shall be paid
or delivered directly to Senior Creditor, until all Senior
Obligations shall have been paid in full as herein provided;
(2) each Subordinated Creditor irrevocably authorizes and empowers
(without imposing any obligation on) Senior Creditor and Senior
Creditor's representatives to demand, sue for, collect and
receive such payments and distributions in respect of the such
Subordinated Obligations and to receipt therefor, and to file and
prove all claims therefor and take all such other action
(including the right to vote the Subordinated Obligations) in the
name of Subordinated Creditor or otherwise, as Senior Creditor or
Senior Creditor's representatives may determine to be necessary
or appropriate; and
(3) each Subordinated Creditor irrevocably authorizes, empowers and
directs all receivers, trustees, liquidators, conservators and
others having authority in the premises to effect all such
payments and deliveries and agrees to execute and deliver to
Senior Creditor and Senior Creditor's representatives all such
further instruments confirming the above authorization, and all
such powers of attorney, proofs of claim, as signments of claim
and other instruments, and shall take all such other action as
may be requested by Senior Creditor or Senior Creditor's
representatives, in order to enable Senior Creditor to enforce
all claims upon or in respect of the Subordinated Obligations.
<PAGE>
-4-
5.2 Unless and until all Senior Obligations shall have been indefeasibly
paid in full as herein provided, no Subordinated Creditor will commence any
proceeding against any Debtor, or join with any creditor in any such proceeding,
under any bankruptcy, reorganization, readjustment of debt, arrangement of debt,
receivership, liquidation or insolvency law or statute of the federal or any
state government, unless the holders of the Senior Obligations shall also join
in bringing such proceeding.
6. Payments and Distributions Received. If any payment or distribution of any
-----------------------------------
character (whether in cash, securities or other property) or any security shall
be received by any Subordinated Creditor in contravention of any of the terms
hereof and before all Senior Obligations shall have been indefeasibly paid in
full as herein provided, such payment or distribution or security shall be held
in trust for the benefit of, and shall be paid over or delivered and transferred
to, Senior Creditor (or Senior Creditor's representatives) for application to
the payment of all Senior Obligations remaining unpaid, to the extent necessary
to pay all such Senior Obligations in full as herein provided. In the event of
the failure of any Subordinated Creditor to endorse or assign any such payment,
distribution or security on demand, Senior Creditor and Senior Creditor's
representatives shall be irrevocably authorized to endorse or assign the same.
7. Rights of Subrogation, etc. No Subordinated Creditor shall exercise any
--------------------------
right of subrogation which it may have with respect to the Senior Obligations
until the Senior Obligations shall have been indefeasibly paid in full following
the termination of the Senior Documents.
8. Security. So long as any of the Senior Obligations shall not have been
--------
indefeasibly paid in full following the termination of the Senior Documents, the
Debtors shall not give and the holders of the Subordinated Obligations shall not
demand, accept or receive, any security, direct or indirect, for any
Subordinated Obligations.
9. Subordination Not Affected, etc. The terms hereof, the subordination
-------------------------------
effected hereby, and the rights of Senior Creditor shall not be affected by (a)
any amendment of or addition or supplement to any Senior Obligations, or any
Senior Document, or any other instrument or agreement relating thereto; (b) any
exercise or nonexercise of any right, power or remedy under or in respect of any
Senior Obligations or any Senior Document, or any other instrument or agreement
relating thereto; (c) any sale, exchange, release or other transaction affecting
all or any part of any property at any time pledged or mortgaged to secure, or
however securing, any Senior Obligations; or (d) any waiver, consent, release,
indulgence, extension, renewal, modification, delay or other action, inaction or
omission, in respect of any Senior Obligations, or any other Senior Document, or
any instrument or agreement relating thereto; whether or not Subordinated
Creditor shall have had notice or knowledge of any of the foregoing.
1. Payment in Full. For all purposes hereof, the Senior Obligations shall not
---------------
be deemed to have been paid in full unless Senior Creditor (or its duly
authorized representative) shall have received cash equal to the amount of
Senior Obligations at the time outstanding.
<PAGE>
-5-
10. Limit on Right of Action. Each Subordinated Creditor, for itself and its
------------------------
successors and assigns, agrees for the benefit of Senior Creditor, that until
all Senior Obligations shall have been paid in full after the termination of the
Senior Documents, each Subordinated Creditor agrees it will not accelerate the
maturity date of the Subordinated Obligations or commence any action, suit or
other legal or equitable proceeding or otherwise seek to enforce its rights,
powers or remedies as such holder with respect to the payment of any
Subordinated Obligations, the performance of any obligations with respect
thereto or the collection thereof, whether under any Subordinated Agreement,
under applicable law or against any collateral.
11. Further Assurances. Each Debtor and each Subordinated Creditor, for itself
------------------
and its successors and assigns as holders of the Subordinated Obligations,
covenants to execute and deliver to Senior Creditor such further instruments and
documents and take such further actions as Senior Creditor may from time to time
request for the purpose of carrying out the provisions and intent of this
Agreement.
12. Requirement of Notice. Each Subordinated Creditor agrees to notify Senior
---------------------
Creditor immediately upon the occurrence of any default or event of default in
respect of the Subordinated Obligations or under any Subordinated Agreement or
any event which, upon notice or lapse of time or both, would constitute such a
default.
13. Notices. Any notice, request, demand, statement or consent ("Notice")
------- ------
desired or required to be given hereunder shall be in writing and shall be
delivered by hand, sent by certified mail, return receipt requested, or sent by
a nationally recognized commercial overnight delivery service with provisions
for a receipt, postage or delivery charges prepaid, and shall be deemed given
when actually delivered, if delivered by hand, (b) upon receipt, if sent by
certified mail, or (c) the next Business Day after being placed in the
possession of an overnight delivery service, if sent by an overnight delivery
service, and shall be addressed as follows:
if to any Debtor:
c/o Paragon Health Network, Inc.
One Ravinia Drive
Atlanta, GA
Attention: General Counsel
if to Senior Creditor:
Health and Retirement Properties Trust
400 Centre Street
Newton, MA 02158
Attn: President
<PAGE>
-6-
if to any Subordinated Creditor:
c/o Paragon Health Network, Inc.
One Ravinia Drive
Atlanta, GA
Attention: General Counsel
or to such other address as any party hereto may from time to time hereafter
designate to the others in writing.
14. Successors; Continuing Effect, etc. This Agreement is being entered into
----------------------------------
for the benefit of Senior Creditor and its respective successors and assigns.
This Agreement shall be a continuing agreement and shall be irrevocable and
shall remain in full force and effect so long as there are both Senior
Obligations and Subordinated Obligations outstanding. The liability of each
Subordinated Creditor hereunder shall be reinstated and revived, and the rights
of Senior Creditor shall continue, with respect to any amount at any time paid
on account of the Senior Obligations which shall thereafter be required to be
restored or returned by Senior Creditor in any Reorganization, all as though
such amount had not been paid. Senior Creditor will have relied and will
continue to rely upon the subordination provided for herein, and each
Subordinated Creditor and, by its acceptance hereof, each Debtor hereby waives
notice and proof of such reliance.
15. Entire Agreement, Amendment. This Agreement constitutes the entire
---------------------------
agreement of the parties and no modification or waiver of any provision of this
Agreement shall in any event be effective unless the same shall be in writing
signed by Senior Creditor and the Subordinated Creditor affected thereby.
16. Severability. Any provision of this Agreement which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof in that jurisdiction or affecting the validity or
enforceability of such provision in any other jurisdiction.
17. Miscellaneous. The headings in this Agreement are for convenience of
-------------
reference only and shall not alter or otherwise affect the meaning hereof. In
the event of any conflict between the provisions of this Agreement and the
provisions of any of the Senior Documents, or any of the Subordinated
Agreements, the provisions of this Agreement shall control. Each Debtor and each
Subordinated Creditor, jointly and severally, shall reimburse Senior Creditor
upon demand for all reasonable costs and expenses (including reasonable
attorney's fees and disbursements) paid or incurred by Senior Creditor in
connection with any enforcement of this Agreement in favor of Senior Creditor.
18. Counterparts. This Agreement may be executed in any number of counterparts,
------------
all of which taken together shall constitute one and the same instrument and any
parties hereto may execute this Agreement by signing any such counterpart.
<PAGE>
-7-
19. GOVERNING LAW.
-------------
EXCEPT AS TO MATTERS REGARDING THE INTERNAL AFFAIRS OF SENIOR CREDITOR AND
ISSUES OF OR LIMITATIONS ON ANY PERSONAL LIABILITY OF THE SHAREHOLDERS AND
TRUSTEES OF SENIOR CREDITOR FOR OBLIGATIONS OF SENIOR CREDITOR, AS TO WHICH THE
LAWS OF THE STATE OF MARYLAND SHALL GOVERN, THIS AGREEMENT AND ANY OTHER
INSTRUMENTS EXECUTED AND DELIVERED TO EVIDENCE, COMPLETE, OR PERFECT THE
TRANSACTIONS CONTEMPLATED HEREBY WILL BE INTERPRETED, CONSTRUED, APPLIED AND
ENFORCED IN ACCORDANCE WITH THE LAWS (OTHER THAN THE LAWS GOVERNING CONFLICTS OF
LAWS) OF THE COMMONWEALTH OF MASSACHUSETTS.
20. NON-LIABILITY OF TRUSTEES. THE DECLARATION OF TRUST ESTABLISHING SENIOR
-------------------------
CREDITOR, DATED OCTOBER 9, 1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS
THERETO (THE "DECLARATION"), IS DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS
AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND
RETIREMENT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION
COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO
TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SENIOR CREDITOR SHALL BE
HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR
CLAIM AGAINST, SENIOR CREDITOR. ALL PERSONS DEALING WITH SENIOR CREDITOR, IN ANY
WAY, SHALL LOOK ONLY TO THE ASSETS OF SENIOR CREDITOR FOR THE PAYMENT OF ANY SUM
OR THE PERFORMANCE OF ANY OBLIGATION.
[Intentionally left blank.]
<PAGE>
-8-
IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be
executed under seal by its duly authorized representative as of the day and year
first above written.
SENIOR CREDITOR:
HEALTH AND RETIREMENT PROPERTIES TRUST, a Maryland real
estate investment trust
By: /s/ David J. Hegarty
--------------------------
Name: David J. Hegarty
Title: President
SUBORDINATED CREDITORS:
PARAGON HEALTH NETWORK, INC., a Delaware corporation
By:____________________________
Name:
Title:
GRANCARE, INC., a Delaware corporation AMERICAN
PHARMACEUTICAL SERVICES, INC., a Delaware corporation
AMERICAN REHABILITY MANAGEMENT, INC., a Tennessee
corporation
AMERICAN REHABILITY SERVICES, INC., a Utah corporation
AMERICAN SENIOR HEALTH SERVICES, INC., a Delaware
corporation
APS HOLDING COMPANY, INC., a Nevada corporation
APS PHARMACY MANAGEMENT, INC., a Delaware corporation
HOSPICE ASSOCIATES OF AMERICA, INC., a Delaware
corporation
HOSPICE MANAGEMENT PARTNERS, INC., a Delaware
corporation
THERAPY MANAGEMENT INNOVATIONS, INC., a Nevada
corporation
By: /s/ Boyd P. Gentry
----------------------------
Name: Boyd P. Gentry
Title: Vice President
<PAGE>
-9-
DEBTORS:
AMS PROPERTIES, INC., a Delaware corporation
GCI HEALTH CARE CENTERS, INC., a Delaware corporation
By: /s/ M. Henry Day, Jr.
-----------------------------
Name: M. Henry Day, Jr.
Title: Assistant Secretary
Signature page to Subordination Agreement
dated as of October 31, 1997.
<PAGE>
EXHIBIT 10.37
AMENDMENT TO GCI HEALTH CARE CENTERS, INC.
FACILITY LEASES
AMENDMENT dated as of October 31, 1997 between HEALTH AND RETIREMENT
PROPERTIES TRUST, a real estate investment trust formed under the laws of the
State of Maryland ("HRP") and GCI HEALTH CARE CENTERS, INC., a Delaware
---
corporation ("GCIHCC")
------
W I T N E S S E T H:
WHEREAS, HRP, as landlord, and GCIHCC, as tenant, have entered into a
Master Lease Document, General Terms and Conditions dated as of June 30, 1992,
as amended (the "Master Lease"), and have also executed Facility Leases which
------------
incorporate by reference the Master Lease (collectively, the "Facility Leases")
---------------
relating to the health care facilities described on Exhibit A-2 to the Master
Lease;
WHEREAS, HRP and GCIHCC have agreed to amend the Facility Leases as
hereinafter provided;
NOW, THEREFORE, in consideration of the foregoing, and of other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, HRP and GCIHCC agree as follows:
SECTION 1. AMENDMENTS TO FACILITY LEASES
1.1 Paragraphs 4 and 5 of the Facility Lease for each Leased Property is
hereby amended in full to read as follows:
4. Fixed Term. The Fixed Term of this Lease is twenty (20) years
----------
and two hundred fourteen (214) days, commencing on July 1, 1992 (the
"Commencement Date"), and ending on January 31, 2013.
-----------------
5. Extended Terms. Subject to the provisions of Section 2.4 of the
--------------
Master Lease, Tenant is hereby granted the right to renew the Lease for two
(2) 10-year consecutive optional renewal terms for a maximum term if all
such options are exercised of twenty (20) years after the expiration of the
Fixed Term.
1.2 The first sentence of Paragraph 6 of the Facility Lease for each
Leased Property listed on Schedule 1 hereto is hereby amended to provide that
----------
the annual amount of initial Minimum Rent and the amount of each monthly
installment of initial Minimum Rent for such Leased Property are the respective
amounts set forth on Schedule 1 hereto.
----------
<PAGE>
-2-
SECTION 2. EFFECT ON FACILITY LEASES
1.3 Except as specifically provided above, the Facility Leases shall
remain in full force and effect and each is hereby ratified and confirmed.
1.4 The amendments set forth herein (i) do not constitute an amendment,
waiver or modification of any term, condition or covenant of any Facility Lease,
or any of the instruments or documents referred to therein, other than as
specifically set forth herein, and (ii) shall not prejudice any rights which HRP
or its successors and assigns may now or hereafter have under or in connection
with Facility Leases, as amended hereby, or any of the instruments or documents
referred to therein.
SECTION 3. EFFECTIVENESS
This Amendment shall become effective as of the date first above indicated
when a counterpart to this Amendment shall have been executed by each of the
parties hereto.
SECTION 4. COSTS, EXPENSES AND TAXES
GCIHCC agrees to pay all costs and expenses of HRP in connection with the
preparation, reproduction, execution and delivery of this Amendment, including
the reasonable fees and expenses of Sullivan & Worcester LLP, special counsel to
HRP with respect thereto.
SECTION 5. GOVERNING LAW
THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL SUBSTANTIVE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
SECTION 6. NO LIABILITY OF TRUSTEES
THE DECLARATION OF TRUST OF HRP, DATED OCTOBER 9, 1986, A COPY OF WHICH,
TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE
OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND,
PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST" REFERS TO THE
TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR
PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HRP
SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY
OBLIGATION OF, OR CLAIM AGAINST, HRP. ALL PERSONS DEALING WITH HRP, IN ANY WAY,
SHALL LOOK ONLY TO THE ASSETS OF HRP FOR THE PAYMENT OF ANY SUM OR THE
PERFORMANCE OF ANY OBLIGATION.
<PAGE>
-3-
IN WITNESS WHEREOF, the parties have executed this amendment as a sealed
instrument as of the date first above written.
LANDLORD:
HEALTH AND RETIREMENT
PROPERTIES TRUST,
a Maryland real estate
investment trust
By: /s/ David J. Hegarty
-------------------------------
Name: David J. Hegarty
Title: President
TENANT:
GCI HEALTH CARE CENTERS, INC.
By: /s/ M. Henry Day, Jr.
-------------------------------
Name: M. Henry Day, Jr.
Title: Assistant Secretary
<PAGE>
SCHEDULE 1 TO AMENDMENT
-----------------------
Schedule of Revised Minimum Rent Amounts
----------------------------------------
<TABLE>
<CAPTION>
Amount of
Aggregate Monthly
Facility Name State Yearly Installment of
- ------------- -----
Minimum Rent Minimum Rent
------------ ------------
<S> <C> <C> <C>
Village Green Nursing Arizona $ 436,479 $ 36,373.25
Home
La Mesa Care Center Arizona 337,939 28,161.58
SunQuest Village of Arizona 109,063 9,088.58
Yuma
La Sallette Health and CA 433,884 36,157.00
Rehabilitation Center
Huron Nursing Home SD 418,585 34,882.08
SunQuest Village of SD 127,206 10,600.50
Huron
Mom & Dads Home SD 435,716 36,309.67
and Health Care Center
$2,298,872.00 $191,572.67
============= ===========
</TABLE>
<PAGE>
EXHIBIT 10.48
EXECUTION COPY
================================================================================
$890,000,000
CREDIT AGREEMENT
among
PARAGON HEALTH NETWORK, INC.,
as Borrower,
The Several Lenders
from Time to Time Parties Hereto,
THE CHASE MANHATTAN BANK,
as Administrative Agent,
and
NATIONSBANK, N.A.,
as Documentation Agent
Dated as of November 4, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. DEFINITIONS................................................................. 1
1.1 Defined Terms................................................................ 1
-------------
1.2 Other Definitional Provisions................................................ 22
-----------------------------
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS............................................. 23
2.1 Term Loan Commitments........................................................ 23
---------------------
2.2 Procedure for Term Loan Borrowing............................................ 24
---------------------------------
2.3 Repayment of Term Loans...................................................... 24
-----------------------
2.4 Revolving Credit Commitments................................................. 25
----------------------------
2.5 Procedure for Revolving Credit Borrowing..................................... 25
----------------------------------------
2.6 Swing Line Commitment........................................................ 26
---------------------
2.7 Procedure for Swing Line Borrowing; Refunding of Swing Line Loans............ 26
-----------------------------------------------------------------
2.8 Commitment Fees, etc......................................................... 27
--------------------
2.9 Termination or Reduction of Revolving Credit Commitments..................... 28
--------------------------------------------------------
2.10 Optional Prepayments......................................................... 28
--------------------
2.11 Mandatory Prepayments........................................................ 28
---------------------
2.12 Conversion and Continuation Options.......................................... 29
-----------------------------------
2.13 Minimum Amounts and Maximum Number of Eurodollar Tranches.................... 30
---------------------------------------------------------
2.14 Interest Rates and Payment Dates............................................. 30
--------------------------------
2.15 Computation of Interest and Fees............................................. 30
--------------------------------
2.16 Inability to Determine Interest Rate......................................... 31
------------------------------------
2.17 Pro Rata Treatment and Payments.............................................. 31
-------------------------------
2.18 Requirements of Law.......................................................... 33
-------------------
2.19 Taxes........................................................................ 34
-----
2.20 Indemnity.................................................................... 35
---------
2.21 Change of Lending Office..................................................... 36
------------------------
2.22 Replacement of Lenders under Certain Circumstances........................... 36
--------------------------------------------------
SECTION 3. LETTERS OF CREDIT........................................................... 36
3.1 L/C Commitment............................................................... 36
--------------
3.2 Procedure for Issuance of Letter of Credit................................... 37
------------------------------------------
3.3 Commissions, Fees and Other Charges.......................................... 37
-----------------------------------
3.4 L/C Participations........................................................... 37
------------------
3.5 Reimbursement Obligation of the Borrower..................................... 38
----------------------------------------
3.6 Obligations Absolute......................................................... 39
--------------------
3.7 Letter of Credit Payments.................................................... 39
-------------------------
3.8 Applications................................................................. 39
------------
SECTION 4. REPRESENTATIONS AND WARRANTIES.............................................. 39
4.1 Financial Condition.......................................................... 39
-------------------
4.2 No Change.................................................................... 40
---------
4.3 Corporate Existence; Compliance with Law..................................... 41
----------------------------------------
4.4 Corporate Power; Authorization; Enforceable Obligations...................... 41
-------------------------------------------------------
4.5 No Legal Bar................................................................. 41
-----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
4.6 No Material Litigation....................................................... 41
----------------------
4.7 No Default................................................................... 42
----------
4.8 Ownership of Property; Liens................................................. 42
----------------------------
4.9 Intellectual Property........................................................ 42
---------------------
4.10 Taxes........................................................................ 42
-----
4.11 Federal Regulations.......................................................... 42
-------------------
4.12 Labor Matters................................................................ 42
-------------
4.13 ERISA........................................................................ 42
-----
4.14 Investment Company Act; Other Regulations.................................... 43
-----------------------------------------
4.15 Subsidiaries................................................................. 43
------------
4.16 Use of Proceeds.............................................................. 43
---------------
4.17 Environmental Matters........................................................ 43
---------------------
4.18 Accuracy of Information, etc................................................. 44
----------------------------
4.19 Security Documents........................................................... 45
------------------
4.20 Solvency..................................................................... 45
--------
4.21 Senior Indebtedness.......................................................... 45
-------------------
4.22 Health Care Permits.......................................................... 45
-------------------
SECTION 5. CONDITIONS PRECEDENT........................................................ 46
5.1 Conditions to Initial Extension of Credit.................................... 46
-----------------------------------------
5.2 Conditions to Each Extension of Credit....................................... 48
--------------------------------------
SECTION 6. AFFIRMATIVE COVENANTS....................................................... 49
6.1 Financial Statements......................................................... 49
--------------------
6.2 Certificates; Other Information.............................................. 49
-------------------------------
6.3 Payment of Obligations....................................................... 50
----------------------
6.4 Conduct of Business and Maintenance of Existence, etc........................ 50
-----------------------------------------------------
6.5 Maintenance of Property; Insurance........................................... 51
----------------------------------
6.6 Health Care Permits and Approvals............................................ 51
---------------------------------
6.7 Inspection of Property; Books and Records; Discussions....................... 51
------------------------------------------------------
6.8 Notices...................................................................... 51
-------
6.9 Environmental Laws........................................................... 52
------------------
6.10 Additional Collateral, etc................................................... 53
--------------------------
6.11 Permitted Acquisitions....................................................... 54
----------------------
SECTION 7. NEGATIVE COVENANTS.......................................................... 55
7.1 Financial Condition Covenants................................................ 55
-----------------------------
7.2 Limitation on Indebtedness................................................... 56
--------------------------
7.3 Limitation on Liens.......................................................... 57
--------------------
7.4 Limitation on Fundamental Changes............................................ 58
----------------------------------
7.5 Limitation on Sale of Assets................................................. 59
----------------------------
7.6 Limitation on Dividends...................................................... 60
-----------------------
7.7 Limitation on Capital Expenditures........................................... 60
----------------------------------
7.8 Limitation on Investments, Loans and Advances................................ 61
---------------------------------------------
7.9 Limitation on Optional Payments and Modifications of Debt Instruments, etc... 62
--------------------------------------------------------------------------
7.10 Limitation on Transactions with Affiliates................................... 62
------------------------------------------
7.11 Limitation on Sales and Leasebacks........................................... 62
----------------------------------
7.12 Health Care Permits and Approvals............................................ 62
---------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
7.13 Limitation on Changes in Fiscal Periods..................................... 63
---------------------------------------
7.14 Limitation on Negative Pledge Clauses....................................... 63
-------------------------------------
7.15 Limitation on Restrictions on Subsidiary Distributions...................... 63
------------------------------------------------------
7.16 Limitation on Lines of Business............................................. 63
-------------------------------
7.17 Limitation on Amendments to Recapitalization Documents, etc................. 63
-----------------------------------------------------------
SECTION 8. EVENTS OF DEFAULT........................................................... 63
SECTION 9. THE ADMINISTRATIVE AGENT.................................................... 67
9.1 Appointment................................................................. 67
-----------
9.2 Delegation of Duties........................................................ 67
--------------------
9.3 Exculpatory Provisions...................................................... 67
----------------------
9.4 Reliance by Administrative Agent............................................ 67
--------------------------------
9.5 Notice of Default........................................................... 68
-----------------
9.6 Non-Reliance on Administrative Agent and Other Lenders...................... 68
------------------------------------------------------
9.7 Indemnification............................................................. 68
---------------
9.8 Administrative Agent in Its Individual Capacity............................. 69
-----------------------------------------------
9.9 Successor Administrative Agent.............................................. 69
------------------------------
9.10 Authorization to Release Liens.............................................. 69
------------------------------
SECTION 10. MISCELLANEOUS.............................................................. 70
10.1 Amendments and Waivers...................................................... 70
----------------------
10.2 Notices..................................................................... 70
-------
10.3 No Waiver; Cumulative Remedies.............................................. 71
------------------------------
10.4 Survival of Representations and Warranties.................................. 71
------------------------------------------
10.5 Payment of Expenses and Taxes............................................... 71
-----------------------------
10.6 Successors and Assigns; Participations and Assignments...................... 72
-----------------------------------------------------
10.7 Adjustments; Set-off........................................................ 75
--------------------
10.8 Counterparts................................................................ 75
------------
10.9 Severability................................................................ 75
-----------
10.10 Integration................................................................. 75
-----------
10.11 GOVERNING LAW............................................................... 75
-------------
10.12 Submission To Jurisdiction; Waivers......................................... 76
-----------------------------------
10.13 Acknowledgements............................................................ 76
----------------
10.14 WAIVERS OF JURY TRIAL....................................................... 76
---------------------
10.15 Confidentiality............................................................. 76
---------------
</TABLE>
<PAGE>
SCHEDULES:
1.1A Commitments
1.1B Mortgaged Property
3.1 Existing Letters of Credit
4.1 Material Dispositions
4.4 Consents and Authorizations
4.6 Litigation
4.9 Intellectual Property Matters
4.15(a) Subsidiaries
4.15(b) Excluded Domestic Subsidiaries
4.17 Environmental Matters
4.19(a) UCC Filing Jurisdictions
4.19(b) Mortgage Filing Jurisdictions
4.22 Health Care Matters
7.2(d) Existing Indebtedness
7.3(f) Existing Liens
7.4(e) HRPT Permitted Dispositions
7.14 Existing Negative Pledges
7.15 Existing Subsidiary Restrictions
EXHIBITS:
A Form of Guarantee and Collateral Agreement
B Form of Compliance Certificate
C Form of Closing Certificate
D Form of Mortgage
E Form of Assignment and Acceptance
F Form of Legal Opinion of Powell, Goldstein, Frazer & Murphy LLP
G-1 Form of Term Note
G-2 Form of Revolving Credit Note
G-3 Form of Swing Line Note
G-4 Form of Alternative Term Note
G-5 Form of Alternative Revolving Credit Note
H Form of Prepayment Option Notice
<PAGE>
CREDIT AGREEMENT, dated as of November 4, 1997, among PARAGON HEALTH
NETWORK, INC., a Delaware corporation (the "Borrower"), the several banks and
--------
other financial institutions or entities from time to time parties to this
Agreement (the "Lenders"), NATIONSBANK, N.A., as documentation agent (in such
-------
capacity, the "Documentation Agent"), and THE CHASE MANHATTAN BANK, as
-------------------
Administrative Agent.
The parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the terms listed in
-------------
this Section 1.1 shall have the respective meanings set forth in this Section
1.1.
"ABR": for any day, a rate per annum (rounded upwards, if necessary,
---
to the next 1/16th of 1%) equal to the greatest of (a) the Prime Rate in effect
on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the
Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes
hereof: "Prime Rate" shall mean the rate of interest per annum publicly
----------
announced from time to time by the Administrative Agent as its prime rate in
effect at its principal office in New York City (the Prime Rate not being
intended to be the lowest rate of interest charged by the Administrative Agent
in connection with extensions of credit to debtors); "Base CD Rate" shall mean
------------
the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) a
fraction, the numerator of which is one and the denominator of which is one
minus the C/D Reserve Percentage and (b) the C/D Assessment Rate; "Three-Month
-----------
Secondary CD Rate" shall mean, for any day, the secondary market rate for three-
- -----------------
month certificates of deposit reported as being in effect on such day (or, if
such day shall not be a Business Day, the next preceding Business Day) by the
Board through the public information telephone line of the Federal Reserve Bank
of New York (which rate will, under the current practices of the Board, be
published in Federal Reserve Statistical Release H.15(519) during the week
following such day), or, if such rate shall not be so reported on such day or
such next preceding Business Day, the average of the secondary market quotations
for three-month certificates of deposit of major money center banks in New York
City received at approximately 10:00 A.M., New York City time, on such day (or,
if such day shall not be a Business Day, on the next preceding Business Day) by
the Administrative Agent from three New York City negotiable certificate of
deposit dealers of recognized standing selected by it; and "Federal Funds
-------------
Effective Rate" shall mean, for any day, 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 on the next succeeding 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
the day of such transactions received by the Administrative Agent from three
federal funds brokers of recognized standing selected by it. Any change in the
ABR due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the
Federal Funds Effective Rate shall be effective as of the opening of business on
the effective day of such change in the Prime Rate, the Three-Month Secondary CD
Rate or the Federal Funds Effective Rate, respectively.
"ABR Loans": Loans the rate of interest applicable to which is based upon
---------
the ABR.
"Acquisition": any acquisition, whether in a single transaction or series
-----------
of related transactions, by the Borrower or any one or more of its Subsidiaries
of (a) all or a substantial part of the assets, or of a business, unit or
division, of any Person, whether through purchase of assets or securities, by
merger or otherwise; (b) any Person that becomes a Subsidiary after giving
effect to such acquisition; or (c) control (as defined in clause (b) of the
definition of "Affiliate") of a partnership, joint venture or other Person.
<PAGE>
2
"Adjustment Date": as defined in the Pricing Grid.
---------------
"Administrative Agent": The Chase Manhattan Bank, together with its
--------------------
affiliates, as the arranger of the Commitments and as the administrative agent,
or collateral agent, as the case may be, for the Lenders under this Agreement
and the other Loan Documents, together with any of its successors.
"Affiliate": as to any Person, any other Person which, directly or
---------
indirectly, is in control of, is controlled by, or is under common control with,
such Person. For purposes of this definition, "control" of a Person means the
power, directly or indirectly, either to (a) vote 10% or more of the securities
having ordinary voting power for the election of directors (or persons
performing similar functions) of such Person or (b) direct or cause the
direction of the management and policies of such Person, whether by contract or
otherwise.
"Agreement": this Credit Agreement, as amended, supplemented or otherwise
---------
modified from time to time.
"Alternative Note": as defined in Section 10.6(f)(ii).
----------------
"Alternative Noteholder": as defined in Section 10.6(f)(ii).
----------------------
"Apollo Merger Sub": Apollo LCA Acquisition Corp., a Delaware corporation.
-----------------
"Applicable Margin": for each Type of Loan, the rate per annum set forth
-----------------
under the relevant column heading below:
<TABLE>
<CAPTION>
Eurodollar
ABR Loans Loans
---------- -----------
<S> <C> <C>
Revolving Credit Loans
and Swing Line Loans 1.25% 2.25%
Tranche A Term Loans 1.25% 2.25%
Tranche B Term Loans 1.50% 2.50%
Tranche C Term Loans 1.75% 2.75%
</TABLE>
; provided, that on and after the first Adjustment Date occurring after March
--------
31, 1998, the Applicable Margin with respect to Revolving Credit Loans, Swing
Line Loans and Tranche A Term Loans will be determined pursuant to the Pricing
Grid and provided further, that the Applicable Margin with respect to the
----------------
Tranche B Term Loans and the Tranche C Term Loans shall be reduced by 0.25%
during any period when the Consolidated Leverage Ratio reported on the most
recent Adjustment Date is equal to or less than 4.50 to 1.00 as at the end of
the relevant Reference Period (provided that such reduction will not apply
during any period when a Default has occurred and is continuing under Section
6.1 or an Event of Default shall have occurred and be continuing).
"Application": an application, in such form as the Issuing Lender may
-----------
specify from time to time, requesting the Issuing Lender to open a Letter of
Credit.
"Asset Sale": any Disposition of Property or series of related
----------
Dispositions of Property (including the issuance of Capital Stock of any
Subsidiary but excluding any Disposition of Property permitted by clause (a),
(b), (c) or (d) of Section 7.5).
"Asset Swap": as defined in Section 7.5(e).
----------
<PAGE>
3
"Assignee": as defined in Section 10.6(c).
--------
"Assignor": as defined in Section 10.6(c).
--------
"Assumed Debt": Indebtedness assumed in connection with an
------------
Acquisition made pursuant to Section 7.8(h), provided, that (a) such
--------
Indebtedness is outstanding at the time of such Acquisition and was not Incurred
in contemplation thereof, (b) the terms of such Indebtedness do not include a
cross-default, cross-acceleration or similar provision in respect of any other
Indebtedness of the Borrower or its Subsidiaries (other than any such provision
that relates solely to other related Assumed Debt held by the same lender or
group of lenders), (c) the terms of such Indebtedness do not permit an
acceleration of such Indebtedness, or require a modification, redemption or
prepayment of such Indebtedness, upon the occurrence of a change of control of
the Borrower or the Subsidiary Incurring such Indebtedness and (d) recourse for
repayment of such Indebtedness is limited to specified Property acquired
pursuant to such Acquisition.
"Attributable Debt": in respect of a Sale/Leaseback Transaction, as
-----------------
at the time of determination, the present value (discounted at the interest rate
assumed in making calculations in accordance with FAS 13) of the total
obligations of the Borrower or the relevant Subsidiary, as lessee, for rental
payments during the remaining term of the lease included in such Sale/Leaseback
Transaction (including any period for which such lease has been extended).
"Available Revolving Credit Commitment": as to any Revolving Credit
-------------------------------------
Lender at any time, an amount equal to the excess, if any, of (a) such Lender's
Revolving Credit Commitment over (b) such Lender's Revolving Extensions of
----
Credit; provided, that in calculating any Lender's Revolving Extensions of
--------
Credit for the purpose of determining such Lender's Available Revolving Credit
Commitment pursuant to Section 2.8(a), the aggregate principal amount of Swing
Line Loans then outstanding shall be deemed to be zero.
"Board": the Board of Governors of the Federal Reserve System of the
-----
United States (or any successor).
"Borrowing Date": any Business Day specified by the Borrower as a
--------------
date on which the Borrower requests the relevant Lenders to make Loans
hereunder.
"Business": as defined in Section 4.17(b).
--------
"Business Day": a day other than a Saturday, Sunday or other day on
------------
which commercial banks in New York City are authorized or required by law to
close.
"Capital Expenditures": for any period, with respect to any Person,
--------------------
the aggregate of all expenditures (other than those arising from Acquisitions
made pursuant to Section 7.8) by such Person and its Subsidiaries for the
acquisition or leasing (pursuant to a capital lease) of fixed or capital assets
or additions to equipment (including replacements, capitalized repairs and
improvements during such period) which should be capitalized under GAAP on a
consolidated balance sheet of such Person and its Subsidiaries.
"Capital Expenditures (Discretionary)": with respect to any Person,
------------------------------------
any Capital Expenditures which do not constitute Capital Expenditures
(Maintenance) of such Person.
<PAGE>
4
"Capital Expenditures (Maintenance)": with respect to any Person, any
----------------------------------
Capital Expenditures made in the ordinary course of business for maintenance or
upkeep of the assets of such Person.
"Capital Lease Obligations": as to any Person, the obligations of
-------------------------
such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP
and, for the purposes of this Agreement, the amount of such obligations at any
time shall be the capitalized amount thereof at such time determined in
accordance with GAAP.
"Capital Stock": any and all shares, interests, participations or
-------------
other equivalents (however designated) of capital stock of a corporation, any
and all equivalent ownership interests in a Person (other than a corporation)
and any and all warrants, rights or options to purchase any of the foregoing.
"Cash Equivalents": (a) marketable direct obligations issued by, or
----------------
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition; (b)
certificates of deposit, time deposits, eurodollar time deposits or overnight
bank deposits having maturities of six months or less from the date of
acquisition issued by any Lender or by any commercial bank organized under the
laws of the United States of America or any state thereof having combined
capital and surplus of not less than $500,000,000; (c) commercial paper of an
issuer rated at least A-2 by Standard & Poor's Ratings Services ("S&P") or P-2
by Moody's Investors Service, Inc. ("Moody's"), or carrying an equivalent rating
by a nationally recognized rating agency, if both of the two named rating
agencies cease publishing ratings of commercial paper issuers generally, and
maturing within six months from the date of acquisition; (d) repurchase
agreements relating to investments described in clauses (a) through (c) above
with a market value at least equal to the consideration paid in connection
therewith, with any Person that 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, if at the time of entering into such
agreement the long-term unsecured debt securities of such Person are rated at
least A by S&P or at least A2 by Moody's; (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 assets of the types described in
clauses (a) through (d) above; and (f) investments pursuant to the Borrower's
captive insurance programs made in compliance with applicable Requirements of
Law, including Medicare regulations.
"C/D Assessment Rate": for any day as applied to any ABR Loan, the
-------------------
annual assessment rate in effect on such day which is payable by a member of the
Bank Insurance Fund maintained by the Federal Deposit Insurance Corporation (the
"FDIC") classified as well-capitalized and within supervisory subgroup "B" (or a
----
comparable successor assessment risk classification) within the meaning of 12
C.F.R. (S) 327.4 (or any successor provision) to the FDIC (or any successor) for
the FDIC's (or such successor's) insuring time deposits at offices of such
institution in the United States.
"C/D Reserve Percentage": for any day as applied to any ABR Loan,
----------------------
that percentage (expressed as a decimal) which is in effect on such day, as
prescribed by the Board, for determining the maximum reserve requirement for a
Depositary Institution (as defined in Regulation D of the Board as in effect
from time to time) in respect of new non-personal time deposits in Dollars
having a maturity of 30 days or more.
<PAGE>
5
"Closing Date": the date on which the conditions precedent set forth
------------
in Section 5.1 shall have been satisfied, which date shall be no later than
November 17, 1997.
"Code": the Internal Revenue Code of 1986, as amended from time to
----
time.
"Collateral": all Property of the Loan Parties, now owned or
----------
hereafter acquired, upon which a Lien is purported to be created by any Security
Document.
"Collateral Agent": as defined in the Guarantee and Collateral
----------------
Agreement.
"Collateral Agent Agreement": as defined in the Guarantee and
--------------------------
Collateral Agreement.
"Commitment": as to any Lender, the sum of the Tranche A Term Loan
----------
Commitment, the Tranche B Term Loan Commitment, the Tranche C Term Loan
Commitment and the Revolving Credit Commitment of such Lender.
"Commitment Fee Rate": 1/2 of 1% per annum; provided, that on and
------------------- --------
after the first Adjustment Date occurring after the completion of two full
fiscal quarters of the Borrower after the Closing Date, the Commitment Fee Rate
will be determined pursuant to the Pricing Grid.
"Commonly Controlled Entity": an entity, whether or not incorporated,
--------------------------
which is under common control with the Borrower within the meaning of Section
4001 of ERISA or is part of a group which includes the Borrower and which is
treated as a single employer under Section 414 of the Code.
"Compliance Certificate": a certificate duly executed by a
----------------------
Responsible Officer substantially in the form of Exhibit B.
"Confidential Information Memorandum": the Confidential Information
-----------------------------------
Memorandum dated September 1997 and furnished to the Lenders.
"Consolidated Current Assets": at a particular date, all amounts
---------------------------
(other than cash and Cash Equivalents) which would, in conformity with GAAP, be
set forth opposite the caption "total current assets" (or any like caption) on a
consolidated balance sheet of the Borrower and its Subsidiaries at such date.
"Consolidated Current Liabilities": at a particular date, all amounts
--------------------------------
which would, in conformity with GAAP, be set forth opposite the caption "total
current liabilities" (or any like caption) on a consolidated balance sheet of
the Borrower and its Subsidiaries at such date, but excluding (a) the current
portion of any Funded Debt of the Borrower and its Subsidiaries and (b) without
duplication of clause (a) above, all Indebtedness consisting of Revolving Credit
Loans or Swing Line Loans to the extent otherwise included therein.
"Consolidated EBITDA": for any period, Consolidated Net Income for
-------------------
such period plus, without duplication and to the extent reflected as a charge in
----
the statement of such Consolidated Net Income for such period, the sum of (a)
total income tax expense, (b) interest expense, amortization or writeoff of debt
discount and debt issuance costs and commissions, discounts and other fees and
charges associated with Indebtedness (including the Loans), (c) depreciation and
amortization expense, (d) amortization of intangibles (including, but not
limited to, goodwill) and organization costs, (e) any extraordinary or non-
recurring expenses or losses (including, whether or not otherwise includable as
a separate item in the statement of such Consolidated Net Income for such
period, losses on sales of assets
<PAGE>
6
outside of the ordinary course of business) or, with respect to the computation
of the financial covenants contained in Section 7.1 for any Reference Period
ending on or prior to September 30, 1998, writeoffs or changes to the income
statements increasing the amount of reserves, in an aggregate amount not to
exceed $15,000,000, of accounts receivable of the Borrower and its Subsidiaries,
(f) any other non-cash charges, (g) with respect to the computation of the
financial covenants contained in Section 7.1 for any Reference Period ending on
or prior to September 30, 1998, fees and expenses related to the transactions
contemplated by the Recapitalization Agreement (including conforming accounting
adjustments) and the financing thereof in an aggregate amount equal to the
lesser of the actual amount of such expenses and $122,000,000 and (h) with
respect to the computation of the financial covenants contained in Section 7.1,
for the Reference Period ending: (a) December 31, 1997, $12,000,000, (b) March
31, 1998, $9,000,000 and (c) June 30, 1998, $6,000,000, and minus, to the extent
-----
included in the statement of such Consolidated Net Income for such period, the
sum of (a) interest income, (b) any extraordinary or non-recurring income or
gains (including, whether or not otherwise includable as a separate item in the
statement of such Consolidated Net Income for such period, gains on the sales of
assets outside of the ordinary course of business) and (c) any other non-cash
income, all as determined on a consolidated basis.
"Consolidated EBITDAR": for any period, Consolidated EBITDA for such
--------------------
period plus Consolidated Rent Expense for such period.
----
"Consolidated Fixed Charge Coverage Ratio": for any period, the ratio
----------------------------------------
of (a) Consolidated EBITDAR for such period less the aggregate amount actually
paid by the Borrower and its Subsidiaries in cash during such period on account
of Capital Expenditures (Maintenance) (excluding the principal amount of
Indebtedness Incurred in connection with such expenditures) to (b) Consolidated
Fixed Charges for such period.
"Consolidated Fixed Charges": for any period, the sum (without
--------------------------
duplication) of (a) Consolidated Interest Expense for such period (excluding
noncash interest expense), (b) scheduled payments made during such period on
account of principal of Indebtedness of the Borrower or any of its Subsidiaries
(including the Term Loans) and (c) Consolidated Rent Expense for such period.
"Consolidated Interest Coverage Ratio": for any period, the ratio of
------------------------------------
(a) Consolidated EBITDA for such period to (b) Consolidated Interest Expense for
such period.
"Consolidated Interest Expense": for any period, total interest
-----------------------------
expense (including that attributable to Capital Lease Obligations and noncash
interest expense attributable to the Senior Subordinated Discount Notes referred
to in the definition of Senior Subordinated Notes) of the Borrower and its
Subsidiaries for such period with respect to all outstanding Indebtedness of the
Borrower and its Subsidiaries (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 Rate Protection
Agreements to the extent such net costs are allocable to such period in
accordance with GAAP, but excluding interest expense in respect of Indebtedness
that is defeased substantially concurrently with the Closing Date to the extent
such defeasance is financed with the Incurrence of Indebtedness), determined net
of (a) cash interest income received by the Borrower or any of its Subsidiaries
during such period and (b) cash dividends paid to the Borrower during such
period in respect of common stock of HRPT owned by the Borrower or a Wholly
Owned Subsidiary of the Borrower on the Closing Date.
"Consolidated Leverage Ratio": as at the last day of any period, the
---------------------------
ratio of (a) the sum of (i) Consolidated Total Debt on such day and (ii)
obligations of the Borrower or any of its Subsidiaries
<PAGE>
7
on such day under any synthetic leases to (b) the sum of (i) Consolidated EBITDA
for such period and (ii) rental payments paid by the Borrower or any of its
Subsidiaries for such period under any synthetic leases.
"Consolidated Leverage Ratio Stepdown Date": the first date on which
-----------------------------------------
the aggregate Purchase Prices of the type referred to in Section 7.8(h)(iii)
expended and/or incurred in any fiscal year, combined with the aggregate amount
of Capital Expenditures (Discretionary) made during such fiscal year (other than
amounts permitted to be carried over from the immediately preceding fiscal
year), exceeds $125,000,000 in reliance on the provisos contained in Sections
7.7 and 7.8(h).
"Consolidated Net Income": for any period, the consolidated net
-----------------------
income (or loss) of the Borrower and its Subsidiaries, determined on a
consolidated basis in accordance with GAAP; provided that there shall be
--------
excluded therefrom (a) the income (or deficit) of any Person (other than a
Subsidiary of the Borrower) in which the Borrower or any of its Subsidiaries has
an ownership interest, except to the extent that any such income is actually
received by the Borrower or such Subsidiary in the form of dividends or similar
distributions and (b) the undistributed earnings of any Subsidiary of the
Borrower to the extent that the declaration or payment of dividends or similar
distributions by such Subsidiary to the Borrower is not at the time permitted by
the terms of any Contractual Obligation or Requirement of Law applicable to such
Subsidiary.
"Consolidated Net Worth": as of the day of determination, all items
----------------------
which in conformity with GAAP would be included under shareholders' equity on a
consolidated balance sheet of the Borrower and its Subsidiaries on such day,
determined without giving effect to any reduction thereof resulting from (a)
non-recurring noncash losses or (b) the acquisition in a transaction accounted
for as a "pooling of interests" of a Person that (i) has undergone a
recapitalization transaction within two years prior to the date of such
acquisition (including, but not limited to a repurchase of its own Capital
Stock) and (ii) has a negative net worth (but only to the extent such negative
net worth resulted from such recapitalization).
"Consolidated Rent Expense": for any period, the aggregate amount of
-------------------------
fixed and contingent rentals payable by the Borrower or any of its Subsidiaries
for such period with respect to leases of real and personal property, net of
rental income from any subleases relating to any of the aforementioned leases,
determined on a consolidated basis in accordance with GAAP.
"Consolidated Total Debt": at any date, the aggregate principal
-----------------------
amount of all Indebtedness of the Borrower and its Subsidiaries at such date,
determined on a consolidated basis in accordance with GAAP.
"Consolidated Working Capital": the excess of Consolidated Current
----------------------------
Assets over Consolidated Current Liabilities.
"Contractual Obligation": as to any Person, any provision of any
----------------------
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
Property is bound.
"Control Investment Affiliate": as to any Person, any other Person
----------------------------
which (a) directly or indirectly, is in control of, is controlled by, or is
under common control with, such Person and (b) is organized by such Person
primarily for the purpose of making equity or debt investments in one or more
companies. For purposes of this definition, "control" of a Person means the
power, directly or indirectly,
<PAGE>
8
to direct or cause the direction of the management and policies of such Person
whether by contract or otherwise.
"Default": any of the events specified in Section 8, whether or not
-------
any requirement for the giving of notice, the lapse of time, or both, has been
satisfied.
"Disposition": with respect to any Property, any sale, lease, sale
-----------
and leaseback, assignment, conveyance, transfer or other disposition thereof;
and the terms "Dispose" and "Disposed of" shall have correlative meanings.
------- -----------
"Dollars" and "$": dollars in lawful currency of the United States of
------- -
America.
"Domestic Subsidiary": any Subsidiary of the Borrower organized under
-------------------
the laws of any jurisdiction within the United States of America.
"ECF Percentage": 75%; provided, that, with respect to each fiscal
-------------- --------
year of the Borrower, the ECF Percentage shall be reduced to 50% if the
Consolidated Leverage Ratio as of the last day of such fiscal year is not
greater than 4.50 to 1.0.
"Employee Loans": as defined in Section 7.8(d).
--------------
"Employee Loan Outstanding Amount": as defined in Section 7.8(d).
--------------------------------
"Environmental Laws": any and all foreign, Federal, state, local or
------------------
municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, requirements of any Governmental Authority or other Requirements of Law
(including common law) regulating, relating to or imposing liability or
standards of conduct concerning protection of human health or the environment,
as now or may at any time hereafter be in effect.
"ERISA": the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time.
"Eurocurrency Reserve Requirements": for any day as applied to a
---------------------------------
Eurodollar Loan made by any Lender, the aggregate (without duplication) of the
maximum rates (expressed as a decimal) of reserve requirements in effect on such
day (including, without limitation, basic, supplemental, marginal and emergency
reserves under any regulations of the Board or other Governmental Authority
having jurisdiction with respect thereto) dealing with reserve requirements
prescribed for eurocurrency funding (currently referred to as "Eurocurrency
Liabilities" in Regulation D of the Board) maintained by a member bank of the
Federal Reserve System as actually incurred by such Lender.
"Eurodollar Base Rate": with respect to each day during each Interest
--------------------
Period pertaining to a Eurodollar Loan, the rate per annum equal to the rate at
which the Administrative Agent is offered Dollar deposits at or about 10:00
A.M., New York City time, two Business Days prior to the beginning of such
Interest Period in the interbank eurodollar market where the eurodollar and
foreign currency and exchange operations in respect of its Eurodollar Loans are
then being conducted for delivery on the first day of such Interest Period for
the number of days comprised therein and in an amount comparable to the amount
of its Eurodollar Loans to be outstanding during such Interest Period.
"Eurodollar Loans": Loans the rate of interest applicable to which is
----------------
based upon the Eurodollar Rate.
<PAGE>
9
"Eurodollar Rate": with respect to each day during each Interest
---------------
Period pertaining to a Eurodollar Loan, a rate per annum determined for such day
in accordance with the following formula (rounded upward to the nearest 1/100th
of 1%):
Eurodollar Base Rate
-----------------------------------------------
1.00 - Eurocurrency Reserve Requirements
"Eurodollar Tranche": the collective reference to Eurodollar Loans
------------------
the then current Interest Periods with respect to all of which begin on the same
date and end on the same later date (whether or not such Loans shall originally
have been made on the same day).
"Event of Default": any of the events specified in Section 8,
----------------
provided that any requirement for the giving of notice, the lapse of time, or
- --------
both, has been satisfied.
"Excess Cash Flow": for any fiscal year of the Borrower, the excess,
----------------
if any, of (a) the sum, without duplication, of (i) Consolidated Net Income for
such fiscal year, (ii) an amount equal to the amount of all non-cash charges
deducted in arriving at such Consolidated Net Income, (iii) decreases in
Consolidated Working Capital for such fiscal year provided that, with respect to
--------
the fiscal year ending September 30, 1998 no change in Consolidated Working
Capital during the fiscal quarter ending December 31, 1997 shall be included in
such Excess Cash Flow calculation, and (iv) an amount equal to the aggregate net
non-cash loss on the Disposition of Property by the Borrower and its
Subsidiaries during such fiscal year (other than sales in the ordinary course of
business), to the extent deducted in arriving at such Consolidated Net Income
over (b) the sum, without duplication, of (i) an amount equal to the amount of
- ----
all non-cash credits included in arriving at such Consolidated Net Income, (ii)
the aggregate amount actually paid by the Borrower and its Subsidiaries in cash
during such fiscal year on account of Capital Expenditures (excluding the
principal amount of Indebtedness Incurred in connection with such expenditures
and any such expenditures financed with the proceeds of any Reinvestment
Deferred Amount), (iii) the aggregate amount actually paid by the Borrower and
its Subsidiaries in cash during such fiscal year on account of Acquisitions made
pursuant to Section 7.8(h) (excluding the principal amount of Indebtedness
Incurred in connection with such Acquisitions and any such Acquisitions financed
with the proceeds of any Reinvestment Deferred Amount), (iv) the aggregate
amount of all prepayments of Revolving Credit Loans and Swing Line Loans during
such fiscal year to the extent accompanying permanent optional reductions of the
Revolving Credit Commitments and all optional prepayments of the Term Loans
during such fiscal year, (v) the aggregate amount of all regularly scheduled
principal payments of Funded Debt (including, without limitation, the Term
Loans) of the Borrower and its Subsidiaries made during such fiscal year (other
than in respect of any revolving credit facility to the extent there is not an
equivalent permanent reduction in commitments thereunder), (vi) increases in
Consolidated Working Capital for such fiscal year provided that, with respect to
--------
the fiscal year ending September 30, 1998 no change in Consolidated Working
Capital during the fiscal quarter ending December 31, 1997 shall be included in
such Excess Cash Flow calculation and (vii) an amount equal to the aggregate net
non-cash gain on the Disposition of Property by the Borrower and its
Subsidiaries during such fiscal year (other than sales in the ordinary course of
business), to the extent included in arriving at such Consolidated Net Income.
"Excess Cash Flow Application Date": as defined in Section 2.11(c).
---------------------------------
"Exchange Act": as defined in Section 8(1)(i).
------------
"Excluded Domestic Subsidiaries": the Domestic Subsidiaries listed on
------------------------------
Schedule 4.15(b), each of which is prohibited by applicable Requirements of Law
or by any Contractual
<PAGE>
10
Obligation from executing and delivering the Guarantee and Collateral Agreement
or which is inactive and, in the case of prohibitions resulting from Contractual
Obligations, with respect to which such Subsidiary, after using its commercially
reasonable best efforts, is unable to obtain a consent or waiver from the holder
of such contractual obligation to such execution and delivery, and deems it
materially detrimental to prepay the Indebtedness to which such Contractual
Obligations relate, provided, that in no event shall PHCMI or any of its
--------
Subsidiaries be required to seek the consent of Omega.
"Excluded Foreign Subsidiaries": any Foreign Subsidiary the pledge of
-----------------------------
all of whose Capital Stock as Collateral would, in the good faith judgment of
the Borrower, result in adverse tax consequences to the Borrower or any of its
Subsidiaries.
"Facility": each of (a) the Tranche A Term Loan Commitments and the
--------
Tranche A Term Loans made thereunder (the "Tranche A Term Loan Facility"), (b)
----------------------------
the Tranche B Term Loan Commitments and the Tranche B Term Loans made thereunder
(the "Tranche B Term Loan Facility"), (c) the Tranche C Term Loan Commitments
----------------------------
and the Tranche C Term Loans made thereunder (the "Tranche C Term Loan
-------------------
Facility") and (d) the Revolving Credit Commitments and the extensions of
revolving credit made thereunder (the "Revolving Credit Facility").
-------------------------
"Federal Funds Effective Rate": as defined in the definition of ABR.
----------------------------
"Foreign Subsidiary": any Subsidiary of the Borrower that is not a
------------------
Domestic Subsidiary.
"Funded Debt": as to any Person, all Indebtedness of such Person that
-----------
matures more than one year from the date of its creation or matures within one
year from such date but is renewable or extendable, at the option of such
Person, to a date more than one year from such date or arises under a revolving
credit or similar agreement that obligates the lender or lenders thereunder to
extend credit during a period of more than one year from such date, including,
without limitation, all current maturities and current sinking fund payments in
respect of such Indebtedness whether or not required to be paid within one year
from the date of its creation and, in the case of the Borrower, Indebtedness in
respect of the Loans.
"GAAP": generally accepted accounting principles in the United States
----
of America as in effect from time to time set forth in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Board and the rules and regulations of the
Securities and Exchange Commission, or in such other statements by such other
entity as may be in general use by significant segments of the accounting
profession, which are applicable to the circumstances of the Borrower as of the
date of determination, except that for purposes of Section 7.1, GAAP shall be
determined on the basis of such principles in effect on the date hereof and
consistent with those used in the preparation of the most recent audited
financial statements delivered pursuant to Section 4.1(b). In the event that
any "Accounting Change" (as defined below) shall occur and such change results
in a change in the method of calculation of financial covenants, standards or
terms in this Agreement, then the Borrower and the Administrative Agent agree to
enter into negotiations in order to amend such provisions of this Agreement so
as to equitably reflect such Accounting Changes with the desired result that the
criteria for evaluating the Borrower's financial condition shall be the same
after such Accounting Changes as if such Accounting Changes had not been made.
Until such time as such an amendment shall have been executed and delivered by
the Borrower, the Administrative Agent and the Required Lenders, all financial
covenants, standards and terms in this Agreement shall continue to be calculated
or construed as if such Accounting Changes had not occurred. "Accounting
----------
Changes" refers to changes in accounting principles required by the promulgation
- -------
of any rule, regulation, pronouncement
<PAGE>
11
or opinion by the Financial Accounting Standards Board of the American Institute
of Certified Public Accountants or, if applicable, the Securities and Exchange
Commission (or successors thereto or agencies with similar functions).
"Governmental Authority": any nation or government, any state or
----------------------
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government (including, without limitation, the National Association of
Insurance Commissioners).
"GranCare": GranCare, Inc., a Delaware corporation, formerly known as
--------
New GranCare, Inc.
"Guarantee and Collateral Agreement": the Guarantee and Collateral
----------------------------------
Agreement to be executed and delivered by the Borrower and each Subsidiary
Guarantor, substantially in the form of Exhibit A, as the same may be amended,
supplemented or otherwise modified from time to time.
"Guarantee Obligation": as to any Person (the "guaranteeing person"),
-------------------- -------------------
any obligation of (a) the guaranteeing person or (b) another Person (including,
without limitation, any bank under any letter of credit), to induce the creation
of which, the guaranteeing person has issued a reimbursement, counterindemnity
or similar obligation, in either case guaranteeing or in effect guaranteeing any
Indebtedness, leases, dividends or other obligations (the "primary obligations")
-------------------
of any other third Person (the "primary obligor") in any manner, whether
---------------
directly or indirectly, including, without limitation, any obligation of the
guaranteeing person, whether or not contingent, (i) to purchase any such primary
obligation or any Property constituting direct or indirect security therefor,
(ii) to advance or supply funds (1) for the purchase or payment of any such
primary obligation or (2) to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor, (iii) to purchase Property, securities or services primarily
for the purpose of assuring the owner of any such primary obligation of the
ability of the primary obligor to make payment of such primary obligation or
(iv) otherwise to assure or hold harmless the owner of any such primary
obligation against loss in respect thereof; provided, however, that the term
-------- -------
Guarantee Obligation shall not include endorsements of instruments for deposit
or collection in the ordinary course of business. The amount of any Guarantee
Obligation of any guaranteeing person shall be deemed to be the lower of (a) an
amount equal to the stated or determinable amount of the primary obligation in
respect of which such Guarantee Obligation is made and (b) the maximum amount
for which such guaranteeing person may be liable pursuant to the terms of the
instrument embodying such Guarantee Obligation, unless such primary obligation
and the maximum amount for which such guaranteeing person may be liable are not
stated or determinable, in which case the amount of such Guarantee Obligation
shall be such guaranteeing person's maximum reasonably anticipated liability in
respect thereof as determined by the Borrower in good faith.
"Health Care Facility": any ownership interest in a facility which
--------------------
provides any level of geriatric care, home care, medical care (including,
without limitation, sub-acute care), assisted living or rehabilitative services,
whether licensed as a skilled nursing facility, intermediate care facility,
personal care facility, out-patient clinic or hospital (including, without
limitation, any long-term acute care hospital) or any products or services
reasonably related thereto.
"Health Care Permit": every accreditation, authorization, certificate
------------------
of need, license or permit that is required by any applicable Governmental
Authority to own, lease, operate or manage a Health Care Facility of the
Borrower or any of its Subsidiaries.
<PAGE>
12
"HRPT": Health and Retirement Properties Trust.
----
"HRPT Transaction Documents": as defined in the Restructure and Asset
--------------------------
Exchange Agreement, dated as of November 4, 1997, among HRPT, the Borrower, AMS
Properties, Inc., and GCI Health Care Centers, Inc.
"Incur": as defined in Section 7.2; and the terms "Incurred" and
----- --------
"Incurrence" shall have correlative meanings.
- -----------
"Indebtedness": of any Person at any date, without duplication, (a)
------------
all indebtedness of such Person for borrowed money, (b) all obligations of such
Person for the deferred purchase price of Property or services (other than
current trade payables incurred in the ordinary course of such Person's business
or trade payables which, though not current, are being contested in good faith
by such Person), (c) all obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments, (d) all indebtedness created or arising
under any conditional sale or other title retention agreement with respect to
Property acquired by such Person, (e) all Capital Lease Obligations of such
Person, (f) all obligations of such Person, contingent or otherwise, as an
account party under acceptance, letter of credit or similar facilities, (g) all
obligations of such Person, contingent or otherwise, to purchase, redeem, retire
or otherwise acquire for value any Capital Stock (other than common stock) of
such Person, (h) all Guarantee Obligations of such Person in respect of
obligations of the kind referred to in clauses (a) through (g) above; (i) all
obligations of the kind referred to in clauses (a) through (h) above secured by
(or for which the holder of such obligation has an existing right, contingent or
otherwise, to be secured by) any Lien on Property (including, without
limitation, accounts and contract rights) owned by such Person, whether or not
such Person has assumed or become liable for the payment of such obligation; (j)
to the extent not reflected in any of the foregoing any obligation (as primary
obligor or guarantor) of such Person under any synthetic lease by such Person or
any of its Subsidiaries; and (k) for the purposes of Section 8(e) only, all
obligations of such Person in respect of Interest Rate Protection Agreements.
"Insolvency": with respect to any Multiemployer Plan, the condition
----------
that such Plan is insolvent within the meaning of Section 4245 of ERISA.
"Insolvent": pertaining to a condition of Insolvency.
---------
"Intellectual Property": the collective reference to all rights,
---------------------
priorities and privileges relating to intellectual property, whether arising
under United States, multinational or foreign laws or otherwise, including,
without limitation, copyrights, copyright licenses, patents, patent licenses,
trademarks, trademark licenses, technology, know-how and processes, and all
rights to sue at law or in equity for any infringement or other impairment
thereof, including the right to receive all proceeds and damages therefrom.
"Interest Payment Date": (a) as to any ABR Loan, the last day of each
---------------------
March, June, September and December and the final maturity date in respect
thereof, (b) as to any Eurodollar Loan having an Interest Period of three months
or less, the last day of such Interest Period, (c) as to any Eurodollar Loan
having an Interest Period longer than three months, each day which is three
months, or a whole multiple thereof, after the first day of such Interest Period
and the last day of such Interest Period and (d) as to any Loan (other than any
Revolving Credit Loan that is an ABR Loan and any Swing Line Loan), the date of
any repayment or prepayment made in respect thereof.
"Interest Period": as to any Eurodollar Loan, (a) initially, the
---------------
period commencing on the borrowing or conversion date, as the case may be, with
respect to such Eurodollar Loan and ending one,
<PAGE>
13
two, three, six or (if available to all Lenders under the relevant Facility)
twelve months thereafter, as selected by the Borrower in its notice of borrowing
or notice of conversion, as the case may be, given with respect thereto; and (b)
thereafter, each period commencing on the last day of the next preceding
Interest Period applicable to such Eurodollar Loan and ending one, two, three,
six or (if available to all Lenders under the relevant Facility) twelve months
thereafter, as selected by the Borrower by irrevocable notice to the
Administrative Agent not less than three Business Days prior to the last day of
the then current Interest Period with respect thereto; provided that, all of the
--------
foregoing provisions relating to Interest Periods are subject to the following:
(i) if any Interest Period would otherwise end on a day that is
not a Business Day, such Interest Period shall be extended to the next
succeeding Business Day unless the result of such extension would be to
carry such Interest Period into another calendar month in which event such
Interest Period shall end on the immediately preceding Business Day;
(ii) any Interest Period with respect to a Revolving Credit Loan,
a Tranche A Term Loan, a Tranche B Term Loan or a Tranche C Term Loan that
would otherwise extend beyond the Revolving Credit Termination Date or
beyond the date final payment is due on the Tranche A Term Loans, the
Tranche B Term Loans or the Tranche C Term Loans, as the case may be, shall
end on the Revolving Credit Termination Date or such due date, as
applicable;
(iii) any Interest Period that begins on the last Business Day of
a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall end on the last Business Day of a calendar month; and
(iv) the Borrower shall use its commercially reasonable efforts
to select Interest Periods so as not to require a scheduled payment of any
Eurodollar Loan during an Interest Period for such Loan.
"Interest Rate Protection Agreement": any interest rate protection
----------------------------------
agreement, interest rate futures contract, interest rate option, interest rate
cap or other interest rate hedge arrangement, to or under which the Borrower or
any of its Subsidiaries is a party or a beneficiary on the date hereof or
becomes a party or a beneficiary after the date hereof.
"Issuing Lender": the collective reference to (a) The Chase Manhattan
--------------
Bank or any of its Affiliates and (b) one other Revolving Credit Lender
(together with any of its Affiliates) selected by the Borrower with the approval
of the Administrative Agent, in each case in its capacity as issuer of any
Letter of Credit.
"L/C Commitment": $50,000,000.
--------------
"L/C Fee Payment Date": the last day of each March, June, September
--------------------
and December and the last day of the Revolving Credit Commitment Period.
"L/C Obligations": at any time, an amount equal to the sum of (a) the
---------------
aggregate then undrawn and unexpired amount of the then outstanding Letters of
Credit and (b) the aggregate amount of drawings under Letters of Credit which
have not then been reimbursed pursuant to Section 3.5.
"L/C Participants": the collective reference to all the Revolving
----------------
Credit Lenders other than the Issuing Lender.
<PAGE>
14
"LCA": Living Centers of America, Inc., a Delaware corporation,
---
which, after consummation of the Recapitalization, will be known as Paragon
Health Network, Inc.
"LCA Merger Sub": LCA Acquisition Sub, Inc., a Delaware corporation.
--------------
"Letters of Credit": as defined in Section 3.1(a).
-----------------
"Lien": any mortgage, pledge, hypothecation, assignment, deposit
----
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement and any capital lease having
substantially the same economic effect as any of the foregoing).
"Loan": any loan made by any Lender pursuant to this Agreement.
----
"Loan Documents": this Agreement, the Security Documents, the
--------------
Collateral Agent Agreement and the Notes.
"Loan Parties": the Borrower and each Subsidiary of the Borrower
------------
which is a party to a Loan Document.
"Majority Facility Lenders": with respect to any Facility, the
-------------------------
holders of more than 50% of the aggregate unpaid principal amount of the Term
Loans or the Total Revolving Extensions of Credit, as the case may be,
outstanding under such Facility (or, in the case of the Revolving Credit
Facility, prior to any termination of the Revolving Credit Commitments, the
holders of more than 50% of the Total Revolving Credit Commitments).
"Majority Revolving Credit Facility Lenders": the Majority Facility
------------------------------------------
Lenders in respect of the Revolving Credit Facility.
"Material Adverse Effect": a material adverse effect on (a) the
-----------------------
business, assets, property, condition (financial or otherwise) or prospects of
the Borrower and its Subsidiaries taken as a whole or (b) the validity or
enforceability of this Agreement or any of the other Loan Documents or the
rights or remedies of the Administrative Agent or the Lenders hereunder or
thereunder.
"Material Environmental Amount": an amount payable by the Borrower
-----------------------------
and/or its Subsidiaries in excess of $10,000,000 for remedial costs, compliance
costs, compensatory damages, punitive damages, fines or penalties in connection
with any Environmental Law, or any combination thereof.
"Material Lease": any lease agreement with respect to a Health Care
--------------
Facility or Health Care Facilities for which either (a) total revenues for such
Health Care Facility or Health Care Facilities for the most recent Reference
Period for which the relevant financial information is available represent 3% or
more of the consolidated revenues of the Borrower and its Subsidiaries during
such Reference Period or (b) the portion of Consolidated EBITDA contributed by
the operation of such Health Care Facility or Health Care Facilities for the
most recent Reference Period for which the relevant financial information is
available represents 3% or more of Consolidated EBITDA during such Reference
Period.
"Materials of Environmental Concern": any gasoline or petroleum
----------------------------------
(including crude oil or any fraction thereof) or petroleum products or any
hazardous or toxic substances, materials or wastes,
<PAGE>
15
defined or regulated as such in or under or that could result in liability under
any Environmental Law, including, without limitation, asbestos, polychlorinated
biphenyls and urea-formaldehyde insulation.
"Mortgaged Properties": the real properties listed on Schedule 1.1B,
--------------------
as to which the Collateral Agent for the benefit of the Lenders shall be granted
a Lien pursuant to the Mortgages.
"Mortgages": each of the mortgages, deeds to secure debt and deeds of
---------
trust made by any Loan Party in favor of, or for the benefit of, the Collateral
Agent for the benefit of the Lenders, substantially in the form of Exhibit D
(with such changes thereto as shall be advisable under the law of the
jurisdiction in which such mortgage or deed of trust is to be recorded), as the
same may be amended, supplemented or otherwise modified from time to time.
"Multiemployer Plan": a Plan which is a multiemployer plan as defined
------------------
in Section 4001(a)(3) of ERISA.
"Net Cash Proceeds": (a) in connection with any Asset Sale or any
-----------------
Recovery Event, the proceeds thereof in the form of cash and Cash Equivalents
(including any such proceeds received by way of deferred payment of principal
pursuant to a note or installment receivable or purchase price adjustment
receivable or otherwise, but only as and when received) of such Asset Sale or
Recovery Event, net of attorneys' fees, accountants' fees, investment banking
fees, amounts required to be applied to the repayment of Indebtedness secured by
a Lien expressly permitted hereunder on any asset which is the subject of such
Asset Sale or Recovery Event (other than any Lien pursuant to a Security
Document) and other customary fees and expenses actually incurred in connection
therewith and net of taxes paid or reasonably estimated to be payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements) and (b) in connection with any
issuance or sale of equity securities or debt securities or instruments or the
incurrence of loans, the cash proceeds received from such issuance or
incurrence, net of attorneys' fees, investment banking fees, accountants' fees,
underwriting discounts and commissions and other customary fees and expenses
actually incurred in connection therewith.
"New PHCMI Subsidiary": any Wholly Owned Subsidiary created or
--------------------
acquired by PHCMI after the Closing Date which shall become the lessee of any
Substitute Omega Property.
"Non-Excluded Taxes": as defined in Section 2.19(a).
------------------
"Non-U.S. Lender": as defined in Section 2.19(b).
---------------
"Notes": the collective reference to any promissory note evidencing
-----
Loans.
"Obligations": the unpaid principal of and interest on (including,
-----------
without limitation, interest accruing after the maturity of the Loans and
Reimbursement Obligations and interest accruing after the filing of any petition
in bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding, relating to the Borrower, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding) the Loans and all other
obligations and liabilities of the Borrower to the Administrative Agent or to
any Lender (or, in the case of Interest Rate Protection Agreements, any
affiliate of any Lender), whether direct or indirect, absolute or contingent,
due or to become due, or now existing or hereafter incurred, which may arise
under, out of, or in connection with, this Agreement, any other Loan Document,
the Letters of Credit, any Interest Rate Protection Agreement entered into with
any Lender or any affiliate of any Lender or any other document made, delivered
or given in connection herewith or therewith, whether on account of principal,
interest, reimbursement obligations, fees,
<PAGE>
16
indemnities, costs, expenses (including, without limitation, all fees, charges
and disbursements of counsel to the Administrative Agent or to any Lender that
are required to be paid by the Borrower pursuant hereto) or otherwise.
"Old GranCare": GranCare, Inc., a California corporation, and formerly
------------
the parent company of GranCare.
"Omega": Omega Healthcare Investors, Inc., a Maryland corporation.
-----
"Omega Letter of Credit": the $9,000,000 letter of credit issued by
----------------------
First Union National Bank for the benefit of Omega and for the account of
GranCare, or any Letter of Credit issued in replacement thereof by the Issuing
Lender for the benefit of Omega and for the account of the Borrower.
"Participant": as defined in Section 10.6(b).
-----------
"PBGC": the Pension Benefit Guaranty Corporation established pursuant
----
to Subtitle A of Title IV of ERISA (or any successor).
"Permitted Acquisitions": as defined in Section 7.8(h).
----------------------
"Permitted Investors": the collective reference to the Sponsor and
-------------------
its Control Investment Affiliates.
"Person": an individual, partnership, corporation, limited liability
------
company, business trust, joint stock company, trust, unincorporated association,
joint venture, Governmental Authority or other entity of whatever nature.
"PHCMI": Professional Health Care Management, Inc., a Michigan
-----
corporation and a Wholly Owned Subsidiary of GranCare.
"Plan": at a particular time, any employee benefit plan which is
----
covered by ERISA and in respect of which the Borrower or a Commonly Controlled
Entity is (or, if such plan were terminated at such time, would under Section
4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of
ERISA.
"Pricing Grid": the pricing grid attached hereto as Annex A.
------------
"Pro Forma Balance Sheet": as defined in Section 4.1(a).
-----------------------
"Projections": as defined in Section 6.2(c).
-----------
"Property": any right or interest in or to property of any kind
--------
whatsoever, whether real, personal or mixed and whether tangible or intangible,
including, without limitation, Capital Stock.
"Purchase Price": with respect to any Acquisition, the sum (without
--------------
duplication) of (a) the amount of cash paid by the Borrower and its Subsidiaries
in connection with such Acquisition, (b) the sum of (i) the value (as determined
for purposes of such Acquisition in accordance with the applicable acquisition
agreement) of all Capital Stock of the Borrower issued or given as consideration
in connection with such Acquisition and (ii) the Qualified Net Cash Equity
Proceeds applied to finance such Acquisition, (c) the principal amount (or, if
less, the accreted value) at the time of such Acquisition
<PAGE>
17
of all Indebtedness incurred, assumed or acquired by Borrower and its
Subsidiaries in connection with such Acquisition, (d) all additional purchase
price amounts in connection with such Acquisition in the form of earnouts,
deferred purchase price and other contingent obligations that should be recorded
as a liability on the balance sheet of the Borrower and its Subsidiaries in
accordance with GAAP, Regulation S-X under the Securities Act of 1933, as
amended, or any other rule or regulation of the United States Securities and
Exchange Commission, (e) all amounts paid by the Borrower and its Subsidiaries
in respect of covenants not to compete, consulting agreements and other
affiliated contracts in connection with such Acquisition, and (f) the aggregate
fair market value of all other consideration given by the Borrower and its
Subsidiaries in connection with such Acquisition.
"Qualified Net Cash Equity Proceeds": the Net Cash Proceeds of any
----------------------------------
offering of Capital Stock of the Borrower so long as (a) such offering was made
in express contemplation of an Acquisition, (b) such Capital Stock is not
mandatorily redeemable and (c) such Acquisition is consummated within 90 days
after receipt by the Borrower of such Net Cash Proceeds.
"Recapitalization": as defined in Section 5.1(b).
----------------
"Recapitalization Agreement": the collective reference to (i) the
--------------------------
Amended and Restated Agreement and Plan of Merger, dated as of September 17,
1997, among the Sponsor, Apollo LCA Acquisition Corporation and LCA and (ii) the
Amended and Restated Agreement and Plan of Merger, dated as of September 17,
1997, among LCA, Grancare and the Sponsor, as each of the same is amended,
restated, supplemented or otherwise modified from time to time in accordance
with the terms hereof.
"Recovery Event": any settlement of or payment in respect of any
--------------
property or casualty insurance claim or any condemnation proceeding relating to
any asset of the Borrower or any of its Subsidiaries.
"Reference Period": with respect to any date, means the period of
----------------
four consecutive fiscal quarters of the Borrower immediately preceding such date
or, if such date is the last day of a fiscal quarter, ending on such date.
"Refunded Swing Line Loans": as defined in Section 2.7(b).
-------------------------
"Refunding Date": as defined in Section 2.7(c).
--------------
"Register": as defined in Section 10.6(d).
--------
"Regulation U": Regulation U of the Board as in effect from time to
------------
time.
"Reimbursement Obligation": the obligation of the Borrower to
------------------------
reimburse the Issuing Lender pursuant to Section 3.5 for amounts drawn under
Letters of Credit.
"Reinvestment Deferred Amount": with respect to any Reinvestment
----------------------------
Event, the aggregate Net Cash Proceeds received by the Borrower or any of its
Subsidiaries in connection therewith which are not applied to prepay the Term
Loans pursuant to Section 2.11(b) as a result of the delivery of a Reinvestment
Notice.
"Reinvestment Event": any Asset Sale or Recovery Event in respect of
------------------
which the Borrower has delivered a Reinvestment Notice.
<PAGE>
18
"Reinvestment Notice": a written notice executed by a Responsible
-------------------
Officer stating that no Event of Default has occurred and is continuing and that
the Borrower (directly or indirectly through a Subsidiary) intends and expects
to use all or a specified portion of the Net Cash Proceeds of an Asset Sale or
Recovery Event to acquire or improve assets useful in its business (including by
way of making Capital Expenditures (Discretionary)) or, in the case of a
Recovery Event only, to repair, restore, rebuild or replace the Property which
was the subject of the Recovery Event.
"Reinvestment Prepayment Amount": with respect to any Reinvestment
------------------------------
Event, the Reinvestment Deferred Amount relating thereto less any amount
expended prior to the relevant Reinvestment Prepayment Date to acquire or
improve assets useful in the Borrower's business (including by way of making
Capital Expenditures (Discretionary)).
"Reinvestment Prepayment Date": with respect to any Reinvestment
----------------------------
Event, the earlier of (a) the date occurring twelve months after such
Reinvestment Event (or, in the case of a Recovery Event with respect to which
repair, rebuilding or replacement of the Property which was the subject of the
Recovery Event can be completed but not within such twelve-month period, such
longer period as may be required to complete such repair, rebuilding or
replacement so long as Borrower or its applicable Subsidiary shall have expended
at least 50% of the property or casualty insurance proceeds received in
connection with such Recovery Event for the repair, rebuilding or replacement of
such Property within twelve months of such Recovery Event and diligently
prosecutes to complete such repair, rebuilding or replacement), and (b) the date
on which the Borrower shall have determined not to, or shall have otherwise
ceased to, acquire assets useful in the Borrower's business with all or any
portion of the relevant Reinvestment Deferred Amount, or, in the case of a
Recovery Event only, to repair, restore, rebuild or replace the Property which
was the subject of the Recovery Event.
"Related Fund": with respect to any Lender that is a fund that
------------
invests in loans, any other fund that invests in loans and is managed by the
same investment advisor as such Lender or by an Affiliate of such investment
advisor.
"Reorganization": with respect to any Multiemployer Plan, the
--------------
condition that such plan is in reorganization within the meaning of Section 4241
of ERISA.
"Reportable Event": any of the events set forth in Section 4043(b) of
----------------
ERISA, other than those events as to which the thirty day notice period is
waived under subsection .27, .28, .29, .30, .31, .32, .34 or .35 of PBGC Reg.
(S) 4043.
"Required Lenders": the holders of more than 50% of (a) until the
----------------
Closing Date, the Commitments and (b) thereafter, the sum of (i) the aggregate
unpaid principal amount of the Term Loans and (ii) the Total Revolving Credit
Commitments or, if the Revolving Credit Commitments have been terminated, the
Total Revolving Extensions of Credit.
"Required Prepayment Lenders": the Majority Facility Lenders in
---------------------------
respect of each Facility.
"Requirement of Law": as to any Person, the Certificate or Articles
------------------
of Incorporation and By-Laws or other organizational or governing documents of
such Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its Property or to which such Person or
any of its Property is subject.
<PAGE>
19
"Responsible Officer": the chief executive officer, president, chief
-------------------
financial officer or treasurer of the Borrower, but in any event, with respect
to financial matters, the chief financial officer or treasurer of the Borrower.
"Revolving Credit Commitment": as to any Lender, the obligation of
---------------------------
such Lender, if any, to make Revolving Credit Loans and participate in Swing
Line Loans and Letters of Credit, in an aggregate principal and/or face amount
not to exceed the amount set forth under the heading "Revolving Credit
Commitment" opposite such Lender's name on Schedule 1.1A, as the same may be
changed from time to time pursuant to the terms hereof. The original amount of
the Total Revolving Credit Commitments is $150,000,000.
"Revolving Credit Commitment Period": the period from and including
----------------------------------
the Closing Date to the Revolving Credit Termination Date.
"Revolving Credit Lender": each Lender which has a Revolving Credit
-----------------------
Commitment or which has made Revolving Credit Loans or other Revolving
Extensions of Credit.
"Revolving Credit Loans": as defined in Section 2.4.
----------------------
"Revolving Credit Percentage": as to any Revolving Credit Lender at
---------------------------
any time, the percentage which such Lender's Revolving Credit Commitment then
constitutes of the Total Revolving Credit Commitments (or, at any time after the
Revolving Credit Commitments shall have expired or terminated, the percentage
which the aggregate principal amount of such Lender's Revolving Extensions of
Credit then outstanding constitutes of the aggregate principal amount of the
Revolving Extensions of Credit then outstanding).
"Revolving Credit Termination Date": the earlier of (a) the Scheduled
---------------------------------
Revolving Credit Termination Date and (b) the date on which the Revolving Credit
Commitments shall terminate as provided herein.
"Revolving Extensions of Credit": as to any Revolving Credit Lender
------------------------------
at any time, an amount equal to the sum of (a) the aggregate principal amount of
all Revolving Credit Loans made by such Lender then outstanding, (b) such
Lender's Revolving Credit Percentage of the L/C Obligations then outstanding and
(c) such Lender's Revolving Credit Percentage of the aggregate principal amount
of Swing Line Loans then outstanding.
"Sale/Leaseback Transaction": as defined in Section 7.11.
--------------------------
"Scheduled Revolving Credit Termination Date": March 31, 2004.
-------------------------------------------
"Security Documents": the collective reference to the Guarantee and
------------------
Collateral Agreement, the Mortgages and all other security documents now or
hereafter delivered to the Administrative Agent granting a Lien on any Property
of any Person to secure, among other things, the obligations and liabilities of
any Loan Party under any Loan Document.
"Senior Subordinated Note Indenture": the collective reference to the
----------------------------------
Indentures entered into by the Borrower in connection with the issuance of the
Senior Subordinated Notes, as the same may be amended, supplemented or otherwise
modified from time to time in accordance with Section 7.9.
<PAGE>
20
"Senior Subordinated Notes": the collective reference to the Senior
-------------------------
Subordinated Notes of the Borrower due 2007 and the Senior Subordinated Discount
Notes of the Borrower due 2007, in each case issued on the Closing Date, as the
same may be amended, supplemented or otherwise modified from time to time in
accordance with Section 7.9.
"Single Employer Plan": any Plan which is covered by Title IV of
--------------------
ERISA, but which is not a Multiemployer Plan.
"Solvent": when used with respect to any Person, means that, as of
-------
any date of determination, (a) the amount of the "present fair saleable value"
of the assets of such Person will, as of such date, exceed the amount of all
"liabilities of such Person, contingent or otherwise", as of such date, as such
quoted terms are determined in accordance with applicable federal and state laws
governing determinations of the insolvency of debtors, (b) the present fair
saleable value of the assets of such Person will, as of such date, be greater
than the amount that will be required to pay the probable liability of such
Person on its debts as such debts become absolute and matured, (c) such Person
will not have, as of such date, an unreasonably small amount of capital with
which to conduct its business, and (d) such Person will be able to pay its debts
as they mature. For purposes of this definition, (i) "debt" means liability on
a "claim", and (ii) "claim" means any (x) right to payment, whether or not such
a right is reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured
or (y) right to an equitable remedy for breach of performance if such breach
gives rise to a right to payment, whether or not such right to an equitable
remedy is reduced to judgment, fixed, contingent, matured or unmatured,
disputed, undisputed, secured or unsecured.
"Specified Change of Control": a "Change of Control" as defined in
---------------------------
the Senior Subordinated Note Indenture.
"Specified Facilities": as defined in Section 4.17(a).
--------------------
"Sponsor": Apollo Management, L.P, a Delaware limited partnership.
-------
"Subsidiary": as to any Person, a corporation, partnership, limited
----------
liability company or other entity of which shares of stock or other ownership
interests having ordinary voting power (other than stock or such other ownership
interests having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other managers of such
corporation, partnership or other entity are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through one
or more intermediaries, or both, by such Person. Unless otherwise qualified,
all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall
refer to a Subsidiary or Subsidiaries of the Borrower.
"Subsidiary Guarantor": each Subsidiary of the Borrower other than
--------------------
any Excluded Domestic Subsidiary and any Excluded Foreign Subsidiary.
"Substitute Omega Property": any Health Care Facility and related
-------------------------
personal property conveyed to PHCMI after the Closing Date (which Health Care
Facility may be leased to a New PHCMI Subsidiary), which Health Care Facility is
or becomes encumbered by a mortgage, deed to secure debt or deed of trust in
favor of Omega, for the purpose of serving as substitute collateral for the
obligations of PHCMI to Omega, in exchange for the surrender by Omega of the
Omega Letter of Credit; provided that the Substitute Omega Property shall not,
--------
in the aggregate, (i) represent more than $3,500,000 of the
<PAGE>
21
Borrower's Consolidated EBITDA for the most recent Reference Period for which
the relevant financial information is available or (ii) have a maximum aggregate
capacity in excess of 600 beds.
"Swing Line Commitment": the obligation of the Swing Line Lender to
---------------------
make Swing Line Loans pursuant to Section 2.6 in an aggregate principal amount
at any one time outstanding not to exceed $35,000,000.
"Swing Line Lender": The Chase Manhattan Bank, in its capacity as the
-----------------
lender of Swing Line Loans.
"Swing Line Loans": as defined in Section 2.6.
----------------
"Swing Line Participation Amount": as defined in Section 2.7(c).
-------------------------------
"Term Loan Lenders": the collective reference to the Tranche A Term
-----------------
Loan Lenders, the Tranche B Term Loan Lenders and the Tranche C Term Loan
Lenders.
"Term Loans": the collective reference to the Tranche A Term Loans,
----------
Tranche B Term Loans and Tranche C Term Loans.
"Total Revolving Credit Commitments": at any time, the aggregate
----------------------------------
amount of the Revolving Credit Commitments at such time.
"Total Revolving Extensions of Credit": at any time, the aggregate
------------------------------------
amount of the Revolving Extensions of Credit of the Revolving Credit Lenders at
such time.
"Tranche A Term Loan": as defined in Section 2.1.
-------------------
"Tranche A Term Loan Commitment": as to any Tranche A Term Loan
------------------------------
Lender, the obligation of such Lender, if any, to make a Tranche A Term Loan to
the Borrower hereunder in a principal amount equal to the amount set forth under
the heading "Tranche A Term Loan Commitment" opposite such Lender's name on
Schedule 1.1A. The original aggregate amount of the Tranche A Term Loan
Commitments is $240,000,000.
"Tranche A Term Loan Lender": each Lender which has a Tranche A Term
--------------------------
Loan Commitment or which has made a Tranche A Term Loan.
"Tranche A Term Loan Percentage": as to any Tranche A Term Loan
------------------------------
Lender at any time, the percentage which such Lender's Tranche A Term Loan
Commitment then constitutes of the aggregate Tranche A Term Loan Commitments
(or, at any time after the Closing Date, the percentage which the aggregate
principal amount of such Lender's Tranche A Term Loans then outstanding
constitutes of the aggregate principal amount of the Tranche A Term Loans then
outstanding).
"Tranche B Term Loan": as defined in Section 2.1.
-------------------
"Tranche B Term Loan Commitment": as to any Tranche B Term Loan
------------------------------
Lender, the obligation of such Lender, if any, to make a Tranche B Term Loan to
the Borrower hereunder in a principal amount equal to the amount set forth under
the heading "Tranche B Term Loan Commitment" opposite such Lender's name on
Schedule 1.1A. The original aggregate amount of the Tranche B Term Loan
Commitments is $250,000,000.
<PAGE>
22
"Tranche B Term Loan Lender": each Lender which has a Tranche B Term
--------------------------
Loan Commitment or which has made a Tranche B Term Loan.
"Tranche B Term Loan Percentage": as to any Tranche B Term Loan
------------------------------
Lender at any time, the percentage which such Lender's Tranche B Term Loan
Commitment then constitutes of the aggregate Tranche B Term Loan Commitments
(or, at any time after the Closing Date, the percentage which the aggregate
principal amount of such Lender's Tranche B Term Loans then outstanding
constitutes of the aggregate principal amount of the Tranche B Term Loans then
outstanding).
"Tranche C Term Loan": as defined in Section 2.1.
-------------------
"Tranche C Term Loan Commitment": as to any Tranche C Term Loan
------------------------------
Lender, the obligation of such Lender, if any, to make a Tranche C Term Loan to
the Borrower hereunder in a principal amount equal to the amount set forth under
the heading "Tranche C Term Loan Commitment" opposite such Lender's name on
Schedule 1.1A. The original aggregate amount of the Tranche C Term Loan
Commitments is $250,000,000.
"Tranche C Term Loan Lender": each Lender which has a Tranche C Term
--------------------------
Loan Commitment or which has made a Tranche C Term Loan.
"Tranche C Term Loan Percentage": as to any Tranche C Term Loan
------------------------------
Lender at any time, the percentage which such Lender's Tranche C Term Loan
Commitment then constitutes of the aggregate Tranche C Term Loan Commitments
(or, at any time after the Closing Date, the percentage which the aggregate
principal amount of such Lender's Tranche C Term Loans then outstanding
constitutes of the aggregate principal amount of the Tranche C Term Loans then
outstanding).
"Transferee": as defined in Section 10.15.
----------
"Type": as to any Loan, its nature as an ABR Loan or a Eurodollar
----
Loan.
"Uniform Customs": the Uniform Customs and Practice for Documentary
---------------
Credits (1993 Revision), International Chamber of Commerce Publication No. 500,
as the same may be amended from time to time.
"U.S. Taxes": as defined in Section 10.6(f)(ii).
----------
"Voting Stock": with respect to any Person, any class or series of
------------
Capital Stock of such Person that is ordinarily entitled to vote in the election
of directors thereof at a meeting of stockholders called for such purpose,
without the occurrence of any additional event or contingency.
"Wholly Owned Subsidiary": as to any Person, any other Person all of
-----------------------
the Capital Stock of which (other than directors' qualifying shares required by
law) is owned by such Person directly and/or through other Wholly Owned
Subsidiaries.
"Wholly Owned Subsidiary Guarantor": any Subsidiary Guarantor that is
---------------------------------
a Wholly Owned Subsidiary of the Borrower and whose Guarantee Obligations under
the Guarantee and Collateral Agreement have not been subordinated to any other
Indebtedness.
<PAGE>
23
1.2 Other Definitional Provisions. (a) Unless otherwise specified
-----------------------------
therein, all terms defined in this Agreement shall have the defined meanings
when used in the other Loan Documents or any certificate or other document made
or delivered pursuant hereto or thereto.
(b) As used herein and in the other Loan Documents, and any
certificate or other document made or delivered pursuant hereto or thereto,
accounting terms relating to the Borrower and its Subsidiaries not defined in
Section 1.1 and accounting terms partly defined in Section 1.1, to the extent
not defined, shall have the respective meanings given to them under GAAP.
(c) For the purposes of calculating Consolidated EBITDA for any
Reference Period pursuant to any determination of the Consolidated Leverage
Ratio, (i) if at any time during such Reference Period the Borrower or any
Subsidiary shall have made any Material Disposition, the Consolidated EBITDA for
such Reference Period shall be reduced by an amount equal to the Consolidated
EBITDA (if positive) attributable to the Property which is the subject of such
Material Disposition for such Reference Period or increased by an amount equal
to the Consolidated EBITDA (if negative) attributable thereto for such Reference
Period; (ii) if during such Reference Period the Borrower or any Subsidiary
shall have made a Material Acquisition, Consolidated EBITDA for such Reference
Period shall be calculated after giving pro forma effect thereto as if such
--- -----
Material Acquisition occurred on the first day of such Reference Period; and
(iii) if during such Reference Period any Person that subsequently became a
Subsidiary or was merged with or into the Borrower or any Subsidiary since the
beginning of such Reference Period shall have entered into any disposition or
acquisition transaction that would have required an adjustment pursuant to
clause (i) or (ii) above if made by the Borrower or a Subsidiary during such
Reference Period, Consolidated EBITDA for such Reference Period shall be
calculated after giving pro forma effect thereto as if such transaction occurred
--- -----
on the first day of such Reference Period. As used in this paragraph, "Material
Acquisition" means any acquisition of Property or series of related acquisitions
of Property (including by way of merger) which (a) constitutes assets comprising
all or substantially all of a facility or an operating unit of a business or
constitutes all or substantially all of the common stock of a Person and (b)
involves the payment of consideration by the Borrower and its Subsidiaries
(valued at the initial principal amount thereof in the case of non-cash
consideration consisting of notes or other debt securities and valued at fair
market value in the case of other non-cash consideration) in excess of
$3,000,000; and "Material Disposition" means any Disposition of Property or
series of related Dispositions of Property which yields gross proceeds to the
Borrower or any of its Subsidiaries (valued at the initial principal amount
thereof in the case of non-cash proceeds consisting of notes or other debt
securities and valued at fair market value in the case of other non-cash
proceeds) in excess of $3,000,000.
(d) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and Section,
Schedule and Exhibit references are to this Agreement unless otherwise
specified.
(e) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
<PAGE>
24
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS
2.1 Term Loan Commitments. Subject to the terms and conditions
---------------------
hereof, (a) each Tranche A Term Loan Lender severally agrees to make a term loan
(a "Tranche A Term Loan") to the Borrower on the Closing Date in an amount equal
-------------------
to the amount of the Tranche A Term Loan Commitment of such Lender, (b) each
Tranche B Term Loan Lender severally agrees to make a term loan (a "Tranche B
---------
Term Loan") to the Borrower on the Closing Date in an amount equal to the amount
- ---------
of the Tranche B Term Loan Commitment of such Lender and (c) each Tranche C Term
Loan Lender severally agrees to make a term loan (a "Tranche C Term Loan") to
-------------------
the Borrower on the Closing Date in an amount equal to the amount of the Tranche
C Term Loan Commitment of such Lender. The Term Loans may from time to time be
Eurodollar Loans or ABR Loans, as determined by the Borrower and notified to the
Administrative Agent in accordance with Sections 2.2 and 2.12.
2.2 Procedure for Term Loan Borrowing. The Borrower shall give the
---------------------------------
Administrative Agent irrevocable notice (which notice must be received by the
Administrative Agent prior to 12:00 noon, New York City time, one Business Day
prior to the anticipated Closing Date) requesting that the Term Loan Lenders
make the Term Loans on the Closing Date and specifying the amount to be
borrowed. The Term Loans made on the Closing Date shall initially be ABR Loans.
Upon receipt of such notice the Administrative Agent shall promptly notify each
Term Loan Lender thereof. Not later than 12:00 Noon, New York City time, on the
Closing Date each Term Loan Lender shall make available to the Administrative
Agent at its office specified in Section 10.2 an amount in immediately available
funds equal to the Term Loan or Term Loans to be made by such Lender. The
Administrative Agent shall credit the account of the Borrower on the books of
such office of the Administrative Agent with the aggregate of the amounts made
available to the Administrative Agent by the Term Loan Lenders in immediately
available funds.
2.3 Repayment of Term Loans. (a) The Tranche A Term Loan of each
-----------------------
Tranche A Term Loan Lender shall be repayable in 22 consecutive quarterly
installments on the last day of each December, March, June and September,
commencing on December 31, 1998, each of which shall be in an amount equal to
such Lender's Tranche A Term Loan Percentage multiplied by one-quarter of the
amount set forth below opposite the period during which such installment is due
or, in the case of the installments due from December 31, 2003 through March 31,
2004, one-half of the amount set forth below opposite the period during which
such installment is due:
<TABLE>
<CAPTION>
Period Principal Amount
------ ----------------
<S> <C>
December 31, 1998 through September 30, 1999 $22,500,000
December 31, 1999 through September 30, 2000 $45,000,000
December 31, 2000 through September 30, 2001 $47,500,000
December 31, 2001 through September 30, 2002 $47,500,000
December 31, 2002 through September 30, 2003 $52,500,000
December 31, 2003 through March 31, 2004 $25,000,000
</TABLE>
(b) The Tranche B Term Loan of each Tranche B Term Loan Lender shall
be repayable in 26 consecutive quarterly installments on the last day of each
December, March, June and September, commencing on December 31, 1998, each of
which shall be in an amount equal to such Lender's Tranche B Term Loan
Percentage multiplied by one-quarter of the amount set forth below opposite the
period during which such installment is due or, in the case of the installments
due from December 31, 2004 through March 31, 2005, one-half of the amount set
forth below opposite the period during which such installment is due:
<PAGE>
25
<TABLE>
<CAPTION>
Period Principal Amount
------ ----------------
<S> <C>
December 31, 1998 through September 30, 1999 $ 2,000,000
December 31, 1999 through September 30, 2000 $ 2,000,000
December 31, 2000 through September 30, 2001 $ 2,000,000
December 31, 2001 through September 30, 2002 $ 2,000,000
December 31, 2002 through September 30, 2003 $ 2,000,000
December 31, 2003 through September 30, 2004 $159,000,000
December 31, 2004 through March 31, 2005 $ 81,000,000
</TABLE>
(c) The Tranche C Term Loan of each Tranche C Term Loan Lender shall
be repayable in 30 consecutive quarterly installments on the last day of each
December, March, June and September, commencing on December 31, 1998, each of
which shall be in an amount equal to such Lender's Tranche C Term Loan
Percentage multiplied by one-quarter of the amount set forth below opposite the
period during which such installment is due or, in the case of the installments
due from December 31, 2005 through March 31, 2006, one-half of the amount set
forth below opposite the period during which such installment is due:
<TABLE>
<CAPTION>
Period Principal Amount
------ ----------------
<S> <C>
December 31, 1998 through September 30, 1999 $ 2,000,000
December 31, 1999 through September 30, 2000 $ 2,000,000
December 31, 2000 through September 30, 2001 $ 2,000,000
December 31, 2001 through September 30, 2002 $ 2,000,000
December 31, 2002 through September 30, 2003 $ 2,000,000
December 31, 2003 through September 30, 2004 $ 2,000,000
December 31, 2004 through September 30, 2005 $158,000,000
December 31, 2005 through March 31, 2006 $ 80,000,000
</TABLE>
2.4 Revolving Credit Commitments. (a) Subject to the terms and
----------------------------
conditions hereof, each Revolving Credit Lender severally agrees to make
revolving credit loans ("Revolving Credit Loans") to the Borrower from time to
----------------------
time during the Revolving Credit Commitment Period in an aggregate principal
amount at any one time outstanding which, when added to such Lender's Revolving
Credit Percentage of the sum of (i) the L/C Obligations then outstanding and
(ii) the aggregate principal amount of the Swing Line Loans then outstanding,
does not exceed the amount of such Lender's Revolving Credit Commitment. During
the Revolving Credit Commitment Period the Borrower may use the Revolving Credit
Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in
part, and reborrowing, all in accordance with the terms and conditions hereof;
provided, however, that up to $25,000,000 of the Revolving Credit Loans and
- -------- -------
Swing Line Loans may be used to finance a portion of the Recapitalization and to
pay related fees and expenses. The Revolving Credit Loans may from time to time
be Eurodollar Loans or ABR Loans, as determined by the Borrower and notified to
the Administrative Agent in accordance with Sections 2.5 and 2.12, provided that
--------
no Revolving Credit Loan shall be made as a Eurodollar Loan or converted to a
Eurodollar Loan after the day that is one month prior to the Revolving Credit
Termination Date.
(b) The Borrower shall repay all outstanding Revolving Credit Loans
on the Revolving Credit Termination Date.
2.5 Procedure for Revolving Credit Borrowing. The Borrower may
----------------------------------------
borrow under the Revolving Credit Commitments during the Revolving Credit
Commitment Period on any Business Day,
<PAGE>
26
provided that the Borrower shall give the Administrative Agent irrevocable
- --------
notice (which notice must be received by the Administrative Agent prior to 12:00
Noon, New York City time, (a) three Business Days prior to the requested
Borrowing Date, in the case of Eurodollar Loans, or (b) one Business Day prior
to the requested Borrowing Date, in the case of ABR Loans), specifying (i) the
amount and Type of Revolving Credit Loans to be borrowed, (ii) the requested
Borrowing Date and (iii) in the case of Eurodollar Loans, the respective amounts
of each such Type of Loan and the respective lengths of the initial Interest
Period therefor. Borrowing notices pursuant to this Section 2.5 may be given by
telephone so long as each such notice shall be confirmed promptly by delivery to
the Administrative Agent of a written notice of borrowing. Subject to Section
3.5, each borrowing under the Revolving Credit Commitments shall be in an amount
equal to (x) in the case of ABR Loans, $5,000,000 or a whole multiple of
$1,000,000 in excess thereof (or, if the then aggregate Available Revolving
Credit Commitments are less than $5,000,000, such lesser amount) and (y) in the
case of Eurodollar Loans, $5,000,000 or a whole multiple of $1,000,000 in excess
thereof; provided, that the Swing Line Lender may request, on behalf of the
--------
Borrower, borrowings under the Revolving Credit Commitments which are ABR Loans
in other amounts pursuant to Section 2.7. Upon receipt of any such notice from
the Borrower, the Administrative Agent shall promptly notify each Revolving
Credit Lender thereof. Each Revolving Credit Lender will make the amount of its
pro rata share of each borrowing available to the Administrative Agent for the
- --- ----
account of the Borrower at the office of the Administrative Agent specified in
Section 10.2 prior to 12:00 Noon, New York City time, on the Borrowing Date
requested by the Borrower in funds immediately available to the Administrative
Agent. Such borrowing will then be made available to the Borrower by the
Administrative Agent crediting the account of the Borrower on the books of such
office with the aggregate of the amounts made available to the Administrative
Agent by the Revolving Credit Lenders and in like funds as received by the
Administrative Agent.
2.6 Swing Line Commitment. (a) Subject to the terms and conditions
---------------------
hereof, the Swing Line Lender agrees to make a portion of the credit otherwise
available to the Borrower under the Revolving Credit Commitments from time to
time during the Revolving Credit Commitment Period by making swing line loans
("Swing Line Loans") to the Borrower; provided that (i) the aggregate principal
- ------------------ --------
amount of Swing Line Loans outstanding at any time shall not exceed the Swing
Line Commitment then in effect (notwithstanding that the Swing Line Loans
outstanding at any time, when aggregated with the Swing Line Lender's other
outstanding Revolving Credit Loans hereunder, may exceed the Swing Line
Commitment then in effect) and (ii) the Borrower shall not request, and the
Swing Line Lender shall not make, any Swing Line Loan if, after giving effect to
the making of such Swing Line Loan, the aggregate amount of the Available
Revolving Credit Commitments would be less than zero. During the Revolving
Credit Commitment Period, the Borrower may use the Swing Line Commitment by
borrowing, repaying and reborrowing, all in accordance with the terms and
conditions hereof; provided, however, that up to $25,000,000 of the Revolving
-------- -------
Credit Loans and Swing Line Loans may be used to finance a portion of the
Recapitalization and to pay related fees and expenses. Swing Line Loans shall
be ABR Loans only.
(b) The Borrower shall repay all outstanding Swing Line Loans on the
Revolving Credit Termination Date.
2.7 Procedure for Swing Line Borrowing; Refunding of Swing Line
-----------------------------------------------------------
Loans. (a) Whenever the Borrower desires that the Swing Line Lender make Swing
Line Loans it shall give the Swing Line Lender irrevocable telephonic notice
confirmed promptly in writing (which telephonic notice must be received by the
Swing Line Lender not later than 1:00 P.M., New York City time, on the proposed
Borrowing Date), specifying (i) the amount to be borrowed and (ii) the requested
Borrowing Date (which shall be a Business Day during the Revolving Credit
Commitment Period). A copy of each such notice shall be promptly furnished by
the Borrower to the Administrative Agent. Subject to Section 3.5, each
borrowing under the Swing Line Commitment shall be in an amount equal to
$500,000 or a
<PAGE>
27
whole multiple of $100,000 in excess thereof. Not later than 3:00 P.M., New York
City time, on the Borrowing Date specified in a notice in respect of Swing Line
Loans, the Swing Line Lender shall make available to the Administrative Agent at
its office specified in Section 10.2 an amount in immediately available funds
equal to the amount of the Swing Line Loan to be made by the Swing Line Lender.
The Administrative Agent shall make the proceeds of such Swing Line Loan
available to the Borrower on such Borrowing Date by depositing such proceeds in
the account of the Borrower with the Administrative Agent on such Borrowing Date
in immediately available funds.
(b) The Swing Line Lender, at any time and from time to time in its
sole and absolute discretion may, on behalf of the Borrower (which hereby
irrevocably directs the Swing Line Lender to act on its behalf), on one Business
Day's notice given by the Swing Line Lender no later than 12:00 Noon, New York
City time, request each Revolving Credit Lender to make, and each Revolving
Credit Lender hereby agrees to make, a Revolving Credit Loan, in an amount equal
to such Revolving Credit Lender's Revolving Credit Percentage of the aggregate
amount of the Swing Line Loans (the "Refunded Swing Line Loans") outstanding on
-------------------------
the date of such notice, to repay the Swing Line Lender. Each Revolving
Credit Lender shall make the amount of such Revolving Credit Loan available to
the Administrative Agent at its office set forth in Section 10.2 in immediately
available funds, not later than 10:00 A.M., New York City time, one Business Day
after the date of such notice. The proceeds of such Revolving Credit Loans shall
be immediately applied by the Swing Line Lender to repay the Refunded Swing Line
Loans. The Borrower irrevocably authorizes the Swing Line Lender to charge the
Borrower's accounts with the Administrative Agent (up to the amount available in
each such account) in order to immediately pay the amount of such Refunded Swing
Line Loans to the extent amounts received from the Revolving Credit Lenders are
not sufficient to repay in full such Refunded Swing Line Loans.
(c) If prior to the time a Revolving Credit Loan would have
otherwise been made pursuant to Section 2.7(b), one of the events described in
Section 8(f) shall have occurred and be continuing with respect to the Borrower
or if for any other reason, as determined by the Swing Line Lender in its sole
discretion, Revolving Credit Loans may not be made as contemplated by Section
2.7(b), each Revolving Credit Lender shall, on the date such Revolving Credit
Loan was to have been made pursuant to the notice referred to in Section 2.7(b)
(the "Refunding Date"), purchase for cash an undivided participating interest in
--------------
an amount equal to (i) its Revolving Credit Percentage times (ii) the aggregate
-----
principal amount of Swing Line Loans then outstanding which were to have been
repaid with such Revolving Credit Loans (the "Swing Line Participation Amount").
-------------------------------
(d) Whenever, at any time after the Swing Line Lender has received
from any Revolving Credit Lender such Lender's Swing Line Participation Amount,
the Swing Line Lender receives any payment on account of the Swing Line Loans,
the Swing Line Lender will distribute to such Lender its Swing Line
Participation Amount (appropriately adjusted, in the case of interest payments,
to reflect the period of time during which such Lender's participating interest
was outstanding and funded and, in the case of principal and interest payments,
to reflect such Lender's pro rata portion of such payment if such payment is not
--- ----
sufficient to pay the principal of and interest on all Swing Line Loans then
due); provided, however, that in the event that such payment received by the
-------- -------
Swing Line Lender is required to be returned, such Revolving Credit Lender will
return to the Swing Line Lender any portion thereof previously distributed to it
by the Swing Line Lender.
(e) Each Revolving Credit Lender's obligation to make the Loans
referred to in Section 2.7(b) and to purchase participating interests pursuant
to Section 2.7(c) shall be absolute and unconditional and shall not be affected
by any circumstance, including, without limitation, (i) any setoff,
counterclaim, recoupment, defense or other right which such Revolving Credit
Lender or the Borrower may have against the Swing Line Lender, the Borrower or
any other Person for any reason whatsoever;
<PAGE>
28
(ii) the occurrence or continuance of a Default or an Event of Default or the
failure to satisfy any of the other conditions specified in Section 5; (iii) any
adverse change in the condition (financial or otherwise) of the Borrower; (iv)
any breach of this Agreement or any other Loan Document by the Borrower, any
other Loan Party or any other Revolving Credit Lender; or (v) any other
circumstance, happening or event whatsoever, whether or not similar to any of
the foregoing.
2.8 Commitment Fees, etc. (a) The Borrower agrees to pay to the
---------------------
Administrative Agent for the account of each Revolving Credit Lender a
commitment fee for the period from and including the Closing Date to the last
day of the Revolving Credit Commitment Period, computed at the Commitment Fee
Rate on the average daily amount of the Available Revolving Credit Commitment of
such Lender during the period for which payment is made, payable quarterly in
arrears on the last day of each March, June, September and December and on the
Revolving Credit Termination Date, commencing on the first of such dates to
occur after the Closing Date.
(b) The Borrower agrees to pay to the Administrative Agent the fees
in the amounts and on the dates previously agreed to in writing by the Borrower.
2.9 Termination or Reduction of Revolving Credit Commitments. The
--------------------------------------------------------
Borrower shall have the right, upon not less than three Business Days' notice to
the Administrative Agent, to terminate the Revolving Credit Commitments or, from
time to time, to reduce the amount of the Revolving Credit Commitments; provided
--------
that no such termination or reduction of Revolving Credit Commitments shall be
permitted if, after giving effect thereto and to any prepayments of the
Revolving Credit Loans and Swing Line Loans made on the effective date thereof,
the Total Revolving Extensions of Credit would exceed the Total Revolving Credit
Commitments. Unless the Revolving Credit Commitments are being reduced in full,
any such reduction shall be in an amount equal to $1,000,000, or a whole
multiple thereof, and shall reduce permanently the Revolving Credit Commitments
then in effect.
2.10 Optional Prepayments. Subject to Section 2.17(d), the Borrower
--------------------
may at any time and from time to time prepay the Loans, in whole or in part,
without premium or penalty, upon irrevocable notice delivered to the
Administrative Agent at least three Business Days prior thereto in the case of
Eurodollar Loans and at least one Business Day prior thereto in the case of ABR
Loans, which notice shall specify the date and amount of prepayment and whether
the prepayment is of Eurodollar Loans or ABR Loans; provided, that if a
--------
Eurodollar Loan is prepaid on any day other than the last day of the Interest
Period applicable thereto, the Borrower shall also pay any amounts owing
pursuant to Section 2.20. Upon receipt of any such notice the Administrative
Agent shall promptly notify each relevant Lender thereof. If any such notice is
given, the amount specified in such notice shall be due and payable on the date
specified therein, together with (except in the case of Revolving Credit Loans
which are ABR Loans and Swing Line Loans) accrued interest to such date on the
amount prepaid. Partial prepayments of Term Loans and Revolving Credit Loans
shall be in an aggregate principal amount of $1,000,000 or a whole multiple
thereof. Partial prepayments of Swing Line Loans shall be in an aggregate
principal amount of $100,000 or a whole multiple thereof.
2.11 Mandatory Prepayments. (a) Unless the Required Prepayment
---------------------
Lenders shall otherwise agree, if any Capital Stock (other than (i) any Capital
Stock issued by the Borrower to finance any Acquisition permitted by Section
7.8(h), subject to the limitations specified in clause (iv) thereof and the
proviso at the end of said Section, and constituting payment of or issued to
fund all or part of the Purchase Price for such Acquisition as described in
clause (b) of the definition of Purchase Price, (ii) any Capital Stock issued to
directors, officers or employees of the Borrower or any Subsidiary in connection
with compensation programs and (iii) contributions made by any Permitted
Investor to the common equity of the Borrower) or Indebtedness shall be issued
or Incurred by the Borrower or any of its
<PAGE>
29
Subsidiaries (excluding any Indebtedness Incurred in accordance with Section 7.2
as in effect on the Closing Date), an amount equal to 75%, in the case of any
Capital Stock, or 100%, in the case of any such Indebtedness, of the Net Cash
Proceeds thereof shall be applied promptly, but in any event within two Business
Days after the date of such issuance or Incurrence, toward the prepayment of the
Term Loans.
(b) Unless the Required Prepayment Lenders shall otherwise agree, if
on any date the Borrower or any of its Subsidiaries shall receive Net Cash
Proceeds from any Asset Sale or Recovery Event then, unless a Reinvestment
Notice shall be delivered in respect thereof, 75% of such Net Cash Proceeds
shall be applied within two Business Days after such date toward the prepayment
of the Term Loans; provided, that, notwithstanding the foregoing, on each
--------
Reinvestment Prepayment Date, an amount equal to the Reinvestment Prepayment
Amount with respect to the relevant Reinvestment Event shall be applied toward
the prepayment of the Term Loans.
(c) Unless the Required Prepayment Lenders shall otherwise agree,
if, for any fiscal year of the Borrower commencing with the fiscal year ending
September 30, 1998, there shall be Excess Cash Flow, the Borrower shall, on the
relevant Excess Cash Flow Application Date, apply the ECF Percentage of such
Excess Cash Flow toward the prepayment of the Term Loans. Each such prepayment
shall be made on a date (an "Excess Cash Flow Application Date") no later than
---------------------------------
five days after the earlier of (i) the date on which the financial statements of
the Borrower referred to in Section 6.1(a), for the fiscal year with respect to
which such prepayment is made, are required to be delivered to the Lenders and
(ii) the date such financial statements are actually delivered.
(d) Each prepayment of the Loans under Section 2.11 shall be
accompanied by accrued interest to the date of such prepayment on the amount
prepaid and any amounts owing pursuant to Section 2.20.
(e) All prepayments made pursuant to this Section 2.11 allocated to
a particular Facility shall be applied, first, to ABR Loans outstanding
-----
thereunder and, second, to Eurodollar Loans outstanding thereunder.
------
Notwithstanding anything to the contrary in this Section 2.11, in the event that
a prepayment required by this Section would require the prepayment of a
Eurodollar Loan prior to the end of the Interest Period then applicable thereto,
the Borrower shall have the option to instead deposit the amount of such
prepayment in an interest-bearing cash collateral account with the
Administrative Agent, for application to the prepayment of the then outstanding
Eurodollar Loans as the relevant Interest Periods expire, until the full amount
required to be applied to prepay the Term Loans pursuant to this Section 2.11
has been so applied.
(f) The requirements of this Section 2.11 shall be subject to the
procedures specified in Section 2.17(d).
2.12 Conversion and Continuation Options. (a) The Borrower may elect
-----------------------------------
from time to time to convert Eurodollar Loans to ABR Loans by giving the
Administrative Agent at least two Business Days' prior irrevocable notice of
such election, provided that any such conversion of Eurodollar Loans may only be
--------
made on the last day of an Interest Period with respect thereto. The Borrower
may elect from time to time to convert ABR Loans to Eurodollar Loans by giving
the Administrative Agent at least three Business Days' prior irrevocable notice
of such election (which notice shall specify the length of the initial Interest
Period therefor), provided that no ABR Loan under a particular Facility may be
--------
converted into a Eurodollar Loan (i) when any Event of Default has occurred and
is continuing and the Administrative Agent or the Majority Facility Lenders in
respect of such Facility have determined in its or their sole discretion not to
permit such conversions (and have notified the Borrower in writing of such
<PAGE>
30
determination) or (ii) after the date that is one month prior to the final
scheduled termination or maturity date of such Facility. Upon receipt of any
such notice the Administrative Agent shall promptly notify each relevant Lender
thereof.
(b) Any Eurodollar Loan may be continued as such upon the expiration
of the then current Interest Period with respect thereto by the Borrower giving
irrevocable notice to the Administrative Agent, in accordance with the
applicable provisions of the term "Interest Period" set forth in Section 1.1, of
the length of the next Interest Period to be applicable to such Loans, provided
--------
that no Eurodollar Loan under a particular Facility may be continued as such (i)
when any Event of Default has occurred and is continuing and the Administrative
Agent has or the Majority Facility Lenders in respect of such Facility have
determined in its or their sole discretion not to permit such continuations (and
have notified the Borrower in writing of such determination) or (ii) after the
date that is one month prior to the final scheduled termination or maturity date
of such Facility, and provided, further, that if the Borrower shall fail to give
-------- -------
any required notice as described above in this paragraph or if such continuation
is not permitted pursuant to the preceding proviso such Loans shall be
automatically converted to ABR Loans on the last day of such then expiring
Interest Period. Upon receipt of any such notice the Administrative Agent shall
promptly notify each relevant Lender thereof.
2.13 Minimum Amounts and Maximum Number of Eurodollar Tranches.
---------------------------------------------------------
Notwithstanding anything to the contrary in this Agreement, all borrowings,
conversions, continuations and optional prepayments of Eurodollar Loans
hereunder and all selections of Interest Periods hereunder shall be in such
amounts and be made pursuant to such elections so that, (a) after giving effect
thereto, the aggregate principal amount of the Eurodollar Loans comprising each
Eurodollar Tranche shall be equal to $5,000,000 or a whole multiple of
$1,000,000 in excess thereof and (b) no more than fifteen (15) Eurodollar
Tranches shall be outstanding at any one time.
2.14 Interest Rates and Payment Dates. (a) Each Eurodollar Loan
--------------------------------
shall bear interest for each day during each Interest Period with respect
thereto at a rate per annum equal to the Eurodollar Base Rate determined for
such day plus the Applicable Margin.
(b) Each ABR Loan shall bear interest at a rate per annum equal to
the ABR plus the Applicable Margin.
(c) (i) If all or a portion of the principal amount of any Loan or
Reimbursement Obligation shall not be paid when due (whether at the stated
maturity, by acceleration or otherwise), all outstanding Loans and Reimbursement
Obligations (whether or not overdue) shall bear interest at a rate per annum
which is equal to (x) in the case of the Loans, the rate that would otherwise be
applicable thereto pursuant to the foregoing provisions of this Section 2.14
plus 2% or (y) in the case of Reimbursement Obligations, the rate applicable to
- ----
ABR Loans under the Revolving Credit Facility plus 2%, and (ii) if all or a
----
portion of any interest payable on any Loan or Reimbursement Obligation or any
commitment fee or other amount payable hereunder shall not be paid when due
(whether at the stated maturity, by acceleration or otherwise), such overdue
amount shall bear interest at a rate per annum equal to the rate applicable to
ABR Loans under the relevant Facility plus 2% (or, in the case of any such other
----
amounts that do not relate to a particular Facility, the ABR plus 3.75%), in
----
each case, with respect to clauses (i) and (ii) above, from the date of such
non-payment until such amount is paid in full (as well after as before
judgment).
(d) Interest shall be payable in arrears on each Interest Payment
Date, provided that interest accruing pursuant to paragraph (c) of this Section
--------
2.14 shall be payable from time to time on demand.
<PAGE>
31
2.15 Computation of Interest and Fees. (a) Interest, fees and
--------------------------------
commissions payable pursuant hereto shall be calculated on the basis of a 360-
day year for the actual days elapsed, except that, with respect to ABR Loans the
rate of interest on which is calculated on the basis of the Prime Rate, the
interest thereon shall be calculated on the basis of a 365- (or 366-, as the
case may be) day year for the actual days elapsed. The Administrative Agent
shall as soon as practicable notify the Borrower and the relevant Lenders of
each determination of a Eurodollar Rate. Any change in the interest rate on a
Loan resulting from a change in the ABR or the Eurocurrency Reserve Requirements
shall become effective as of the opening of business on the day on which such
change becomes effective. The Administrative Agent shall as soon as practicable
notify the Borrower and the relevant Lenders of the effective date and the
amount of each such change in interest rate.
(b) Each determination of an interest rate by the Administrative
Agent pursuant to any provision of this Agreement shall be conclusive and
binding on the Borrower and the Lenders in the absence of manifest error. The
Administrative Agent shall, at the request of the Borrower, deliver to the
Borrower a statement showing the quotations used by the Administrative Agent in
determining any interest rate pursuant to Section 2.14(a).
2.16 Inability to Determine Interest Rate. If prior to the first day
------------------------------------
of any Interest Period:
(a) the Administrative Agent shall have determined (which
determination shall be conclusive and binding upon the Borrower) that, by
reason of circumstances affecting the relevant market, adequate and
reasonable means do not exist for ascertaining the Eurodollar Rate for such
Interest Period, or
(b) the Administrative Agent shall have received notice from the
Majority Facility Lenders in respect of the relevant Facility that the
Eurodollar Rate determined or to be determined for such Interest Period
will not adequately and fairly reflect the cost to such Lenders (as
conclusively certified by such Lenders) of making or maintaining their
affected Loans during such Interest Period,
the Administrative Agent shall give telecopy or telephonic notice thereof to the
Borrower and the relevant Lenders as soon as practicable thereafter. If such
notice is given (x) any Eurodollar Loans under the relevant Facility requested
to be made on the first day of such Interest Period shall be made as ABR Loans,
(y) any Loans under the relevant Facility that were to have been converted on
the first day of such Interest Period to Eurodollar Loans shall be continued as
ABR Loans and (z) any outstanding Eurodollar Loans under the relevant Facility
shall be converted, on the first day of their respective Interest Periods, to
ABR Loans. Until such notice has been withdrawn by the Administrative Agent, no
further Eurodollar Loans under the relevant Facility shall be made or continued
as such, nor shall the Borrower have the right to convert Loans under the
relevant Facility to Eurodollar Loans.
2.17 Pro Rata Treatment and Payments. (a) Each borrowing by the
-------------------------------
Borrower from the Lenders hereunder, each payment by the Borrower on account of
any commitment fee and any reduction of the Commitments of the Lenders shall be
made pro rata according to the respective Tranche A Term Loan Percentages,
--- ----
Tranche B Term Loan Percentages, Tranche C Term Loan Percentages or Revolving
Credit Percentages, as the case may be, of the relevant Lenders.
(b) Each payment (including each prepayment) by the Borrower on
account of principal of and interest on the Term Loans shall be applied pro rata
--- ----
according to the respective outstanding principal amounts of the Term Loans then
held by the Term Loan Lenders (except as otherwise provided in paragraph (d)
below). The amount of each principal payment of the Term Loans made pursuant to
<PAGE>
32
Section 2.10 or 2.11 shall be applied to reduce each of the then remaining
installments of the Tranche A Term Loans, Tranche B Term Loans and Tranche C
Term Loans, as the case may be, pro rata based upon the then remaining principal
--- ----
amounts thereof. Amounts prepaid on account of the Term Loans may not be
reborrowed.
(c) Each payment (including each prepayment) by the Borrower on
account of principal of and interest on the Revolving Credit Loans shall be made
pro rata according to the respective outstanding principal amounts of the
- --- ----
Revolving Credit Loans then held by the Revolving Credit Lenders.
(d) Notwithstanding anything to the contrary in Section 2.10, 2.11
or any other paragraph of this Section 2.17, with respect to the amount of any
optional or mandatory prepayment described in Section 2.10 or 2.11 that is
allocated to Tranche B Term Loans or Tranche C Term Loans (such amounts, the
"Tranche B Prepayment Amount" and the "Tranche C Prepayment Amount",
- ---------------------------- ---------------------------
respectively), at any time when Tranche A Term Loans remain outstanding, the
Borrower will, in lieu of applying such amount to the prepayment of Tranche B
Term Loans and Tranche C Term Loans, respectively, as provided in Section 2.10
(in the case of optional prepayments) or Section 2.11 (in the case of mandatory
prepayments), on the date specified in Section 2.10 or 2.11, as the case may be,
for such prepayment, give the Administrative Agent telephonic notice (promptly
confirmed in writing) requesting that the Administrative Agent prepare and
provide to each Tranche B Term Loan Lender and Tranche C Term Loan Lender a
notice (each, a "Prepayment Option Notice") as described below. As promptly as
------------------------
practicable after receiving such notice from the Borrower, the Administrative
Agent will send to each Tranche B Term Loan Lender and Tranche C Term Loan
Lender a Prepayment Option Notice, which shall be in the form of Exhibit H, and
shall include an offer by the Borrower to prepay on the date (each a "Prepayment
----------
Date") that is 10 Business Days after the date of the Prepayment Option Notice,
- ----
the relevant Term Loans of such Lender by an amount equal to the portion of the
Tranche B Prepayment Amount or the Tranche C Prepayment Amount, as the case may
be, indicated in such Lender's Prepayment Option Notice as being applicable to
such Lender's Tranche B Term Loans or Tranche C Term Loans, as the case may be.
Each Tranche B Term Loan Lender and Tranche C Term Loan Lender shall notify the
Administrative Agent and the Borrower in writing, by no later than 10:00 a.m.,
New York City time, on the second Business Day preceding the Prepayment Date,
whether or not it accepts the Borrower's prepayment offer. Failure by such
Lender to so notify the Administrative Agent by such time shall be deemed to be
notice that such Lender accepts the Borrower's prepayment offer. On the
Prepayment Date, (i) the Borrower shall pay to the Administrative Agent the
aggregate amount necessary to prepay that portion of the outstanding relevant
Term Loans in respect of which Tranche B Term Loan Lenders and Tranche C Term
Loan Lenders have accepted prepayment as described above (such Lenders, the
"Accepting Lenders"), and such amount shall be applied to reduce the Tranche B
- ------------------
Prepayment Amounts and Tranche C Prepayment Amounts, as applicable, with respect
to each Accepting Lender and (ii) the Borrower shall pay to the Administrative
Agent an amount equal to the remaining portion of the Tranche B Prepayment
Amount and the Tranche C Prepayment Amount not accepted by the Tranche B Term
Loan Lenders and the Tranche C Term Loan Lenders, and such amount shall be
applied to the prepayment of the Tranche A Term Loans.
(e) All payments (including prepayments) to be made by the Borrower
hereunder, whether on account of principal, interest, fees or otherwise, shall
be made without setoff or counterclaim and shall be made prior to 12:00 noon,
New York City time, on the due date thereof to the Administrative Agent, for the
account of the Lenders, at the Administrative Agent's office specified in
Section 10.2, in Dollars and in immediately available funds. Payments received
by the Administrative Agent after such time shall be deemed to have been
received on the next Business Day. The Administrative Agent shall distribute
such payments to the Lenders promptly upon receipt in like funds as received.
If any payment hereunder (other than payments on the Eurodollar Loans) becomes
due and
<PAGE>
33
payable on a day other than a Business Day, such payment shall be extended to
the next succeeding Business Day. If any payment on a Eurodollar Loan becomes
due and payable on a day other than a Business Day, the maturity thereof shall
be extended to the next succeeding Business Day unless the result of such
extension would be to extend such payment into another calendar month, in which
event such payment shall be made on the immediately preceding Business Day. In
the case of any extension of any payment of principal pursuant to the preceding
two sentences, interest thereon shall be payable at the then applicable rate
during such extension.
(f) Unless the Administrative Agent shall have been notified in
writing by any Lender prior to a borrowing that such Lender will not make the
amount that would constitute its share of such borrowing available to the
Administrative Agent, the Administrative Agent may assume that such Lender is
making such amount available to the Administrative Agent, and the Administrative
Agent may, in reliance upon such assumption, make available to the Borrower a
corresponding amount. If such amount is not made available to the Administrative
Agent by the required time on the Borrowing Date therefor, such Lender shall pay
to the Administrative Agent, on demand, such amount with interest thereon at a
rate equal to the daily average Federal Funds Effective Rate for the period
until such Lender makes such amount immediately available to the Administrative
Agent. A certificate of the Administrative Agent submitted to any Lender with
respect to any amounts owing under this Section 2.17(f) shall be conclusive in
the absence of manifest error. If such Lender's share of such borrowing is not
made available to the Administrative Agent by such Lender within three Business
Days of such Borrowing Date, the Administrative Agent shall also be entitled to
recover such amount with interest thereon at the rate per annum applicable to
ABR Loans under the relevant Facility, on demand, from the Borrower.
2.18 Requirements of Law. (a) If the adoption of or any change in
-------------------
any Requirement of Law or in the interpretation or application thereof or
compliance by any Lender with any request or directive (whether or not having
the force of law) from any central bank or other Governmental Authority made
subsequent to the date hereof:
(i) shall subject any Lender to any tax of any kind whatsoever
with respect to this Agreement, any Letter of Credit, any Application or
any Eurodollar Loan made by it, or change the basis of taxation of payments
to such Lender in respect thereof (except for Non-Excluded Taxes covered by
Section 2.19 and changes in the rate of tax on the overall net income of
such Lender);
(ii) shall impose, modify or hold applicable any reserve,
special deposit, compulsory loan or similar requirement against assets held
by, deposits or other liabilities in or for the account of, advances, loans
or other extensions of credit by, or any other acquisition of funds by, any
office of such Lender which is not otherwise included in the determination
of the Eurodollar Rate hereunder; or
(iii) shall impose on such Lender any other condition;
and the result of any of the foregoing is to increase the cost to such Lender of
making, converting into, continuing or maintaining Eurodollar Loans or issuing
or participating in Letters of Credit, or to reduce any amount receivable
hereunder in respect thereof, in each case by an amount which such Lender deems
to be material, then, in any such case, the Borrower shall promptly pay such
Lender, upon its demand, any additional amounts necessary to compensate such
Lender for such increased cost or reduced amount receivable. If any Lender
becomes entitled to claim any additional amounts pursuant to this Section 2.18,
it shall promptly notify the Borrower (with a copy to the Administrative Agent),
in reasonable detail, of the event by reason of which it has become so entitled;
provided that the Borrower shall not be
- --------
<PAGE>
34
required to compensate a Lender pursuant to this paragraph for any amounts
incurred more than one year prior to the date that such Lender notifies the
Borrower of such Lender's intention to claim compensation therefor; and provided
--------
further that, if the circumstances giving rise to such claim have a retroactive
- -------
effect, then such one-year period shall be extended to include the period of
such retroactive effect.
(b) If any Lender shall have determined that the adoption of or any
change in any Requirement of Law regarding capital adequacy or in the
interpretation or application thereof or compliance by such Lender or any
corporation controlling such Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof shall have the effect of reducing
the rate of return on such Lender's or such corporation's capital as a
consequence of its obligations hereunder or under or in respect of any Letter of
Credit to a level below that which such Lender or such corporation could have
achieved but for such adoption, change or compliance (taking into consideration
such Lender's or such corporation's policies with respect to capital adequacy)
by an amount deemed by such Lender to be material, then from time to time, after
submission by such Lender to the Borrower (with a copy to the Administrative
Agent) of a written request therefor, together with an explanation in reasonable
detail of the basis on which such request is being made, the Borrower shall pay
to such Lender such additional amount or amounts as will compensate such Lender
for such reduction; provided that the Borrower shall not be required to
--------
compensate a Lender pursuant to this paragraph for any amounts incurred more
than six months prior to the date that such Lender notifies the Borrower of such
Lender's intention to claim compensation therefor; and provided further that, if
-------- -------
the circumstances giving rise to such claim have a retroactive effect, then such
six-month period shall be extended to include the period of such retroactive
effect.
(c) If any Lender shall become subject to any Eurocurrency Reserve
Requirement with respect to its Loans or Reimbursement Obligations owing to it
hereunder or with respect to any deposit or other funds acquired by it to fund
such Loans or Reimbursement Obligations as reasonably determined by it and shall
give notice to the Administrative Agent and the Borrower of becoming so subject,
the Borrower shall thereafter pay to such Lender through the Administrative
Agent on each Interest Payment Date with respect to any such Loan or
Reimbursement Obligation, an additional amount equal to the difference between
the Eurodollar Rate on such Loan or Reimbursement Obligation and the Eurodollar
Base Rate thereon for the period for which interest is then payable (or, if
less, the portion of the period following the date of such notice). Such Lender
shall give prompt notice to the Administrative Agent and the Borrower of its
ceasing to be subject to any Eurocurrency Reserve Requirement.
(d) A certificate as to any additional amounts payable pursuant to
this Section 2.18 submitted by any Lender to the Borrower (with a copy to the
Administrative Agent) shall be conclusive in the absence of manifest error. The
obligations of the Borrower pursuant to this Section 2.18 shall survive the
termination of this Agreement and the payment of the Loans and all other amounts
payable hereunder.
2.19 Taxes. (a) All payments made by the Borrower under this
-----
Agreement shall be made free and clear of, and without deduction or withholding
for or on account of, any present or future income, stamp or other taxes,
levies, imposts, duties, charges, fees, deductions or withholdings, now or
hereafter imposed, levied, collected, withheld or assessed by any Governmental
Authority, excluding net income taxes and franchise taxes (imposed in lieu of
net income taxes) imposed on the Administrative Agent or any Lender as a result
of a present or former connection between the Administrative Agent or such
Lender and the jurisdiction of the Governmental Authority imposing such tax or
any political subdivision or taxing authority thereof or therein (other than any
such connection arising solely from the Administrative Agent or such Lender
having executed, delivered or performed its obligations or received a payment
under, or enforced, this Agreement or any other Loan Document). If any such
non-excluded
<PAGE>
35
taxes, levies, imposts, duties, charges, fees, deductions or withholdings
("Non-Excluded Taxes") are required to be withheld from any amounts payable to
------------------
the Administrative Agent or any Lender hereunder, the amounts so payable to the
Administrative Agent or such Lender shall be increased to the extent necessary
to yield to the Administrative Agent or such Lender (after payment of all Non-
Excluded Taxes) interest or any such other amounts payable hereunder at the
rates or in the amounts specified in this Agreement, provided, however, that the
-------- -------
Borrower shall not be required to increase any such amounts payable to any
Lender that is not organized under the laws of the United States of America or a
state thereof to the extent such Lender's compliance with the requirements of
Section 2.19(b) at the time such Lender becomes a party to this Agreement fails
to establish a complete exemption from such withholding. Whenever any Non-
Excluded Taxes are payable by the Borrower, as promptly as possible thereafter
the Borrower shall send to the Administrative Agent for its own account or for
the account of such Lender, as the case may be, a certified copy of an original
official receipt received by the Borrower showing payment thereof. If the
Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing
authority or fails to remit to the Administrative Agent the required receipts or
other required documentary evidence, the Borrower shall indemnify the
Administrative Agent and the Lenders for any incremental taxes, interest or
penalties that may become payable by the Administrative Agent or any Lender as a
result of any such failure. The agreements in this Section 2.19 shall survive
the termination of this Agreement and the payment of the Loans and all other
amounts payable hereunder.
(b) Each Lender (or Transferee) that is not a citizen or resident of
the United States of America, a corporation, partnership or other entity created
or organized in or under the laws of the United States of America (or any
jurisdiction thereof), or any estate or trust that is subject to federal income
taxation regardless of the source of its income (a "Non-U.S. Lender") shall
---------------
deliver to the Borrower and the Administrative Agent (or, in the case of a
Participant, to the Lender from which the related participation shall have been
purchased) two copies of either U.S. Internal Revenue Service Form 1001 or Form
4224, or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal
withholding tax under Section 871(h) or 881(c) of the Code with respect to
payments of "portfolio interest", a Form W-8, or any subsequent versions thereof
or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8, an
annual certificate representing that such Non-U.S. Lender is not a "bank" for
purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within
the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is not a
controlled foreign corporation related to the Borrower (within the meaning of
Section 864(d)(4) of the Code)), properly completed and duly executed by such
Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S.
federal withholding tax on all payments by the Borrower under this Agreement and
the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender
on or before the date it becomes a party to this Agreement (or, in the case of
any Participant, on or before the date such Participant purchases the related
participation). In addition, each Non-U.S. Lender shall deliver such forms
promptly upon the obsolescence or invalidity of any form previously delivered by
such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrower at
any time it determines that it is no longer in a position to provide any
previously delivered certificate to the Borrower (or any other form of
certification adopted by the U.S. taxing authorities for such purpose).
Notwithstanding any other provision of this Section 2.19(b), a Non-U.S. Lender
shall not be required to deliver any form pursuant to this Section 2.19(b) that
such Non-U.S. Lender is not legally able to deliver.
2.20 Indemnity. The Borrower agrees to indemnify each Lender and to
---------
hold each Lender harmless from any loss or expense which such Lender may sustain
or incur as a consequence of (a) default by the Borrower in making a borrowing
of, conversion into or continuation of Eurodollar Loans after the Borrower has
given a notice requesting the same in accordance with the provisions of this
Agreement, (b) default by the Borrower in making any prepayment after the
Borrower has given a notice thereof in accordance with the provisions of this
Agreement or (c) the making of a prepayment of
<PAGE>
36
Eurodollar Loans on a day which is not the last day of an Interest Period with
respect thereto. Such indemnification may include an amount equal to the excess,
if any, of (i) the amount of interest which would have accrued on the amount so
prepaid, or not so borrowed, converted or continued, for the period from the
date of such prepayment or of such failure to borrow, convert or continue to the
last day of such Interest Period (or, in the case of a failure to borrow,
convert or continue, the Interest Period that would have commenced on the date
of such failure) in each case at the applicable rate of interest for such Loans
provided for herein (excluding, however, the Applicable Margin included therein,
if any) over (ii) the amount of interest (as reasonably determined by such
----
Lender) which would have accrued to such Lender on such amount by placing such
amount on deposit for a comparable period with leading banks in the interbank
eurodollar market. A certificate as to any amounts payable pursuant to this
Section 2.20 submitted to the Borrower by any Lender shall be conclusive in the
absence of manifest error. This covenant shall survive the termination of this
Agreement and the payment of the Loans and all other amounts payable hereunder.
2.21 Change of Lending Office. Each Lender agrees that, upon the
------------------------
occurrence of any event giving rise to the operation of Section 2.18 or 2.19(a)
with respect to such Lender, it will, if requested by the Borrower, use
reasonable efforts (subject to overall policy considerations of such Lender) to
designate another lending office for any Loans affected by such event with the
object of avoiding the consequences of such event; provided, that such
--------
designation is made on terms that, in the sole judgment of such Lender, cause
such Lender and its lending office(s) to suffer no economic, legal or regulatory
disadvantage, and provided, further, that nothing in this Section 2.21 shall
-------- -------
affect or postpone any of the obligations of any Borrower or the rights of any
Lender pursuant to Section 2.18 or 2.19(a).
2.22 Replacement of Lenders under Certain Circumstances. The
--------------------------------------------------
Borrower shall be permitted to replace any Lender which (a) requests
reimbursement for amounts owing pursuant to Section 2.18 or 2.19 or (b) defaults
in its obligation to make Loans hereunder, with a replacement financial
institution; provided that (i) such replacement does not conflict with any
--------
Requirement of Law, (ii) no Event of Default shall have occurred and be
continuing at the time of such replacement, (iii) prior to any such replacement,
such Lender shall have taken no action under Section 2.21 so as to eliminate the
continued need for payment of amounts owing pursuant to Section 2.18 or 2.19,
(iv) the replacement financial institution shall purchase, at par, all Loans and
other amounts owing to such replaced Lender under this Agreement or any other
Loan Documents on or prior to the date of replacement, (v) the Borrower shall be
liable to such replaced Lender under Section 2.20 if any Eurodollar Loan owing
to such replaced Lender shall be purchased other than on the last day of the
Interest Period relating thereto, (vi) the replacement financial institution, if
not already a Lender, shall be reasonably satisfactory to the Administrative
Agent, (vii) the replaced Lender shall be obligated to make such replacement in
accordance with the provisions of Section 10.6 (provided that the Borrower shall
be obligated to pay the registration and processing fee referred to therein),
(viii) until such time as such replacement shall be consummated, the Borrower
shall pay all additional amounts (if any) required pursuant to Section 2.18 or
2.19, as the case may be, and (ix) any such replacement shall not be deemed to
be a waiver of any rights which the Borrower, the Administrative Agent or any
other Lender shall have against the replaced Lender.
SECTION 3. LETTERS OF CREDIT
3.1 L/C Commitment. (a) Subject to the terms and conditions
--------------
hereof, the Issuing Lender, in reliance on the agreements of the other Revolving
Credit Lenders set forth in Section 3.4(a), agrees to issue letters of credit
("Letters of Credit") for the account of the Borrower on any Business Day during
-----------------
the Revolving Credit Commitment Period in such form as may be approved from time
to time by the Issuing Lender; provided that the Issuing Lender shall have no
--------
obligation to issue any Letter of
<PAGE>
37
Credit if, after giving effect to such issuance, (i) the L/C Obligations would
exceed the L/C Commitment or (ii) the aggregate amount of the Available
Revolving Credit Commitments would be less than zero. Each Letter of Credit
shall (i) be denominated in Dollars and (ii) expire no later than the earlier of
(x) the first anniversary of its date of issuance and (y) the date which is five
Business Days prior to the Scheduled Revolving Credit Termination Date, provided
--------
that any Letter of Credit with a one-year term may provide for the renewal
thereof for additional one-year periods (which shall in no event extend beyond
the date referred to in clause (y) above). The letters of credit set forth on
Schedule 3.1 shall be deemed to be issued under this Agreement and shall
constitute Letters of Credit for all purposes hereunder.
(b) Each Letter of Credit shall be subject to the Uniform Customs
and, to the extent not inconsistent therewith, the laws of the State of New
York.
(c) The Issuing Lender shall not at any time be obligated to issue
any Letter of Credit hereunder if such issuance would conflict with, or cause
the Issuing Lender or any L/C Participant to exceed any limits imposed by, any
applicable Requirement of Law.
3.2 Procedure for Issuance of Letter of Credit. The Borrower may
------------------------------------------
from time to time request that the Issuing Lender issue a Letter of Credit by
delivering to the Issuing Lender at its address for notices specified herein an
Application therefor, completed to the satisfaction of the Issuing Lender, and
such other certificates, documents and other papers and information as the
Issuing Lender may reasonably request. Upon receipt of any Application, the
Issuing Lender will process such Application and the certificates, documents and
other papers and information delivered to it in connection therewith in
accordance with its customary procedures and shall promptly issue the Letter of
Credit requested thereby (but in no event shall the Issuing Lender be required
to issue any Letter of Credit earlier than three Business Days after its receipt
of the Application therefor and all such other certificates, documents and other
papers and information relating thereto) by issuing the original of such Letter
of Credit to the beneficiary thereof or as otherwise may be agreed to by the
Issuing Lender and the Borrower. The Issuing Lender shall furnish a copy of
such Letter of Credit to the Borrower promptly following the issuance thereof.
The Issuing Lender shall promptly furnish to the Administrative Agent, which
shall in turn promptly furnish to the Lenders, notice of the issuance of each
Letter of Credit (including the amount thereof). In the event of a conflict
between the provisions of the Application and the terms of this Agreement, the
terms of this Agreement shall govern.
3.3 Commissions, Fees and Other Charges. (a) The Borrower will pay
-----------------------------------
a commission on all outstanding Letters of Credit at a per annum rate equal to
the Applicable Margin then in effect with respect to Eurodollar Loans under the
Revolving Credit Facility, shared ratably among the Revolving Credit Lenders and
payable quarterly in arrears on each L/C Fee Payment Date after the issuance
date. In addition, the Borrower shall pay to the Issuing Lender for its own
account a fronting fee in an amount agreed upon between the Issuing Lender and
the Borrower, which shall in no event be greater than 1/4 of 1% per annum,
payable quarterly in arrears on each L/C Fee Payment Date after the Issuance
Date.
(b) In addition to the foregoing fees and commissions, the Borrower
shall pay or reimburse the Issuing Lender for such normal and customary costs
and expenses as are incurred or charged by the Issuing Lender in issuing,
negotiating, effecting payment under, amending or otherwise administering any
Letter of Credit.
3.4 L/C Participations. (a) The Issuing Lender irrevocably agrees
------------------
to grant and hereby grants to each L/C Participant, and, to induce the Issuing
Lender to issue Letters of Credit hereunder,
<PAGE>
38
each L/C Participant irrevocably agrees to accept and purchase and hereby
accepts and purchases from the Issuing Lender, on the terms and conditions
hereinafter stated, for such L/C Participant's own account and risk an undivided
interest equal to such L/C Participant's Revolving Credit Percentage in the
Issuing Lender's obligations and rights under each Letter of Credit issued
hereunder and the amount of each draft paid by the Issuing Lender thereunder.
Each L/C Participant unconditionally and irrevocably agrees with the Issuing
Lender that, if a draft is paid under any Letter of Credit for which the Issuing
Lender is not reimbursed in full by the Borrower in accordance with the terms of
this Agreement, such L/C Participant shall pay to the Issuing Lender upon demand
at the Issuing Lender's address for notices specified herein an amount equal to
such L/C Participant's Revolving Credit Percentage of the amount of such draft,
or any part thereof, which is not so reimbursed.
(b) If any amount required to be paid by any L/C Participant to the
Issuing Lender pursuant to Section 3.4(a) in respect of any unreimbursed portion
of any payment made by the Issuing Lender under any Letter of Credit is paid to
the Issuing Lender within three Business Days after the date such payment is
due, such L/C Participant shall pay to the Issuing Lender on demand an amount
equal to the product of (i) such amount, times (ii) the daily average Federal
Funds Effective Rate during the period from and including the date such payment
is required to the date on which such payment is immediately available to the
Issuing Lender, times (iii) a fraction the numerator of which is the number of
days that elapse during such period and the denominator of which is 360. If any
such amount required to be paid by any L/C Participant pursuant to Section
3.4(a) is not made available to the Issuing Lender by such L/C Participant
within three Business Days after the date such payment is due, the Issuing
Lender shall be entitled to recover from such L/C Participant, on demand, such
amount with interest thereon calculated from such due date at the rate per annum
applicable to ABR Loans under the Revolving Credit Facility. A certificate of
the Issuing Lender submitted to any L/C Participant with respect to any amounts
owing under this Section shall be conclusive in the absence of manifest error.
(c) Whenever, at any time after the Issuing Lender has made payment
under any Letter of Credit and has received from any L/C Participant its pro
---
rata share of such payment in accordance with Section 3.4(a), the Issuing Lender
- ----
receives any payment related to such Letter of Credit (whether directly from the
Borrower or otherwise, including proceeds of collateral applied thereto by the
Issuing Lender), or any payment of interest on account thereof, the Issuing
Lender will distribute to such L/C Participant its pro rata share thereof;
--- ----
provided, however, that in the event that any such payment received by the
- -------- -------
Issuing Lender shall be required to be returned by the Issuing Lender, such L/C
Participant shall return to the Issuing Lender the portion thereof previously
distributed by the Issuing Lender to it.
3.5 Reimbursement Obligation of the Borrower. The Borrower agrees to
----------------------------------------
reimburse the Issuing Lender on each date on which the Issuing Lender notifies
the Borrower of the date and amount of a draft presented under any Letter of
Credit and paid by the Issuing Lender for the amount of (a) such draft so paid
and (b) any taxes, fees, charges or other costs or expenses incurred by the
Issuing Lender in connection with such payment. Each such payment shall be made
to the Issuing Lender at its address for notices specified herein in lawful
money of the United States of America and in immediately available funds.
Interest shall be payable on any and all amounts remaining unpaid by the
Borrower under this Section from the date such amounts become payable (whether
at stated maturity, by acceleration or otherwise) until payment in full at the
rate set forth in Section 2.14(c). Unless reimbursed pursuant to this Section
3.5, each drawing under any Letter of Credit shall (unless an event of the type
described in clause (i) or (ii) of Section 8(f) shall have occurred and be
continuing with respect to the Borrower, in which case the procedures specified
in Section 3.4 for funding by L/C Participants shall apply) constitute a request
by the Borrower to the Administrative Agent for a borrowing pursuant to Section
2.5 of ABR Loans (or, at the option of the Administrative Agent and the Swing
Line Lender in their sole discretion, a
<PAGE>
39
borrowing pursuant to Section 2.7 of Swing Line Loans) in the amount of such
drawing. The Borrowing Date with respect to such borrowing shall be the date of
such drawing.
3.6 Obligations Absolute. The Borrower's obligations under this
--------------------
Section 3 shall be absolute and unconditional under any and all circumstances
and irrespective of any setoff, counterclaim or defense to payment which the
Borrower may have or have had against the Issuing Lender, any beneficiary of a
Letter of Credit or any other Person. The Borrower also agrees with the Issuing
Lender that the Issuing Lender shall not be responsible for, and the Borrower's
Reimbursement Obligations under Section 3.5 shall not be affected by, among
other things, the validity or genuineness of documents or of any endorsements
thereon, even though such documents shall in fact prove to be invalid,
fraudulent or forged, or any dispute between or among the Borrower and any
beneficiary of any Letter of Credit or any other party to which such Letter of
Credit may be transferred or any claims whatsoever of the Borrower against any
beneficiary of such Letter of Credit or any such transferee. The Issuing Lender
shall not be liable for any error, omission, interruption or delay in
transmission, dispatch or delivery of any message or advice, however
transmitted, in connection with any Letter of Credit, except for errors or
omissions found by a final and nonappealable decision of a court of competent
jurisdiction to have resulted from the gross negligence or willful misconduct of
the Issuing Lender. The Borrower agrees that any action taken or omitted by the
Issuing Lender under or in connection with any Letter of Credit or the related
drafts or documents, if done in the absence of gross negligence or willful
misconduct and in accordance with the standards of care specified in the Uniform
Commercial Code of the State of New York and the Uniform Customs, shall be
binding on the Borrower and shall not result in any liability of the Issuing
Lender to the Borrower.
3.7 Letter of Credit Payments. If any draft shall be presented for
-------------------------
payment under any Letter of Credit, the Issuing Lender shall promptly notify the
Borrower of the date and amount thereof. The responsibility of the Issuing
Lender to the Borrower in connection with any draft presented for payment under
any Letter of Credit shall, in addition to any payment obligation expressly
provided for in such Letter of Credit, be limited to determining that the
documents (including each draft) delivered under such Letter of Credit in
connection with such presentment are substantially in conformity with such
Letter of Credit.
3.8 Applications. To the extent that any provision of any
------------
Application related to any Letter of Credit is inconsistent with the provisions
of this Section 3, the provisions of this Section 3 shall apply.
SECTION 4. REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into this
Agreement and to make the Loans and issue or participate in the Letters of
Credit, the Borrower hereby represents and warrants to the Administrative Agent
and each Lender that:
4.1 Financial Condition. (a) The unaudited pro forma consolidated
------------------- --- -----
balance sheet of the Borrower and its consolidated Subsidiaries as at June 30,
1997 (including the notes thereto) (the "Pro Forma Balance Sheet"), a copy of
-----------------------
which has heretofore been furnished to each Lender, has been prepared giving
effect (as if such events had occurred on such date) to (i) the consummation of
the Recapitalization, (ii) the Loans to be made and the Senior Subordinated
Notes to be issued on the Closing Date and the use of proceeds thereof and (iii)
the payment of fees and expenses in connection with the foregoing. The Pro
Forma Balance Sheet complies with Regulation S-X of the Securities Act of 1933,
as amended, based on the best information available to the Borrower as of the
date of delivery thereof and consistent in all material respects with the
sources and uses of funds for the Recapitalization
<PAGE>
40
as previously disclosed to the Lenders and the forecasts and projections
previously provided to the Lenders, and presents fairly on a pro forma basis the
--- -----
estimated financial position of Borrower and its consolidated Subsidiaries as at
June 30, 1997, assuming that the events specified in the preceding sentence had
actually occurred at such date.
(b) The audited consolidated balance sheets of (i) Old GranCare as at
December 31, 1996, December 31, 1995 and December 31, 1994 and the related
consolidated statements of income and of cash flows for the fiscal years ended
on such dates, reported on by and accompanied by an unqualified report from
Ernst & Young LLP and (ii) LCA as at September 30, 1996, September 30, 1995 and
September 30, 1994 and the related consolidated statements of income and of cash
flows for the fiscal years ended on such dates, reported on by and accompanied
by an unqualified report from Ernst & Young LLP, in each case present fairly the
consolidated financial condition of Old GranCare or LCA, as the case may be, as
at such dates, and the consolidated results of their operations and their
consolidated cash flows for the respective fiscal years then ended. The
unaudited consolidated balance sheet of GranCare as at June 30, 1997, and the
related unaudited consolidated statements of income and cash flows for the six-
month period ended on such date, present fairly the consolidated financial
condition of GranCare as at such date, and the consolidated results of its
operations and its consolidated cash flows for the six-month period then ended
(subject to normal year-end audit adjustments). The unaudited consolidated
balance sheet of LCA as at June 30, 1997, and the related unaudited consolidated
statements of income and cash flows for the nine-month period ended on such
date, present fairly the consolidated financial condition of LCA as at such
date, and the consolidated results of its operations and its consolidated cash
flows for the nine-month period then ended (subject to normal year-end audit
adjustments). All such financial statements, including the related schedules
and notes thereto, have been prepared in accordance with GAAP applied
consistently throughout the periods involved (except as approved by the
aforementioned firm of accountants and disclosed therein). The Borrower and its
Subsidiaries do not have any material Guarantee Obligations, contingent
liabilities and liabilities for taxes, or any long-term leases or unusual
forward or long-term commitments, including, without limitation, any interest
rate or foreign currency swap or exchange transaction or other obligation in
respect of derivatives, which are not reflected in the most recent financial
statements of GranCare or LCA, as the case may be, referred to in this paragraph
(b). Except as disclosed in Schedule 4.1, during the period from September 30,
1996 to and including the Closing Date there has been no Disposition by LCA of
any material part of its business or Property and during the period from
December 31, 1996 to and including the Closing Date there has been no
Disposition by Old GranCare prior to February 13, 1997, or by GranCare from and
after February 13, 1997, of any material part of its business or Property.
4.2 No Change. (a) From September 30, 1996 to and including the date
---------
hereof there has been no development or event which has had or could reasonably
be expected to have a material adverse effect on the business, assets, property,
condition (financial or otherwise) or prospects of LCA and its Subsidiaries
taken as a whole; (b) from December 31, 1996 to and including the date hereof
there has been no development or event which has had or could reasonably be
expected to have a material adverse effect on the business, assets, property,
condition (financial or otherwise) or prospects of Grancare and its Subsidiaries
taken as a whole (other than the spin-off by Old GranCare of its interests in
TeamCare to Vitalink Pharmacy Services, Inc.); (c) since the date hereof, there
has been no development or event which has had or could reasonably be expected
to have a material adverse effect on the business, assets, property, condition
(financial or otherwise) or prospects of the Borrower and its Subsidiaries taken
as a whole; and (d) since the date hereof, there has been no development or
event which has had or could reasonably be expected to have a material adverse
effect on the validity or enforceability of this Agreement or any of the other
Loan Documents or the rights or remedies of the Administrative Agent or the
Lenders hereunder or thereunder.
<PAGE>
41
4.3 Corporate Existence; Compliance with Law. Each of the Borrower
----------------------------------------
and its Subsidiaries (a) is duly organized, validly existing (except to the
extent the failure to so exist results from a transaction permitted by Section
7.4) and in good standing under the laws of the jurisdiction of its
organization, (b) has the corporate power and authority, and the legal right, to
own and operate its Property, to lease the Property it operates as lessee and to
conduct the businesses in which it is currently engaged, (c) is duly qualified
as a foreign corporation and in good standing under the laws of each
jurisdiction where its ownership, lease or operation of Property or the conduct
of its business requires such qualification except where failure to so be
qualified could not, in the aggregate, reasonably be expected to have a Material
Adverse Effect and (d) is in compliance with all Requirements of Law except to
the extent that the failure to comply therewith could not, in the aggregate,
reasonably be expected to have a Material Adverse Effect.
4.4 Corporate Power; Authorization; Enforceable Obligations. Each
-------------------------------------------------------
Loan Party has the corporate power and authority, and the legal right, to make,
deliver and perform the Loan Documents to which it is a party and, in the case
of the Borrower, to borrow hereunder. Each Loan Party has taken all necessary
corporate action to authorize the execution, delivery and performance of the
Loan Documents to which it is a party and, in the case of the Borrower, to
authorize the borrowings on the terms and conditions of this Agreement. Each
consent or authorization of, filing with, notice to or other act by or in
respect of, any Governmental Authority or any other Person required in
connection with the Recapitalization and the borrowings hereunder or with the
execution, delivery, performance, validity or enforceability of this Agreement
or any of the Loan Documents, has been obtained or made and is in full force and
effect, except for the filings referred to in Section 4.19, which shall be made
promptly after the Closing Date and except as set forth on Schedule 4.4. Each
Loan Document has been duly executed and delivered on behalf of each Loan Party
party thereto. This Agreement constitutes, and each other Loan Document upon
execution will constitute, a legal, valid and binding obligation of each Loan
Party party thereto, enforceable against each such Loan Party in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
4.5 No Legal Bar. The execution, delivery and performance of this
------------
Agreement and the other Loan Documents, the issuance of Letters of Credit, the
borrowings hereunder and the use of the proceeds thereof will not violate any
Requirement of Law or, except with respect to those leases referred to on
Schedule 4.4, any Contractual Obligation of the Borrower or any of its
Subsidiaries and will not result in, or require, the creation or imposition of
any Lien on any of their respective properties or revenues pursuant to any
Requirement of Law or any such Contractual Obligation (other than the Liens
created by the Security Documents). No Requirement of Law or Contractual
Obligation applicable to the Borrower or any of its Subsidiaries could
reasonably be expected to have a Material Adverse Effect.
4.6 No Material Litigation. Except as described on Schedule 4.6, no
----------------------
litigation, investigation or proceeding of or before any arbitrator or
Governmental Authority is pending or, to the best knowledge of the Borrower,
threatened by or against the Borrower or any of its Subsidiaries or against any
of their respective properties or revenues (a) with respect to any of the Loan
Documents or any of the transactions contemplated hereby or thereby, or (b)
which could reasonably be expected to have a Material Adverse Effect.
4.7 No Default. Neither the Borrower nor any of its Subsidiaries is
----------
in default under or with respect to any of its Contractual Obligations in any
respect which could reasonably be expected to have a Material Adverse Effect.
No Default or Event of Default has occurred and is continuing.
<PAGE>
42
4.8 Ownership of Property; Liens. Each of the Borrower and its
----------------------------
Subsidiaries has title in fee simple to, or a valid leasehold interest in, all
its real property, and good title to, or a valid leasehold interest in, all its
other Property, and none of such Property is subject to any Lien except as
permitted by Section 7.3.
4.9 Intellectual Property. Except as described on Schedule 4.9: (a)
---------------------
the Borrower and each of its Subsidiaries owns, or is licensed to use, all
Intellectual Property necessary for the conduct of its business as currently
conducted; (b) to the best knowledge of the Borrower, no material claim has been
asserted and is pending by any Person challenging or questioning the use of any
Intellectual Property or the validity or effectiveness of any Intellectual
Property, nor does the Borrower know of any valid basis for any such claim; and
(c) to the best knowledge of the Borrower, the use of Intellectual Property by
the Borrower and its Subsidiaries does not infringe on the rights of any Person
in any material respect.
4.10 Taxes. Each of the Borrower and each of its Subsidiaries has
-----
filed or caused to be filed all Federal, state and other material tax returns
which are required to be filed and has paid all taxes shown to be due and
payable on said returns or on any assessments made against it or any of its
Property and all other material taxes, fees or other charges imposed on it or
any of its Property by any Governmental Authority (other than any such taxes,
fees or charges the amount or validity of which is currently being contested in
good faith by appropriate proceedings and with respect to which reserves in
conformity with GAAP have been provided on the books of the Borrower or its
Subsidiaries, as the case may be); no tax Lien has been filed, and, to the
knowledge of the Borrower, no claim is being asserted, with respect to any such
material tax, fee or other charge.
4.11 Federal Regulations. No part of the proceeds of any Loans will
-------------------
be used for "purchasing" or "carrying" any "margin stock" within the respective
meanings of each of the quoted terms under Regulation G or Regulation U of the
Board as now and from time to time hereafter in effect or for any purpose which
violates the provisions of the Regulations of the Board. If requested by any
Lender or the Administrative Agent, the Borrower will furnish to the
Administrative Agent and each Lender a statement to the foregoing effect in
conformity with the requirements of FR Form G-3 or FR Form U-1 referred to in
said Regulation G or Regulation U, as the case may be.
4.12 Labor Matters. There are no strikes or other labor disputes
-------------
against the Borrower or any of its Subsidiaries pending or, to the knowledge of
the Borrower, threatened that (individually or in the aggregate) could
reasonably be expected to have a Material Adverse Effect. Hours worked by and
payment made to employees of the Borrower and its Subsidiaries have not been in
violation of the Fair Labor Standards Act or any other applicable Requirement of
Law dealing with such matters that (individually or in the aggregate) could
reasonably be expected to have a Material Adverse Effect. All payments due from
the Borrower or any of its Subsidiaries on account of employee health and
welfare insurance that (individually or in the aggregate) could reasonably be
expected to have a Material Adverse Effect if not paid have been paid or accrued
as a liability on the books of the Borrower or the relevant Subsidiary.
4.13 ERISA. Neither a Reportable Event nor an "accumulated funding
-----
deficiency" (within the meaning of Section 412 of the Code or Section 302 of
ERISA) has occurred during the five-year period prior to the date on which this
representation is made or deemed made with respect to any Plan, and each Plan
has complied in all material respects with the applicable provisions of ERISA
and the Code. No termination of a Single Employer Plan (other than the American
Medical Services Employees' Pension Plan (the "American Plan")) has occurred,
and no Lien in favor of the PBGC or a Plan has arisen, during such five-year
period. The present value of all accrued benefits under each Single
<PAGE>
43
Employer Plan (based on those assumptions used to fund such Plans) did not, as
of the last annual valuation date prior to the date on which this representation
is made or deemed made, exceed the value of the assets of such Plan allocable to
such accrued benefits by a material amount. Neither the Borrower nor any
Commonly Controlled Entity has had a complete or partial withdrawal from any
Multiemployer Plan which has resulted or could reasonably be expected to result
in a material liability under ERISA, and neither the Borrower nor any Commonly
Controlled Entity would become subject to any material liability under ERISA if
the Borrower or any such Commonly Controlled Entity were to withdraw completely
from all Multiemployer Plans as of the valuation date most closely preceding the
date on which this representation is made or deemed made. No such Multiemployer
Plan is in Reorganization or Insolvent. Neither the Borrower nor any Commonly
Controlled Entity has incurred any liability which remains outstanding to the
PBGC by reason of the termination of the American Plan.
4.14 Investment Company Act; Other Regulations. No Loan Party is an
-----------------------------------------
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended. No Loan
Party is subject to regulation under any Requirement of Law (other than
Regulation X of the Board) which limits its ability to incur Indebtedness of the
type incurred or to be incurred under this Agreement or any other Loan Document.
4.15 Subsidiaries. The Subsidiaries listed on Schedule 4.15(a)
------------
constitute all the Subsidiaries of the Borrower at the Closing Date.
4.16 Use of Proceeds. The proceeds of the Term Loans shall be used
---------------
to finance a portion of the Recapitalization and to pay related fees and
expenses. The proceeds of the Revolving Credit Loans, the Swing Line Loans and
the Letters of Credit shall be used for permitted acquisitions, working capital
needs and general corporate purposes; provided, however, that up to $25,000,000
-------- -------
of the Revolving Credit Loans and Swing Line Loans may be used to finance a
portion of the Recapitalization and to pay related fees and expenses.
4.17 Environmental Matters. Except as described on Schedule 4.17 and
---------------------
such other matters as, individually or in the aggregate, could not reasonably be
expected to result in the payment of a Material Environmental Amount:
(a) To the knowledge of the Borrower and its Subsidiaries, the
facilities and properties owned, leased or operated by the Borrower or any
of its Subsidiaries (the "Specified Facilities") do not contain, and have
--------------------
not previously contained, any Materials of Environmental Concern in amounts
or concentrations or under circumstances which (i) constitute or
constituted a violation of, or (ii) could give rise to liability under, any
Environmental Law.
(b) All operations of the Borrower and its Subsidiaries at the
Specified Facilities are in compliance and have in the last five years been
in compliance with all applicable Environmental Laws, and (ii) to the
knowledge of the Borrower and its Subsidiaries, there is no contamination
at, under or about the Specified Facilities or violation of any
Environmental Law with respect to the Specified Facilities or the business
operated by the Borrower or any of its Subsidiaries (the "Business") which
--------
could interfere with the continued operation of the Specified Facilities or
impair the fair saleable value thereof.
(c) Neither the Borrower nor any of its Subsidiaries has received or
knows of any notice of violation, alleged violation, non-compliance,
liability or potential liability regarding environmental matters or
compliance with Environmental Laws with regard to any of the
<PAGE>
44
Specified Facilities or the Business, nor does the Borrower have knowledge
or reason to believe that any such notice will be received or is being
threatened.
(d) To the knowledge of the Borrower or any of its Subsidiaries,
materials of Environmental Concern have not been transported or disposed of
in violation of, or in a manner or to a location which could give rise to
liability of the Borrower or any of its Subsidiaries under, any
Environmental Law, nor have any Materials of Environmental Concern been
generated, treated, stored or disposed of at, on or under any location in
violation of, or in a manner that could reasonably be anticipated to give
rise to liability of the Borrower or any of its Subsidiaries under, any
applicable Environmental Law.
(e) No judicial proceeding or governmental or administrative action
is pending or, to the knowledge of the Borrower, threatened, under any
Environmental Law to which the Borrower or any Subsidiary is or will be
named as a party, nor are there any consent decrees or other decrees,
consent orders, administrative orders or other orders, or other
administrative or judicial requirements applicable to the Borrower or any
of its Subsidiaries outstanding under any Environmental Law.
(f) To the knowledge of the Borrower and its Subsidiaries, there has
been no release or threat of release of Materials of Environmental Concern
at or from the Specified Facilities, or arising from or related to the
operations of the Borrower or any Subsidiary in connection with the
Specified Facilities or otherwise in connection with the Business, in
violation of or that could reasonably be expected to give rise to liability
under Environmental Laws.
4.18 Accuracy of Information, etc. No statement or information
----------------------------
contained in this Agreement, any other Loan Document, the Confidential
Information Memorandum or any other document, certificate or statement furnished
to the Administrative Agent or the Lenders or any of them, by or on behalf of
any Loan Party for use in connection with the transactions contemplated by this
Agreement or the other Loan Documents, contained as of the date such statement,
information, document or certificate was so furnished (or, in the case of the
Confidential Information Memorandum, as of the Closing Date), any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements contained herein or therein not misleading. The
projections and pro forma financial information contained in the materials
--- -----
referenced above are based upon good faith estimates and assumptions believed by
management of the Borrower to be reasonable at the time made, it being
recognized by the Lenders that such financial information as it relates to
future events is not to be viewed as fact and that actual results during the
period or periods covered by such financial information may differ from the
projected results set forth therein by a material amount. As of the Closing
Date, the representations and warranties contained in the Recapitalization
Agreement are true and correct in all material respects. There is no fact known
to any Loan Party that could reasonably be expected to have a Material Adverse
Effect that has not been expressly disclosed herein, in the other Loan
Documents, in the Confidential Information Memorandum or in any other documents,
certificates and statements furnished to the Administrative Agent and the
Lenders for use in connection with the transactions contemplated hereby and by
the other Loan Documents.
4.19 Security Documents. (a) The Guarantee and Collateral Agreement
------------------
is effective to create in favor of the Collateral Agent, for the benefit of the
Lenders, a legal, valid and enforceable Lien on or security interest in the
Collateral described therein and proceeds thereof. In the case of the Pledged
Stock described in the Guarantee and Collateral Agreement, when stock
certificates representing such Pledged Stock (together with undated stock powers
relating thereto) are delivered to the Administrative Agent, and in the case of
the other Collateral described in the Guarantee and Collateral Agreement as to
<PAGE>
45
which a security interest may be perfected by the filing of financing statements
under the Uniform Commercial Code, when financing statements describing such
Collateral in appropriate form are filed in the offices specified on Schedule
4.19(a), the Guarantee and Collateral Agreement shall constitute a fully
perfected Lien on, and security interest in, all right, title and interest of
the Loan Parties in such Collateral and the proceeds thereof, as security for
the Obligations (as defined in the Guarantee and Collateral Agreement), in each
case prior and superior in right to any other Person, except as permitted in
Section 7.3.
(b) Each of the Mortgages is effective to create in favor of the
Collateral Agent, for the benefit of the Lenders, a legal, valid and enforceable
Lien on the Mortgaged Properties described therein and proceeds thereof, and
when the Mortgages are filed in the offices specified on Schedule 4.19(b), each
such Mortgage shall constitute a fully perfected Lien on, and security interest
in, all right, title and interest of the Loan Parties in the Mortgaged
Properties and the proceeds thereof, as security for the Obligations (as defined
in the relevant Mortgage), in each case prior and superior in right to any other
Person, except as permitted in Section 7.3.
4.20 Solvency. Each Loan Party is, and after giving effect to the
--------
Recapitalization and the incurrence of all Indebtedness and obligations being
incurred in connection herewith and therewith will be and will continue to be,
Solvent.
4.21 Senior Indebtedness. The Obligations constitute "Senior
-------------------
Indebtedness" of the Borrower under and as defined in the Senior Subordinated
Note Indenture. The obligations of each Subsidiary Guarantor under the
Guarantee and Collateral Agreement constitute "Guarantor Senior Indebtedness" of
such Subsidiary Guarantor under and as defined in the Senior Subordinated Note
Indenture.
4.22 Health Care Permits. Except as disclosed on Schedule 4.22:
-------------------
(a) Except as, in the aggregate, could not reasonably be expected to
have a Material Adverse Effect: (i) each of the Borrower and its
Subsidiaries now has (after giving effect to the Recapitalization), and has
no reason to believe it will not be able to maintain in effect, all Health
Care Permits necessary for the lawful conduct of its business or operations
wherever now conducted and as planned to be conducted, including, without
limitation, the ownership and operation of its Health Care Facilities
pursuant to all Requirements of Law, (ii) all such Health Care Permits are
in full force and effect and have not been amended or otherwise modified,
rescinded, revoked or assigned, (iii) the Borrower and each of its
Subsidiaries is substantially complying with the requirements of each such
Health Care Permit, and no event has occurred, and no condition exists,
which, with the giving of notice, the passage of time, or both, would
constitute a violation thereof, (iv) neither the Borrower nor any of its
Subsidiaries, has received any written notice of any violation of any
Requirement of Law, (v) to the knowledge of the Borrower, no condition
exists or event has occurred which in itself or with the giving of notice
or the lapse of time, or both, would result in the suspension, revocation,
impairment, forfeiture or non-renewal of any such Health Care Permit, (vi)
there is no claim filed with any Governmental Authority of which the
Borrower or any of its Subsidiaries has been notified in writing
challenging the validity of any such Health Care Permit and (vii) the
continuation, validity and effectiveness of all such Health Care Permits
will not be adversely affected by the Recapitalization or the execution and
performance of any of the Loan Documents.
(b) All Health Care Facilities owned, leased, managed or operated by
the Borrower or any of its Subsidiaries are entitled to participate in, and
receive payment under, the
<PAGE>
46
appropriate Medicare, Medicaid and related reimbursement programs, and any
similar state or local government-sponsored program, to the extent that the
Borrower or any of its Subsidiaries has decided to participate in any such
program, and to receive reimbursement from private and commercial payers
and health maintenance organizations to the extent applicable thereto.
There are no proceedings pending or, to the knowledge of the Borrower, any
proceedings threatened or investigations pending or threatened, by any
Governmental Authority with respect to the Borrower's or any of its
Subsidiaries' participation in the Medicare, Medicaid or related
reimbursement programs and which could reasonably be expected to have a
Material Adverse Effect.
SECTION 5. CONDITIONS PRECEDENT
5.1 Conditions to Initial Extension of Credit. The agreement of each
-----------------------------------------
Lender to make the initial extension of credit requested to be made by it is
subject to the satisfaction, prior to or concurrently with the making of such
extension of credit on the Closing Date, of the following conditions precedent:
(a) Loan Documents. The Administrative Agent shall have received (i)
--------------
this Agreement, executed and delivered by a duly authorized officer of the
Borrower, (ii) the Guarantee and Collateral Agreement, executed and
delivered by a duly authorized officer of the Borrower and each Subsidiary
Guarantor, (iii) each of the Mortgages, executed and delivered by a duly
authorized officer of each party thereto, and (iv) for the account of each
relevant Lender, Notes conforming to the requirements hereof and executed
and delivered by a duly authorized officer of the Borrower.
(b) Recapitalization, etc. (i) The following transactions shall
---------------------
have been consummated, or shall be consummated substantially
contemporaneously with the initial extension of credit hereunder, in each
case in accordance with the Recapitalization Agreement:
(A) Apollo Merger Sub shall have received at least $240,000,000
from the proceeds of equity issued by Apollo Merger Sub to the
Permitted Investors; (B) Apollo Merger Sub shall have merged with and
into LCA; (C) Grancare and LCA Merger Sub shall have merged, with the
surviving entity of such merger remaining a Wholly Owned Subsidiary of
LCA, and any transactions related to any of the foregoing, all
pursuant to the Recapitalization Agreement (collectively, the
"Recapitalization") and no provision of the Recapitalization Agreement
----------------
shall have been waived, amended, supplemented or otherwise modified in
any manner reasonably deemed by the Administrative Agent to be
material and adverse to the Lenders; and (D) the Borrower shall have
received at least $450,000,000 in gross cash proceeds from the
issuance of the Senior Subordinated Notes.
(ii) The Borrower shall not be in breach or violation of any of
its obligations under the Recapitalization Agreement or the other documents
executed in connection therewith (including, without limitation, the Senior
Subordinated Note Indenture) and the execution and delivery by the Borrower
of the Recapitalization Agreement shall not violate any Requirement of Law
or Contractual Obligation to which the Borrower or any of its Subsidiaries
or Affiliates is subject.
<PAGE>
47
(c) Pro Forma Balance Sheet; Financial Statements. The Lenders shall
---------------------------------------------
have received (i) the Pro Forma Balance Sheet, (ii) audited consolidated
financial statements of Old GranCare and LCA for the 1996, 1995 and 1994
fiscal years and (iii) unaudited interim consolidated financial statements
of GranCare and LCA for each fiscal quarterly period ended subsequent to
the date of the latest applicable financial statements delivered pursuant
to clause (ii) of this paragraph as to which such financial statements are
available, and such financial statements shall not, in the reasonable
judgment of the Lenders, reflect any material adverse change in the
consolidated financial condition of GranCare or LCA, as the case may be, as
reflected in the financial statements or projections contained in the
Confidential Information Memorandum.
(d) Approvals. All material governmental and third party approvals
---------
and filings (including, without limitation, approvals or filings required
in connection with Health Care Permits and landlords', real estate
investment trusts' and other consents) necessary in connection with the
Recapitalization, the continuing operations of the Borrower and its
Subsidiaries and the transactions contemplated hereby shall have been
obtained or made, as applicable, and be in full force and effect, and all
applicable waiting periods shall have expired without any action being
taken or threatened by any competent authority which would restrain,
prevent or otherwise impose adverse conditions on the Recapitalization or
the financing contemplated hereby (or in the case of Health Care Permits
which cannot be obtained prior to consummation of the Recapitalization, the
Administrative Agent shall have received evidence that satisfactory
arrangements have been made to apply for and obtain such Health Care
Permits as promptly as practicable after the Closing Date). No litigation
or order of any court of competent jurisdiction shall be pending which
seeks the enjoinment of or which has had the effect of enjoining the
Recapitalization shall be pending or shall be in full force and effect.
The Lenders shall be reasonably satisfied with the resolution or settlement
of any such litigation or court order.
(e) Lien Searches. The Administrative Agent shall have received the
-------------
results of a recent lien search in each of the jurisdictions where assets
of the Loan Parties are located, and such search shall reveal no liens on
any of the assets of the Borrower or its Subsidiaries except for liens
permitted by Section 7.3 or liens to be discharged on or prior to the
Closing Date.
(f) Expenses. The Administrative Agent shall have received
--------
reasonably satisfactory evidence that the fees and expenses to be incurred
in connection with the Recapitalization and the financing thereof shall not
exceed $122,000,000.
(g) Closing Certificate. The Administrative Agent shall have
-------------------
received, with a counterpart for each Lender, a certificate of each Loan
Party, dated the Closing Date, substantially in the form of Exhibit C, with
appropriate insertions and attachments.
(h) Legal Opinions. The Administrative Agent shall have received the
--------------
following executed legal opinions:
(i) the legal opinion of Powell, Goldstein, Frazer & Murphy
LLP, counsel to the Borrower and its Subsidiaries, substantially in
the form of Exhibit F;
(ii) to the extent consented to by the relevant counsel,
each legal opinion, if any, delivered in connection with the
Recapitalization Agreement, accompanied by a reliance letter in favor
of the Lenders; and
<PAGE>
48
(iii) the legal opinion of local counsel in each
jurisdiction where the Borrower or any Subsidiary Guarantor keeps a
material amount of its Property.
Each such legal opinion shall cover such other matters incident to the
transactions contemplated by this Agreement as the Administrative Agent may
reasonably require.
(i) Pledged Stock; Stock Powers. The Administrative Agent shall have
---------------------------
received the certificates representing the shares of Capital Stock pledged
pursuant to the Guarantee and Collateral Agreement, together with an
undated stock power for each such certificate executed in blank by a duly
authorized officer of the pledgor thereof.
(j) Filings, Registrations and Recordings. Each document (including,
-------------------------------------
without limitation, any Uniform Commercial Code financing statement)
required by the Security Documents or under law or reasonably requested by
the Administrative Agent to be filed, registered or recorded in order to
create in favor of the Collateral Agent, for the benefit of the Lenders, a
perfected Lien on the Collateral described therein, prior and superior in
right to any other Person (other than with respect to Liens expressly
permitted by Section 7.3), shall be in proper form for filing, registration
or recordation.
(k) Mortgages, etc. The Administrative Agent shall have received a
--------------
Mortgage with respect to each Mortgaged Property, executed and delivered by
a duly authorized officer of each party thereto.
(l) Solvency Opinion. The Administrative Agent shall have received a
----------------
solvency opinion from Valuation Research Corp.
(m) Insurance. The Administrative Agent shall have received
---------
insurance certificates satisfying the requirements of Section 5 of the
Guarantee and Collateral Agreement.
(n) Fees. The Administrative Agent and the Lenders shall have
----
received the fees to be received on the Closing Date previously agreed to
in writing between them and all expenses for which invoices have been
presented on or before the Closing Date.
5.2 Conditions to Each Extension of Credit. The agreement of each
--------------------------------------
Lender to make any extension of credit requested to be made by it on any date
(including, without limitation, its initial extension of credit) is subject to
the satisfaction of the following conditions precedent:
(a) Representations and Warranties. Each of the representations and
------------------------------
warranties made by any Loan Party in or pursuant to the Loan Documents
shall be true and correct in all material respects on and as of such date
as if made on and as of such date, except to the extent such
representations and warranties expressly relate to an earlier date.
(b) No Default. No Default or Event of Default shall have occurred
----------
and be continuing on such date or after giving effect to the extensions of
credit requested to be made on such date.
Each borrowing by and issuance of a Letter of Credit on behalf of the Borrower
hereunder shall constitute a representation and warranty by the Borrower as of
the date of such extension of credit that the conditions contained in this
Section 5.2 have been satisfied.
<PAGE>
49
SECTION 6. AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitments remain in
effect, any Letter of Credit remains outstanding or any Loan or other amount is
owing to any Lender or the Administrative Agent hereunder, the Borrower shall
and shall cause each of its Subsidiaries to:
6.1 Financial Statements. Furnish to the Administrative Agent (with
--------------------
sufficient copies for each Lender):
(a) as soon as available, but in any event within 90 days after the
end of each fiscal year of the Borrower, a copy of the audited consolidated
balance sheet of the Borrower and its consolidated Subsidiaries as at the
end of such year and the related audited consolidated statements of income
and of cash flows for such year, setting forth in each case in comparative
form (for fiscal years 1998 and thereafter) the figures for the previous
year, reported on without a "going concern" or like qualification or
exception, or qualification arising out of the scope of the audit, by Ernst
& Young LLP or other independent certified public accountants of nationally
recognized standing; and
(b) as soon as available, but in any event not later than 45 days
after the end of each of the first three quarterly periods of each fiscal
year of the Borrower, the unaudited consolidated balance sheet of the
Borrower and its consolidated Subsidiaries as at the end of such quarter
and the related unaudited consolidated statements of income and of cash
flows for such quarter and the portion of the fiscal year through the end
of such quarter, setting forth in each case in comparative form the figures
for the previous year, certified by a Responsible Officer as being fairly
stated in all material respects (subject to normal year-end audit
adjustments);
all such financial statements shall be complete and correct in all material
respects and shall be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods (except as approved by such accountants or officer, as the case may be,
and disclosed therein).
6.2 Certificates; Other Information. Furnish to each of the Lenders:
-------------------------------
(a) concurrently with the delivery of the financial statements
referred to in Section 6.1(a), a certificate of the independent certified
public accountants reporting on such financial statements stating that in
making the examination necessary therefor no knowledge was obtained of any
Default or Event of Default, except as specified in such certificate;
(b) concurrently with the delivery of any financial statements
pursuant to Section 6.1, (i) a certificate of a Responsible Officer stating
that, to the best of each such Responsible Officer's knowledge, each Loan
Party during such period has observed or performed all of its covenants and
other material agreements, and satisfied every material condition,
contained in this Agreement and the other Loan Documents to which it is a
party to be observed, performed or satisfied by it, and that such
Responsible Officer has obtained no knowledge of any Default or Event of
Default except as specified in such certificate and (ii) in the case of
quarterly or annual financial statements, (x) a Compliance Certificate
containing all information necessary for determining compliance by the
Borrower and its Subsidiaries with the provisions of Section 7.1 of this
Agreement referred to therein as of the last day of the fiscal quarter or
fiscal year of the Borrower, as the case may be, and (y) to the extent not
previously disclosed to the Administrative Agent, a listing of any county
or state within the United States where any Loan
<PAGE>
50
Party keeps inventory (excluding immaterial pharmaceutical inventory
located in a county where neither the Borrower nor any of its Subsidiaries
maintains a distribution center) or equipment and of any Intellectual
Property acquired by any Loan Party since the date of the most recent list
delivered pursuant to this clause (y) (or, in the case of the first such
list so delivered, since the Closing Date);
(c) as soon as available, and in any event no later than 45 days
after the end of each fiscal year of the Borrower, a detailed consolidated
budget for the following fiscal year (including a projected consolidated
balance sheet of the Borrower and its Subsidiaries as of the end of the
following fiscal year, and the related consolidated statements of projected
cash flow, projected changes in financial position and projected income),
and, as soon as available, significant revisions, if any, of such budget
and projections with respect to such fiscal year (collectively, the
"Projections"), which Projections shall in each case be accompanied by a
summary of assumptions and a certificate of a Responsible Officer stating
that such Projections are based on reasonable estimates, information and
assumptions and that such Responsible Officer has no reason to believe that
such Projections are incorrect or misleading in any material respect;
(d) promptly following the circulation thereof for execution, but
prior to the effectiveness thereof, copies of substantially final drafts of
any proposed amendment, supplement, waiver or other modification with
respect to the Senior Subordinated Note Indenture, the Senior Subordinated
Notes or the Recapitalization Agreement;
(e) within five days after the same are sent, copies of all financial
statements and reports which the Borrower sends to the holders of any class
of its debt securities or public equity securities and within five days
after the same are filed, copies of all financial statements and reports
which the Borrower may make to, or file with, the Securities and Exchange
Commission or any successor or analogous Governmental Authority; and
(f) promptly, such additional financial and other information as any
Lender may from time to time reasonably request (through the Administrative
Agent).
6.3 Payment of Obligations. Pay, discharge or otherwise satisfy at
----------------------
or before maturity or before they become delinquent, as the case may be, all its
material obligations of whatever nature, except where the amount or validity
thereof is currently being contested in good faith by appropriate proceedings
and reserves in conformity with GAAP with respect thereto have been provided on
the books of the Borrower or its Subsidiaries, as the case may be.
6.4 Conduct of Business and Maintenance of Existence, etc. (a) (i)
------------------------------------------------------
Continue to engage in the business of owning, operating, managing and/or
financing Health Care Facilities and providing other services or amenities
customarily provided by, or other activities customarily undertaken by, Persons
owning, operating, managing and/or financing Health Care Facilities, (ii)
preserve, renew and keep in full force and effect its corporate existence
(except as otherwise permitted by Section 7.4) and (iii) take all reasonable
action to maintain all rights, privileges and franchises necessary or desirable
in the normal conduct of its business, except, in each case, as otherwise
permitted by Section 7.4 and except, in the case of clause (iii) above, to the
extent that failure to do so could not reasonably be expected to have a Material
Adverse Effect; and (b) comply with all Contractual Obligations and Requirements
of Law except to the extent that failure to comply therewith could not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
<PAGE>
51
6.5 Maintenance of Property; Insurance. (a) Keep all Property
----------------------------------
useful and necessary in its business in good working order and condition,
ordinary wear and tear excepted and (b) maintain with financially sound and
reputable insurance companies insurance on all its Property in at least such
amounts and against at least such risks (but including in any event public
liability, product liability and business interruption) as are usually insured
against by companies engaged in the same or a similar business in the same
geographic areas.
6.6 Health Care Permits and Approvals. Take all action reasonably
---------------------------------
necessary to (a) maintain in full force and effect all Health Care Permits
reasonably necessary for the lawful conduct of its business or operations where
now conducted and as planned to be conducted, including the ownership and
operation of its Health Care Facilities, pursuant to all Requirements of Law and
(b) to ensure that all Health Care Facilities owned, leased, managed or operated
by the Borrower or any of its Subsidiaries are entitled to participate in, and
receive payment under, the appropriate Medicare, Medicaid and related
reimbursement programs, and any similar state or local government-sponsored
program, to the extent the Borrower or any of its Subsidiaries has decided to
participate in any such program, and to receive reimbursement from private and
commercial payers and health maintenance organizations to the extent applicable
thereto, except, in each case, where a failure to do so could not reasonably be
expected to have a Material Adverse Effect.
6.7 Inspection of Property; Books and Records; Discussions. (a)
------------------------------------------------------
Keep proper books of records and account in which full, true and correct entries
in conformity with GAAP and all Requirements of Law shall be made of all
dealings and transactions in relation to its business and activities and (b)
permit representatives of any Lender to visit and inspect any of its properties
and examine and make abstracts from any of its books and records at any
reasonable time and as often as may reasonably be desired and to discuss the
business, operations, properties and financial and other condition of the
Borrower and its Subsidiaries with officers and employees of the Borrower and
its Subsidiaries and with its independent certified public accountants;
provided, that the Administrative Agent shall use reasonable efforts to
- --------
coordinate any such visits prior to the occurrence and during the continuance of
an Event of Default.
6.8 Notices. Promptly give notice to the Administrative Agent and
-------
each Lender of:
(a) the occurrence of any Default or Event of Default, provided, that
--------
in the case of Defaults or Events of Default referred to in Section 8(d),
the Borrower has knowledge thereof;
(b) any (i) default or event of default under any Contractual
Obligation of the Borrower or any of its Subsidiaries or (ii) litigation,
investigation or proceeding which may exist at any time between the
Borrower or any of its Subsidiaries and any Governmental Authority, which
in either case could reasonably be expected to have a Material Adverse
Effect;
(c) any litigation or proceeding affecting the Borrower or any of its
Subsidiaries in which the amount involved is $10,000,000 or more and not
covered by insurance or in which injunctive or similar relief is sought;
(d) the following events, as soon as possible and in any event within
30 days after the Borrower knows or has reason to know thereof: (i) the
occurrence of any Reportable Event with respect to any Plan, a failure to
make any required contribution to a Plan, the creation of any Lien in favor
of the PBGC or a Plan or any withdrawal from, or the termination,
Reorganization or Insolvency of, any Multiemployer Plan or (ii) the
institution of proceedings or the taking of any other action by the PBGC or
the Borrower or any Commonly Controlled Entity or any
<PAGE>
52
Multiemployer Plan with respect to the withdrawal from, or the termination,
Reorganization or Insolvency of, any Plan;
(e) the following events, as soon as possible and in any event within
five Business Days (i) after obtaining knowledge thereof, the occurrence of
any event that would (with the giving of notice, the passage of time, or
both) be a violation of any Health Care Permit necessary for the lawful
conduct of the business or operations of the Borrower or any of its
Subsidiaries (other than those Health Care Permits the violation of which
could not reasonably be expected to have a Material Adverse Effect),
including, without limitation, the ownership and operation of its Health
Care Facilities, (ii) after receipt thereof, any notice of any violation of
any Requirements of Law which would (with the giving of notice, the passage
of time, or both) cause any of the Health Care Permits referred to in
clause (i) to be modified, rescinded or revoked and which the Borrower does
not reasonably expect to be able to cure within a reasonable period of
time, (iii) after receipt thereof, any notice, summons, citation or other
proceeding seeking to adversely modify in any material respect, revoke, or
suspend any Medicare provider agreement, Medicaid provider agreement,
Medicare certification or Medicaid certification applicable to any of the
Health Care Facilities of the Borrower or any of its Subsidiaries in any
manner which could reasonably be expected to have a Material Adverse
Effect, or (iv) after obtaining knowledge thereof, any revocation or
involuntary termination of any Medicare provider agreement, Medicaid
provider agreement, Medicare certification or Medicaid certification
applicable to any of the Health Care Facilities of the Borrower or any of
its Subsidiaries that could reasonably be expected to have a Material
Adverse Effect;
(f) as soon as possible and in any event within 10 days of obtaining
knowledge thereof, the default, notice of default, event of default or
breach by the Borrower or any of its Subsidiaries under any Material Lease;
(g) any development or event which has had or could reasonably be
expected to have a Material Adverse Effect; and
(h) as soon as possible and in any event within 10 days of obtaining
knowledge thereof, any development, event, or condition that, individually
or in the aggregate with other developments, events or conditions, could
reasonably be expected to result in the payment by Borrower and its
Subsidiaries, in the aggregate, of a Material Environmental Amount.
Each notice pursuant to this Section 6.8 shall be accompanied by a statement of
a Responsible Officer setting forth details of the occurrence referred to
therein and stating what action the Borrower or the relevant Subsidiary proposes
to take with respect thereto.
6.9 Environmental Laws. (a) Comply in all material respects with,
------------------
and use commercially reasonable efforts to ensure compliance in all material
respects by all tenants and subtenants, if any, with, all applicable
Environmental Laws, and obtain and comply in all material respects with and
maintain, and use commercially reasonable efforts to ensure that all tenants and
subtenants obtain and comply in all material respects with and maintain, any and
all licenses, approvals, notifications, registrations or permits required by
applicable Environmental Laws.
(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply with all orders and directives of all
Governmental Authorities regarding Environmental Laws, unless such requirement,
order or directive is being timely challenged in appropriate proceedings and the
pendency
<PAGE>
53
of such proceedings could not reasonably be expected to result in payment of a
Material Environmental Amount.
(c) With respect to any development, event, or condition that is (or
should have been) the subject of a notice provided pursuant to subsection 6.8(h)
of this Agreement, provide such information to the Administrative Agent as may
be necessary to give the Administrative Agent reasonable assurance that such
development, event, or condition could not reasonably be expected to result in a
Material Adverse Effect.
6.10 Additional Collateral, etc. (a) With respect to any Property
--------------------------
acquired after the Closing Date by the Borrower or any of its Subsidiaries
(other than (w) owned or leased real property, (x) any Property described in
paragraph (b), (c) or (d) below, (y) any Property subject to a Lien expressly
permitted by Section 7.3(g), (k) or (l), and (z) Property located at a
particular site having a value of less than $400,000) as to which the Collateral
Agent, for the benefit of the Lenders, does not have a perfected Lien, promptly
(i) execute and deliver to the Administrative Agent such amendments to the
Guarantee and Collateral Agreement or such other documents as the Administrative
Agent deems reasonably necessary or advisable in order to grant to the
Collateral Agent, for the benefit of the Lenders, a security interest in such
Property and (ii) take all actions reasonably necessary or advisable to grant to
the Collateral Agent, for the benefit of the Lenders, a perfected security
interest in such Property that is prior to all other security interests except
as permitted by Section 7.3, including without limitation, the filing of Uniform
Commercial Code financing statements in such jurisdictions as may be required by
the Guarantee and Collateral Agreement or by law or as may be reasonably
requested by the Administrative Agent.
(b) With respect to any fee interest in any real estate having a
value (together with improvements thereof) of at least $2,000,000 acquired after
the Closing Date by the Borrower or any of its Subsidiaries (other than any such
real estate subject to a Lien expressly permitted by Section 7.3(g), (k) or
(l)), promptly (i) execute and deliver a first priority mortgage, deed to secure
debt or deed of trust, as the case may be, in favor of the Collateral Agent, for
the benefit of the Lenders, covering such real estate, in form and substance
reasonably satisfactory to the Administrative Agent and (ii) provide the
Administrative Agent with evidence of title to such real estate.
(c) With respect to any new Subsidiary (other than an Excluded
Foreign Subsidiary) created or acquired after the Closing Date by the Borrower
or any of its Subsidiaries (which, for the purposes of this paragraph (c), shall
include any existing Subsidiary that ceases to be an Excluded Foreign Subsidiary
or any existing inactive Subsidiary which becomes active), promptly (i) execute
and deliver to the Administrative Agent such amendments or joinders to the
Guarantee and Collateral Agreement as the Administrative Agent deems reasonably
necessary or advisable in order to grant to the Collateral Agent, for the
benefit of the Lenders, a perfected first priority security interest in the
Capital Stock of such new Subsidiary which is owned by the Borrower or any of
its Subsidiaries (subject to any Liens permitted by Section 7.3), (ii) deliver
to the Administrative Agent the certificates representing such Capital Stock,
together with undated stock powers, in blank, executed and delivered by a duly
authorized officer of the Borrower or such Subsidiary, as the case may be and
(iii) cause such new Subsidiary (A) to become a party to the Guarantee and
Collateral Agreement and (B) to take such actions reasonably necessary or
advisable to grant to the Collateral Agent for the benefit of the Lenders a
perfected first priority security interest in the Collateral described in the
Guarantee and Collateral Agreement with respect to such new Subsidiary (subject
to any Liens permitted by Section 7.3), including, without limitation, the
filing of Uniform Commercial Code financing statements in such jurisdictions as
may be required by the Guarantee and Collateral Agreement or by law or as may be
reasonably requested by the Administrative Agent.
<PAGE>
54
(d) With respect to any new Excluded Foreign Subsidiary created or
acquired after the Closing Date by the Borrower or any of its Subsidiaries,
promptly (i) execute and deliver to the Administrative Agent such amendments or
joinders to the Guarantee and Collateral Agreement as the Administrative Agent
deems necessary or advisable in order to grant to the Collateral Agent, for the
benefit of the Lenders, a perfected first priority security interest in the
Capital Stock of such new Subsidiary which is owned by the Borrower or any of
its Subsidiaries (provided that in no event shall more than 65% of the total
outstanding Capital Stock of any such new Subsidiary be required to be so
pledged) and (ii) deliver to the Administrative Agent the certificates
representing such Capital Stock, together with undated stock powers, in blank,
executed and delivered by a duly authorized officer of the Borrower or such
Subsidiary, as the case may be.
6.11 Permitted Acquisitions. (a) Deliver to the Lenders, not less
----------------------
than 10 Business Days prior to the closing of any proposed Acquisition involving
a Purchase Price greater than or equal to $10,000,000 (which Purchase Price
shall be increased to $25,000,000 if the Consolidated Leverage Ratio as of the
last day of the most recently completed fiscal quarter is less than 4.5 to 1.0),
each of the following: (i) a description of the property, assets and/or equity
interest being purchased, in reasonable detail; (ii) a term sheet or other
description setting forth the essential terms and the basic structure of the
proposed Acquisition (including, Purchase Price and method and structure of
payment; in this regard, if the Purchase Price includes a note or other right to
payment the Borrower shall detail the economic terms thereof and state in
writing the balance sheet amount that will be required to be recorded in
connection with such consideration; if the proposed Acquisition is approved, the
amount of such consideration for purposes of the restrictions set forth in
Section 7.8(h) shall be such balance sheet amount); (iii) projected statements
of income for the entity that is being acquired (or the assets, if an asset
Acquisition) for at least a two-year period following such Acquisition
(including a summary of assumptions or pro forma adjustments for such
projections); (iv) to the extent made available to Borrower, historical
financial statements for the entity that is being acquired (or the assets, if an
asset Acquisition) (including balance sheets and statements of income, retained
earnings and cash flows for at least a two-year period prior to such
Acquisition); and (v) confirmation, supported by detailed calculations, that the
Borrower and its Subsidiaries (A) would have been in compliance with all the
covenants in Section 7.1 for the fiscal quarter ending immediately prior to the
consummation of such Permitted Acquisition, with such compliance determined on a
pro forma basis as if such Permitted Acquisition had been consummated on the
first day of the Reference Period ending on the last day of such fiscal quarter,
and (B) will have been in compliance with all the covenants of Section 7.1 for
the Reference Period beginning on the first day of the fiscal quarter during
which the consummation of such Permitted Acquisition occurs, with such
compliance determined on a pro forma basis as if such Permitted Acquisition had
been consummated on the first day of such Reference Period. With respect to any
proposed Acquisition involving a Purchase Price of $25,000,000 or more, the
Borrower agrees that in reviewing such compliance and the historical financial
statements of the Person or Persons being acquired, the Administrative Agent may
require a review, at the cost of the Borrower, by an independent certified
public accountant.
(b) Deliver to the Lenders, not later than 45 days after the end of
each fiscal quarter of the Borrower, the information required pursuant to clause
(i) of paragraph (a) above for each Permitted Acquisition which was closed
during such fiscal quarter and involves a Purchase Price of at least $3,000,000.
SECTION 7. NEGATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitments remain in
effect, any Letter of Credit remains outstanding or any Loan or other amount is
owing to any Lender or the
<PAGE>
55
Administrative Agent hereunder, the Borrower shall not, and shall not permit any
of its Subsidiaries to, directly or indirectly:
7.1 Financial Condition Covenants.
-----------------------------
(a) Consolidated Leverage Ratio. Permit the Consolidated Leverage
---------------------------
Ratio as at the last day of any Reference Period ending during any period set
forth below to exceed the ratio set forth below opposite such period:
<TABLE>
<CAPTION>
Consolidated
Period Leverage Ratio
------ --------------
<S> <C>
December 31, 1997 through September 30, 1998 6.75 to 1.00
December 31, 1998 through June 30, 1999 6.50 to 1.00
September 30, 1999 through June 30, 2000 6.00 to 1.00
September 30, 2000 through June 30, 2001 5.50 to 1.00
September 30, 2001 through June 30, 2002 5.00 to 1.00
September 30, 2002 through June 30, 2003 4.75 to 1.00
September 30, 2003 (or, if earlier, the Consolidated
Leverage Ratio Stepdown Date) and thereafter 4.50 to 1.00
</TABLE>
(b) Consolidated Interest Coverage Ratio. Permit the Consolidated
------------------------------------
Interest Coverage Ratio for any Reference Period ending during any period set
forth below to be less than the ratio set forth below opposite such period:
<TABLE>
<CAPTION>
Consolidated Interest
Period Coverage Ratio
------ ---------------------
<S> <C>
December 31, 1997 through September 30, 1998 1.60 to 1.00
December 31, 1998 through September 30, 1999 1.75 to 1.00
December 31, 1999 through September 30, 2000 2.00 to 1.00
December 31, 2000 through September 30, 2001 2.25 to 1.00
December 31, 2001 through September 30, 2002 2.50 to 1.00
December 31, 2002 and thereafter 2.75 to 1.00
</TABLE>
; provided, that for the purposes of determining the ratio described above for
--------
the fiscal quarters of the Borrower ending December 31, 1997, March 31, 1998 and
June 30, 1998, Consolidated Interest Expense for the relevant Reference Period
shall be deemed to equal Consolidated Interest Expense for such fiscal quarter
(and, in the case of the latter two such determinations, each previous fiscal
quarter commencing after September 30, 1997) multiplied by 4, 2 and 4/3,
-------------
respectively.
(c) Consolidated Fixed Charge Coverage Ratio. Permit the
----------------------------------------
Consolidated Fixed Charge Coverage Ratio for any Reference Period ending during
any period set forth below to be less than the ratio set forth below opposite
such period:
<TABLE>
<CAPTION>
Consolidated Fixed
Period Charge Coverage Ratio
------ ---------------------
<S> <C>
December 31, 1997 through September 30, 1998 1.10 to 1.00
December 31, 1998 through September 30, 1999 1.15 to 1.00
</TABLE>
<PAGE>
56
<TABLE>
<S> <C>
December 31, 1999 through September 30, 2001 1.20 to 1.00
December 31, 2001 and thereafter 1.25 to 1.00
</TABLE>
; provided, that for the purposes of determining the ratio described above for
--------
the fiscal quarters of the Borrower ending December 31, 1997, March 31, 1998 and
June 30, 1998, Consolidated Interest Expense and Capital Expenditures
(Maintenance) for the relevant Reference Period shall be deemed to equal
Consolidated Interest Expense or Capital Expenditures (Maintenance), as the case
may be, for such fiscal quarter (and, in the case of the latter two such
determinations, each previous fiscal quarter commencing after September 30,
1997) multiplied by 4, 2 and 4/3, respectively.
-------------
(d) Maintenance of Consolidated Net Worth. Permit Consolidated Net
-------------------------------------
Worth at the last day of any fiscal quarter of the Borrower ending after
December 31, 1997 to be less than the sum of (x) all items which were included
on the consolidated balance sheet under shareholders' equity at December 31,
1997 less $50,000,000, (y) 50% of Consolidated Net Income (if positive) for the
period from January 1, 1998 to such date and (z) without duplication, 100% of
the Net Cash Proceeds of any issuance of Capital Stock by, or capital
contributions made to, the Borrower or any of its Subsidiaries after the Closing
Date.
7.2 Limitation on Indebtedness. Create, incur, assume or suffer to
--------------------------
exist (in each case, to "Incur") any Indebtedness, except:
-----
(a) Indebtedness of any Loan Party pursuant to any Loan Document;
(b) Indebtedness of the Borrower to any Subsidiary and of any Wholly
Owned Subsidiary Guarantor and, if incurred in the ordinary course of
business, any other Wholly Owned Subsidiary, to the Borrower or any other
Subsidiary;
(c) Indebtedness referred to in Section 7.3(g), Capital Lease
Obligations and Attributable Debt in an aggregate principal amount for all
Indebtedness referred to in this paragraph (c) not to exceed $50,000,000 at
any one time outstanding, provided, that in no event shall the aggregate
--------
principal amount of Attributable Debt exceed $10,000,000 at any one time
outstanding;
(d) Indebtedness outstanding on the Closing Date and listed on
Schedule 7.2(d) and any refinancings, refundings, renewals or extensions
thereof (without any increase in the principal amount thereof, except to
the extent (i) interest, premium and other amounts owing in respect of the
Indebtedness being refinanced, refunded, renewed or extended and (ii)
customary transaction costs incurred in connection with such refinancings,
refundings, renewals or extensions, in each case, are capitalized in
connection therewith);
(e) (i) guarantees made in the ordinary course of business by the
Borrower or any of its Subsidiaries of obligations of any Wholly Owned
Subsidiary; (ii) guarantees made by the Borrower of any Assumed Debt of any
Wholly Owned Subsidiary Guarantor; (iii) guarantees by any New PHCMI
Subsidiary of PHCMI's obligations to Omega in connection with granting
Omega a Lien on any Substitute Omega Property; and (iv) guarantees made by
the Borrower, GranCare, AMS Properties, Inc. and GCI Health Care Centers,
Inc. under the HRPT Transaction Documents as described on Schedule 7.4(e);
(f) Indebtedness of the Borrower in respect of the Senior
Subordinated Notes; provided, that the aggregate gross proceeds thereof do
--------
not exceed $500,000,000;
<PAGE>
57
(g) additional Indebtedness of the Borrower in an aggregate principal
amount not to exceed $25,000,000 at any one time outstanding;
(h) Assumed Debt Incurred pursuant to an Acquisition consummated in
accordance with Section 7.8(h);
(i) additional Indebtedness of any of the Borrower's Subsidiaries in
an aggregate principal amount (for all Subsidiaries) not to exceed
$25,000,000 at any one time outstanding;
(j) Indebtedness in respect of Interest Rate Protection Agreements
with any Lender or any affiliate of any Lender for hedging and not for
speculative purposes; and
(k) obligations to acquire Capital Stock pursuant to Section 7.6(b).
7.3 Limitation on Liens. Create, incur, assume or suffer to exist
-------------------
any Lien upon any of its Property or revenues, whether now owned or hereafter
acquired, except for:
(a) Liens for taxes not yet due or which are being contested in good
faith by appropriate proceedings, provided that adequate reserves with
--------
respect thereto are maintained on the books of the Borrower or its
Subsidiaries, as the case may be, in conformity with GAAP;
(b) carriers', warehousemen's, mechanics', materialmen's, repairmen's
or other like Liens arising in the ordinary course of business which are
not overdue for a period of more than 30 days or which are being contested
in good faith by appropriate proceedings;
(c) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation;
(d) deposits to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business;
(e) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which do not in
any case materially detract from the value of the Property subject thereto
or materially interfere with the ordinary conduct of the business of the
Borrower or any of its Subsidiaries;
(f) Liens in existence on the Closing Date listed on Schedule 7.3(f),
securing Indebtedness permitted by Section 7.2(d), provided that no such
--------
Lien is spread to cover any additional Property after the Closing Date and
that the amount of Indebtedness secured thereby is not increased (it being
understood that if such Indebtedness is refinanced, refunded, renewed or
extended in accordance with Section 7.2(d), Liens with respect to the
relevant Property may continue to apply to such Indebtedness as so
refinanced, refunded, renewed or extended);
(g) Liens securing Indebtedness of the Borrower or any other
Subsidiary Incurred pursuant to Section 7.2(c) to finance the acquisition
of fixed or capital assets, provided that (i) such Liens shall be created
--------
substantially simultaneously with the acquisition of such fixed or capital
assets, (ii) such Liens do not at any time encumber any Property other than
the Property financed by such Indebtedness and (iii) the amount of
Indebtedness secured thereby is not increased;
<PAGE>
58
(h) Liens created pursuant to the Security Documents;
(i) Liens resulting from judgments not constituting an Event of
Default so long as no remedies in respect of such Liens have been
exercised;
(j) any interest or title of a lessor under any lease entered into by
the Borrower or any other Subsidiary in the ordinary course of its business
and covering only the assets so leased;
(k) Liens securing Assumed Debt so long as such Liens (i) were not
incurred in contemplation of the Acquisition consummated in conjunction
with the assumption of such Assumed Debt and (ii) such Liens do not
encumber any Property other than the Property acquired pursuant to such
Acquisition;
(l) Liens securing Indebtedness Incurred pursuant to Section 7.2(i)
so long as (i) such Indebtedness was Incurred to finance the acquisition of
Property, (ii) recourse for repayment of such Indebtedness is limited to
the Property so acquired and (iii) such Liens do not encumber any Property
other than the Property so acquired;
(m) the creation of Liens by PHCMI and any New PHCMI Subsidiary in
favor of Omega with respect to any Substitute Omega Property;
(n) the creation of Liens by the Borrower, GranCare, AMS Properties,
Inc. and GCI Health Care Centers, Inc. in favor of HRPT in connection with
the transactions described in Schedule 7.4(e) hereto;
(o) Liens not otherwise permitted by this Section 7.3 so long as
neither (i) the aggregate outstanding principal amount of the obligations
secured thereby nor (ii) the aggregate fair market value (determined as of
the date such Lien is incurred) of the assets subject thereto exceeds (as
to the Borrower and all Subsidiaries) $5,000,000 at any one time; and
(p) Permitted Exceptions (as such term is defined in the Mortgages)
in effect on the Closing Date.
7.4 Limitation on Fundamental Changes. Enter into any merger,
---------------------------------
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or Dispose of, all or substantially all
of its Property or business, or make any material change in its present method
of conducting business, except:
(a) any Subsidiary of the Borrower may be merged or consolidated with
or into the Borrower (provided that the Borrower shall be the continuing or
--------
surviving corporation) or with or into any Wholly Owned Subsidiary
Guarantor (provided that the Wholly Owned Subsidiary Guarantor shall be the
--------
continuing or surviving corporation);
(b) any Subsidiary of the Borrower may Dispose of any or all of its
assets (upon voluntary liquidation or otherwise) to the Borrower or any
Wholly Owned Subsidiary Guarantor;
(c) any Subsidiary of the Borrower may Dispose of one or more
Substitute Omega Properties to PHCMI or any of the New PHCMI Subsidiaries
in connection with providing substitute collateral to Omega in exchange for
the surrender by Omega of the Omega Letter of Credit;
<PAGE>
59
(d) any acquisition expressly permitted by Section 7.8 may be
structured as a merger with or into the Borrower (provided that the
--------
Borrower shall be the continuing or surviving corporation) or with or into
any Wholly Owned Subsidiary Guarantor (provided that the Wholly Owned
--------
Subsidiary Guarantor shall be the continuing or surviving corporation); and
(e) the Dispositions described in Schedule 7.4(e) hereto and the
transactions permitted pursuant to Section 7.5(e) and 7.5(f).
7.5 Limitation on Sale of Assets. Dispose of any of its Property or
----------------------------
business (including, without limitation, receivables and leasehold interests),
whether now owned or hereafter acquired, or, in the case of any Subsidiary,
issue or sell any shares of such Subsidiary's Capital Stock to any Person,
except:
(a) the Disposition of obsolete or worn out property in the ordinary
course of business;
(b) the sale of inventory in the ordinary course of business;
(c) Dispositions permitted by Section 7.4(b), 7.4(c) or 7.4(e);
(d) the sale or issuance of any Subsidiary's Capital Stock to the
Borrower or any Wholly Owned Subsidiary Guarantor;
(e) the exchange by the Borrower or any of its Subsidiaries of any of
its Health Care Facilities for any Health Care Facility of any third Person
other than any exchange described in Schedule 7.4(e) hereto (any such
exchange, an "Asset Swap"); provided, that (i) the aggregate amount of
---------- --------
Asset Swaps that may be consummated during the term of this Agreement shall
not exceed $50,000,000, valued at the fair market value thereof, (ii) prior
to consummating any Asset Swap the Borrower shall have provided evidence
reasonably satisfactory to the Administrative Agent demonstrating pro forma
compliance by the Borrower with Section 7.1 both before and after giving
effect to such Asset Swap, (iii) the fair market value of the property
being received by the Borrower or any of its Subsidiaries in connection
with any such Asset Swap shall be substantially equivalent to the fair
market value of the property being exchanged by the Borrower or any of its
Subsidiaries, (iv) prior to consummating any Asset Swap the Borrower shall
have provided evidence reasonably satisfactory to the Administrative Agent
demonstrating that the net effect of any such Asset Swap on Consolidated
EBITDA on a pro forma basis would be substantially equivalent to or greater
than the Consolidated EBITDA for such Reference Period and (v) the Borrower
or the relevant Subsidiary shall take all steps requested by the
Administrative Agent to provide the Administrative Agent on behalf of the
Lenders with a fully perfected Lien on or security interest in the property
being received by the Borrower or any of its Subsidiaries in connection
with any such Asset Swap to the same extent as the Lien or security
interest which the Administrative Agent had in the property being exchanged
by the Borrower or any of its Subsidiaries; and
(f) the sale of other assets having a fair market value not to exceed
$50,000,000 in the aggregate for any fiscal year of the Borrower; provided,
--------
that no such individual sale or series of sales in an aggregate amount in
excess of $10,000,000 may be consummated unless the Borrower provides a
certificate to the Administrative Agent demonstrating pro forma compliance
with Section 7.1 both before and after consummating such sale or sales; and
provided further, that regardless of the aggregate amount of such
----------------
individual sale or series of sales, the Borrower
<PAGE>
60
shall be in pro forma compliance with Section 7.1 both before and after any
such sale or series of sales.
7.6 Limitation on Dividends. Declare or pay any dividend (other than
-----------------------
dividends payable solely in common stock of the Person making such dividend) on,
or make any payment on account of, or set apart assets for a sinking or other
analogous fund for, the purchase, redemption, defeasance, retirement or other
acquisition of, any shares of any class of Capital Stock of the Borrower or any
Subsidiary or any warrants or options to purchase any such Capital Stock,
whether now or hereafter outstanding, or make any other distribution in respect
thereof, either directly or indirectly, whether in cash or property or in
obligations of the Borrower or any Subsidiary (collectively, "Restricted
Payments"), except that:
(a) any Subsidiary may make Restricted Payments to the Borrower or
any Wholly Owned Subsidiary Guarantor; and
(b) so long as no Default or Event of Default shall have occurred and
be continuing, the Borrower may purchase its common stock or common stock
options (i) from present or former officers or employees of the Borrower or
any Subsidiary upon the death, disability or termination of employment of
such officer or employee or (ii) to the extent deemed necessary by the
Borrower in connection with employee compensation programs, provided, that
--------
after giving effect to any payment under this paragraph (b), the aggregate
amount of all payments made pursuant to this paragraph (b) during the term
of this Agreement, when added to the Employee Loan Outstanding Amount then
in effect, shall not exceed $10,000,000.
7.7 Limitation on Capital Expenditures. Make or commit to make (by
----------------------------------
way of the acquisition of securities of a Person or otherwise) any Capital
Expenditures (Discretionary), except (a) Capital Expenditures (Discretionary) of
the Borrower and its Subsidiaries in any fiscal year which, when combined with
the aggregate amount of Permitted Acquisitions made pursuant to Section 7.8(h)
during such fiscal year (excluding the aggregate amount of the Purchase Prices
thereof which is made in the form of the consideration referred to in clause (b)
of the definition of Purchase Price), shall not exceed $125,000,000; provided
--------
that (i) no Default or Event of Default has occurred and is continuing (unless a
binding commitment to make such Capital Expenditures was entered into prior to
the occurrence of such Default or Event of Default), or would occur after giving
effect to any such Capital Expenditures (Discretionary); (ii) any amount
permitted herein for Capital Expenditures (Discretionary) during any fiscal year
and not so expended in the fiscal year for which it is permitted may be carried
over for expenditure only in the next following fiscal year; (iii) Capital
Expenditures (Discretionary) made pursuant to this clause (a) during any fiscal
year shall be deemed made, first, in respect of amounts carried over from the
-----
prior fiscal year pursuant to subclause (ii) above and, second, in respect of
------
amounts permitted for the then-current fiscal year as provided above and (iv) if
the Consolidated Leverage Ratio as of the last day of the most recently
completed fiscal quarter is less than 4.5 to 1.0 then the amount referred to
above shall be increased to $200,000,000 (and if availability under this clause
(iv) is utilized the Consolidated Leverage Ratio Stepdown Date shall occur) and
(b) Capital Expenditures made with the proceeds of any Reinvestment Deferred
Amount.
7.8 Limitation on Investments, Loans and Advances. On or after the
---------------------------------------------
Closing Date, make any advance, loan, extension of credit (by way of guarantee
or otherwise) or capital contribution to, or purchase any stock, bonds, notes,
debentures or other securities of, or make any Acquisition from, or make any
other investment in, any Person, except:
(a) extensions of trade credit in the ordinary course of business;
<PAGE>
61
(b) investments in Cash Equivalents;
(c) Guarantee Obligations permitted by Section 7.2;
(d) loans and advances ("Employee Loans") to employees of the
--------------
Borrower or its Subsidiaries in the ordinary course of business (including,
without limitation, for travel, entertainment and relocation expenses), so
long as, after giving effect to the making of any Employee Loan, the
aggregate amount of Employee Loans made since the Closing Date (determined
net of amounts actually repaid in cash in respect thereof) (the "Employee
--------
Loan Outstanding Amount"), when added to the aggregate amount of Restricted
-----------------------
Payments made since the Closing Date pursuant to Section 7.6(b), shall not
exceed $10,000,000;
(e) the Recapitalization;
(f) investments made by the Borrower or any of its Subsidiaries with
the proceeds of any Reinvestment Deferred Amount;
(g) capital contributions or other similar investments by the
Borrower or any of its Subsidiaries in the Borrower or any Person that,
prior to any such investment, is a Wholly Owned Subsidiary Guarantor or, if
made in the ordinary course of business, any other Wholly Owned Subsidiary;
(h) any Acquisition of any Person or business, either through the
purchase of the assets (including the goodwill) of such Person or business
or the purchase of 100% of the Capital Stock of such Person, if each of the
following conditions is satisfied: (i) the requirements of Section 6.11
have been satisfied with respect to such Acquisition and the Borrower shall
be in pro forma compliance with Section 7.1 both before and after giving
effect to such Acquisition; (ii) no Default or Event of Default has
occurred and is continuing, or would occur after giving effect to such
Acquisition; (iii) the aggregate Purchase Prices (not including clause (b)
of the definition thereof) of all such Acquisitions in any fiscal year of
the Borrower, when combined with the aggregate amount of Capital
Expenditures (Discretionary) made during such fiscal year, shall not exceed
$125,000,000; (iv) the Purchase Price (or any portion thereof) which is
paid in the form of the consideration referred to in clause (b) of the
definition of Purchase Price for all such Acquisitions in any fiscal year
of the Borrower shall not exceed $200,000,000; and (v) any such Acquisition
shall have been approved by the Board of Directors or such comparable
governing body of the Person or business being acquired; provided, that if
--------
the Consolidated Leverage Ratio as of the last day of the most recently
completed fiscal quarter for which the relevant financial information is
available both before and after giving pro forma effect for such
Acquisition as if such Acquisition were consummated on the first day of the
Reference Period ending on the last day of the most recently completed
fiscal quarter is less than 4.5 to 1.0, then the amount referred to in
clause (iii) shall be increased to $200,000,000 (and if availability under
this proviso is utilized the Consolidated Leverage Ratio Stepdown Date
shall occur); and provided, further, that if the Consolidated Leverage
-----------------
Ratio as of the last day of the most recently completed fiscal quarter
for which the relevant financial information is available after giving pro
forma effect for such Acquisition as if such Acquisition were consummated
on the first day of the Reference Period ending on the last day of the most
recently completed fiscal quarter is less than 4.5 to 1.0, then the amount
referred to in clause (iv) shall be increased to $300,000,000 (all such
Acquisitions, the "Permitted Acquisitions");
----------------------
(i) investments by the Borrower or any of its Subsidiaries in patient
trust accounts;
<PAGE>
62
(j) investments representing non-cash consideration in the form of
senior notes of the purchasing party pledged by the Borrower or the
relevant Subsidiary in favor of the Collateral Agent for the benefit of the
Lenders received by the Borrower or any of its Subsidiaries in connection
with any Asset Sale; provided that the aggregate amount of any such
--------
investments shall not exceed $50,000,000 during the term of this Agreement;
and
(k) in addition to investments otherwise expressly permitted by this
Section 7.8, investments by the Borrower or any of its Subsidiaries in an
aggregate amount (valued at cost) not to exceed $20,000,000 in the
aggregate during the term of this Agreement.
7.9 Limitation on Optional Payments and Modifications of Debt
---------------------------------------------------------
Instruments, etc. (a) Make or offer to make any payment, prepayment,
- -----------------
repurchase or redemption of or otherwise defease or segregate funds with respect
to the Senior Subordinated Notes (other than scheduled interest payments
required to be made in cash), (b) amend, modify, waive or otherwise change, or
consent or agree to any amendment, modification, waiver or other change to, any
of the terms of the Senior Subordinated Indenture or the Senior Subordinated
Notes (other than any such amendment, modification, waiver or other change which
(i) would extend the maturity or reduce the amount of any payment of principal
thereof or which would reduce the rate or extend the date for payment of
interest thereon or (ii) is not adverse to the interests of the Lenders in any
respect) or (c) designate any Indebtedness as "Designated Senior Indebtedness"
for the purposes of the Senior Subordinated Note Indenture.
7.10 Limitation on Transactions with Affiliates. Enter into any
------------------------------------------
transaction, including, without limitation, any purchase, sale, lease or
exchange of Property, the rendering of any service or the payment of any
management, advisory or similar fees, with any Affiliate (other than the
Borrower or any Wholly Owned Subsidiary) unless such transaction is (a)
otherwise permitted under this Agreement, (b) in the ordinary course of business
of the Borrower or such Subsidiary, as the case may be, and (c) upon fair and
reasonable terms no less favorable to the Borrower or such Subsidiary, as the
case may be, than it would obtain in a comparable arm's length transaction with
a Person which is not an Affiliate.
7.11 Limitation on Sales and Leasebacks. Enter into any arrangement
----------------------------------
with any Person providing for the leasing by the Borrower or any Subsidiary of
real or personal property which has been or is to be sold or transferred by the
Borrower or such Subsidiary to such Person or to any other Person to whom funds
have been or are to be advanced by such Person on the security of such property
or rental obligations of the Borrower or such Subsidiary (any such transaction,
a "Sale/Leaseback Transaction"), except (a) to the extent expressly permitted by
--------------------------
Section 7.2(c), (b) Sale/Leaseback Transactions identified on Schedule 7.2(d)
and (c) the Sale/Leaseback Transaction described on Schedule 7.4(e).
7.12 Health Care Permits and Approvals. Engage in any activity that
---------------------------------
(a) constitutes or, with the giving of notice, the passage of time, or both,
would result in a material violation of, any Health Care Permit necessary for
the lawful conduct of its business or operations or (b) constitutes or, with the
giving of notice, the passage of time, or both, would result in the loss by any
Health Care Facility owned, leased, managed or operated by the Borrower or any
of its Subsidiaries of the right to participate in, and receive payment under,
the appropriate Medicare, Medicaid and related reimbursement programs, and any
similar state or local government-sponsored program, to the extent that such
Loan Party has decided to participate in any such program, and to receive
reimbursement from private and commercial payers and health maintenance
organizations to the extent applicable thereto, in each case, except where the
loss of such Health Care Permit or rights to participate in or receive payments
under such programs could not reasonably be expected to have a Material Adverse
Effect.
<PAGE>
63
7.13 Limitation on Changes in Fiscal Periods. Permit the fiscal year
---------------------------------------
of the Borrower to end on a day other than September 30 or change the Borrower's
method of determining fiscal quarters.
7.14 Limitation on Negative Pledge Clauses. Except as set forth on
-------------------------------------
Schedule 7.14, enter into or suffer to exist or become effective any agreement
which prohibits or limits the ability of the Borrower or any of its Subsidiaries
to create, incur, assume or suffer to exist any Lien upon any of its Property or
revenues, whether now owned or hereafter acquired, other than (a) this Agreement
and the other Loan Documents and (b) any agreements governing any purchase money
Liens or Capital Lease Obligations otherwise permitted hereby (in which case,
any prohibition or limitation shall only be effective against the assets
financed thereby).
7.15 Limitation on Restrictions on Subsidiary Distributions. Except
------------------------------------------------------
as set forth on Schedule 7.15, enter into or suffer to exist or become effective
any consensual encumbrance or restriction on the ability of any Subsidiary of
the Borrower to (a) pay dividends or make any other distributions in respect of
any Capital Stock of such Subsidiary held by, or pay any Indebtedness owed to,
the Borrower or any other Subsidiary of the Borrower, (b) make loans or advances
to the Borrower or any other Subsidiary of the Borrower or (c) transfer any of
its assets to the Borrower or any other Subsidiary of the Borrower, except for
such encumbrances or restrictions existing under or by reason of (i) any
restrictions existing under the Loan Documents and (ii) any restrictions with
respect to a Subsidiary imposed pursuant to an agreement which has been entered
into in connection with the Disposition of all or substantially all of the
Capital Stock or assets of such Subsidiary.
7.16 Limitation on Lines of Business. Enter into any business,
-------------------------------
either directly or through any Subsidiary, except for those businesses in which
the Borrower and its Subsidiaries are engaged on the Closing Date or which are
reasonably related thereto.
7.17 Limitation on Amendments to Recapitalization Documents, etc.
-----------------------------------------------------------
Amend, supplement or otherwise modify the terms and conditions of the
Recapitalization Agreement or any other document delivered by the parties
thereto (other than the Borrower) or any of their Affiliates in connection
therewith except to the extent that any such amendment, supplement or
modification could not reasonably be expected to have a Material Adverse Effect.
SECTION 8. EVENTS OF DEFAULT
If any of the following events shall occur and be continuing:
(a) The Borrower shall fail to pay any principal of any Loan or
Reimbursement Obligation when due in accordance with the terms hereof; or
the Borrower shall fail to pay any interest on any Loan or Reimbursement
Obligation, or any other amount payable hereunder or under any other Loan
Document, within five days after any such interest or other amount becomes
due in accordance with the terms hereof; or
(b) Any representation or warranty made or deemed made by any Loan
Party herein or in any other Loan Document or which is contained in any
certificate, document or financial or other statement furnished by it at
any time under or in connection with this Agreement or any such other Loan
Document shall prove to have been inaccurate in any material respect on or
as of the date made or deemed made; or
<PAGE>
64
(c) Any Loan Party shall default in the observance or performance of
any agreement contained in clause (i) or (ii) of Section 6.4(a) (with
respect to the Borrower and GranCare only), Section 6.8(a) or Section 7; or
(d) any Loan Party shall default in the observance or performance of
any other agreement contained in this Agreement or any other Loan Document
(other than any Mortgage), and such default shall continue unremedied for a
period of 30 days after notice to the Borrower from the Administrative
Agent or the Required Lenders; or
(e) the Borrower or any of its Subsidiaries shall (i) default in
making any payment of any principal of any Indebtedness (including, without
limitation, any Guarantee Obligation, but excluding the Loans) on the
scheduled or original due date with respect thereto; or (ii) default in
making any payment of any interest on any such Indebtedness beyond the
period of grace, if any, provided in the instrument or agreement under
which such Indebtedness was created; or (iii) default in the observance or
performance of any other agreement or condition relating to any such
Indebtedness or contained in any instrument or agreement evidencing,
securing or relating thereto, or any other event shall occur or condition
exist, the effect of which default or other event or condition is to cause,
or to permit the holder or beneficiary of such Indebtedness (or a trustee
or agent on behalf of such holder or beneficiary) to cause, with the giving
of notice if required, such Indebtedness to become due prior to its stated
maturity or (in the case of any such Indebtedness constituting a Guarantee
Obligation) to become payable; provided, that a default, event or condition
--------
described in clause (i), (ii) or (iii) of this paragraph (e) shall not at
any time constitute an Event of Default under this Agreement unless, at
such time, one or more defaults, events or conditions of the type described
in clauses (i), (ii) and (iii) of this paragraph (e) shall have occurred
and be continuing with respect to Indebtedness the outstanding principal
amount of which exceeds in the aggregate $10,000,000; or
(f) (i) the Borrower or any of its Subsidiaries shall commence any
case, proceeding or other action (A) under any existing or future law of
any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief
entered with respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to it or
its debts, or (B) seeking appointment of a receiver, trustee, custodian,
conservator or other similar official for it or for all or any substantial
part of its assets, or the Borrower or any of its Subsidiaries shall make a
general assignment for the benefit of its creditors; or (ii) there shall be
commenced against the Borrower or any of its Subsidiaries any case,
proceeding or other action of a nature referred to in clause (i) above
which (A) results in the entry of an order for relief or any such
adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for a period of 60 days; or (iii) there shall be commenced against
the Borrower or any of its Subsidiaries any case, proceeding or other
action seeking issuance of a warrant of attachment, execution, distraint or
similar process against all or any substantial part of its assets which
results in the entry of an order for any such relief which shall not have
been vacated, discharged, or stayed or bonded pending appeal within 60 days
from the entry thereof; or (iv) the Borrower or any of its Subsidiaries
shall take any action in furtherance of, or indicating its consent to,
approval of, or acquiescence in, any of the acts set forth in clause (i),
(ii), or (iii) above; or (v) the Borrower or any of its Subsidiaries shall
generally not, or shall be unable to, or shall admit in writing its
inability to, pay its debts as they become due; or
<PAGE>
65
(g) (i) Any Person shall engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Code) involving any
Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, shall exist with respect to any Plan or
any Lien in favor of the PBGC or a Plan shall arise on the assets of the
Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall
occur with respect to, or proceedings shall commence to have a trustee
appointed, or a trustee shall be appointed, to administer or to terminate,
any Single Employer Plan, which Reportable Event or commencement of
proceedings or appointment of a trustee is, in the reasonable opinion of
the Required Lenders, likely to result in the termination of such Plan for
purposes of Title IV of ERISA, (iv) any Single Employer Plan shall
terminate for purposes of Title IV of ERISA, (v) the Borrower or any
Commonly Controlled Entity shall, or in the reasonable opinion of the
Required Lenders is likely to, incur any liability in connection with a
withdrawal from, or the Insolvency or Reorganization of, a Multiemployer
Plan or (vi) any other event or condition shall occur or exist with respect
to a Plan; and in each case in clauses (i) through (vi) above, such event
or condition, together with all other such events or conditions, if any,
could, in the sole judgment of the Required Lenders, reasonably be expected
to have a Material Adverse Effect; or
(h) One or more judgments or decrees shall be entered against the
Borrower or any of its Subsidiaries involving in the aggregate a liability
(not paid or fully covered by insurance as to which the relevant insurance
company has acknowledged coverage) of $10,000,000 or more, and all such
judgments or decrees shall not have been vacated, discharged, stayed or
bonded pending appeal within 30 days from the entry thereof; or
(i) Any of the Security Documents shall cease, for any reason, to be
in full force and effect, or any Loan Party or any Affiliate of any Loan
Party shall so assert, or any Lien created by any of the Security Documents
shall cease to be enforceable and of the same effect and priority purported
to be created thereby; or
(j) The guarantee contained in Section 2 of the Guarantee and
Collateral Agreement shall cease, for any reason, to be in full force and
effect or any Loan Party or any Affiliate of any Loan Party shall so
assert; or
(k) Any breach, default or event of default shall occur, or any other
event shall occur or condition exist, under any Material Lease of the
Borrower or any of its Subsidiaries if the effect thereof is to terminate,
or permit the counterparty to such Material Lease to terminate, such
Material Lease or any Material Lease of the Borrower or any of its
Subsidiaries shall be terminated by the lessor thereof (other than as a
result of the expiration of the term of such Material Lease); or
(l) (i) Any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), excluding the Permitted Investors, shall at any time
designate or obtain the right to designate a percentage (the "Third Party
Board Percentage") equal to 25% or more of the members of the Board of
Directors of the Borrower unless at such time the percentage of the members
------
of the Board of Directors of the Borrower designated by the Permitted
Investors is greater than the Third Party Board Percentage; (ii) any
"person" or "group" (as such terms are defined above), excluding the
Permitted Investors, shall at any time become, or obtain rights (whether by
means of warrants, options or otherwise) to become, the "beneficial owner"
(as defined in Rules 13(d) 3 and 13(d) 5 under the Exchange Act), directly
or indirectly, of a percentage (the "Third Party Stock Percentage") equal
to 33-1/3% or more of the Voting Stock of the Borrower unless at such time
------
<PAGE>
66
the percentage of outstanding Voting Stock of the Borrower beneficially
owned by the Permitted Investors (determined on a fully diluted basis) is
equal to or greater than the Third Party Stock Percentage, provided, that
--------
for the purposes of this clause (ii), Voting Stock that a Permitted
Investor has the power to vote in its sole discretion pursuant to contract
or proxy shall be deemed to be beneficially owned by such Permitted
Investor and not by any other "person" or "group"; or (iii) a Specified
Change of Control shall occur; or
(m) The Senior Subordinated Notes shall cease, for any reason, to be
validly subordinated to the Obligations, as provided in the Senior
Subordinated Note Indenture, or any Loan Party or any Affiliate of any Loan
Party or any trustee in respect of the Senior Subordinated Notes shall so
assert;
then, and in any such event, (A) if such event is an Event of Default specified
in clause (i) or (ii) of paragraph (f) above with respect to the Borrower,
automatically the Commitments shall immediately terminate and the Loans
hereunder (with accrued interest thereon) and all other amounts owing under this
Agreement and the other Loan Documents (including, without limitation, all
amounts of L/C Obligations, whether or not the beneficiaries of the then
outstanding Letters of Credit shall have presented the documents required
thereunder) shall immediately become due and payable, and (B) if such event is
any other Event of Default, either or both of the following actions may be
taken: (i) with the consent of the Majority Revolving Credit Facility Lenders,
the Administrative Agent may, or upon the request of the Majority Revolving
Credit Facility Lenders, the Administrative Agent shall, by notice to the
Borrower declare the Revolving Credit Commitments to be terminated forthwith,
whereupon the Revolving Credit Commitments shall immediately terminate; and (ii)
with the consent of the Required Lenders, the Administrative Agent may, or upon
the request of the Required Lenders, the Administrative Agent shall, by notice
to the Borrower, declare the Loans hereunder (with accrued interest thereon) and
all other amounts owing under this Agreement and the other Loan Documents
(including, without limitation, all amounts of L/C Obligations, whether or not
the beneficiaries of the then outstanding Letters of Credit shall have presented
the documents required thereunder) to be due and payable forthwith, whereupon
the same shall immediately become due and payable. With respect to all Letters
of Credit with respect to which presentment for honor shall not have occurred at
the time of an acceleration pursuant to this paragraph, the Borrower shall at
such time deposit in a cash collateral account opened by the Administrative
Agent an amount equal to the aggregate then undrawn and unexpired amount of such
Letters of Credit. Amounts held in such cash collateral account shall be
applied by the Administrative Agent to the payment of drafts drawn under such
Letters of Credit, and the unused portion thereof after all such Letters of
Credit shall have expired or been fully drawn upon, if any, shall be applied to
repay other Obligations of the Borrower. After all such Letters of Credit shall
have expired or been fully drawn upon, all Reimbursement Obligations shall have
been satisfied and all other obligations of the Borrower hereunder and under the
other Loan Documents shall have been paid in full, the balance, if any, in such
cash collateral account shall be returned to the Borrower (or such other Person
as may be lawfully entitled thereto).
SECTION 9. THE ADMINISTRATIVE AGENT
9.1 Appointment. Each Lender hereby irrevocably designates and
-----------
appoints the Administrative Agent as the agent of such Lender under this
Agreement and the other Loan Documents, and each such Lender irrevocably
authorizes the Administrative Agent, in such capacity, to take such action on
its behalf under the provisions of this Agreement and the other Loan Documents
and to exercise such powers and perform such duties as are expressly delegated
to the Administrative Agent by the terms of this Agreement and the other Loan
Documents, together with such other powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary elsewhere in this
<PAGE>
67
Agreement, the Administrative Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against the
Administrative Agent.
9.2 Delegation of Duties. The Administrative Agent may execute any
--------------------
of its duties under this Agreement and the other Loan Documents by or through
agents or attorneys-in-fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Administrative Agent
shall not be responsible for the negligence or misconduct of any agents or
attorneys in-fact selected by it with reasonable care.
9.3 Exculpatory Provisions. Neither the Administrative Agent nor any
----------------------
of its officers, directors, employees, agents, attorneys-in-fact or affiliates
shall be (i) liable for any action lawfully taken or omitted to be taken by it
or such Person under or in connection with this Agreement or any other Loan
Document (except to the extent that any of the foregoing are found by a final
and nonappealable decision of a court of competent jurisdiction to have resulted
from its or such Person's own gross negligence or willful misconduct) or (ii)
responsible in any manner to any of the Lenders for any recitals, statements,
representations or warranties made by any Loan Party or any officer thereof
contained in this Agreement or any other Loan Document or in any certificate,
report, statement or other document referred to or provided for in, or received
by the Administrative Agent under or in connection with, this Agreement or any
other Loan Document or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any other Loan Document or
for any failure of any Loan Party a party thereto to perform its obligations
hereunder or thereunder. The Administrative Agent shall not be under any
obligation to any Lender to ascertain or to inquire as to the observance or
performance of any of the agreements contained in, or conditions of, this
Agreement or any other Loan Document, or to inspect the properties, books or
records of any Loan Party.
9.4 Reliance by Administrative Agent. The Administrative Agent shall
--------------------------------
be entitled to rely, and shall be fully protected in relying, upon any
instrument, writing, resolution, notice, consent, certificate, affidavit,
letter, telecopy, telex or teletype message, statement, order or other document
or conversation believed by it to be genuine and correct and to have been
signed, sent or made by the proper Person or Persons and upon advice and
statements of legal counsel (including, without limitation, counsel to the
Borrower), independent accountants and other experts selected by the
Administrative Agent. The Administrative Agent may deem and treat the payee of
any Note as the owner thereof for all purposes unless a written notice of
assignment, negotiation or transfer thereof shall have been filed with the
Administrative Agent. The Administrative Agent shall be fully justified in
failing or refusing to take any action under this Agreement or any other Loan
Document unless it shall first receive such advice or concurrence of the
Required Lenders (or, if so specified by this Agreement, all Lenders) as it
deems appropriate or it shall first be indemnified to its satisfaction by the
Lenders against any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action. The Administrative Agent
shall in all cases be fully protected in acting, or in refraining from acting,
under this Agreement and the other Loan Documents in accordance with a request
of the Required Lenders (or, if so specified by this Agreement, all Lenders),
and such request and any action taken or failure to act pursuant thereto shall
be binding upon all the Lenders and all future holders of the Loans.
9.5 Notice of Default. The Administrative Agent shall not be deemed
-----------------
to have knowledge or notice of the occurrence of any Default or Event of Default
hereunder unless the Administrative Agent has received notice from a Lender or
the Borrower referring to this Agreement, describing such Default or Event of
Default and stating that such notice is a "notice of default". In the event
that the Administrative Agent receives such a notice, the Administrative Agent
shall give notice
<PAGE>
68
thereof to the Lenders. The Administrative Agent shall take such action with
respect to such Default or Event of Default as shall be reasonably directed by
the Required Lenders (or, if so specified by this Agreement, all Lenders);
provided that unless and until the Administrative Agent shall have received such
- --------
directions, the Administrative Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default or
Event of Default as it shall deem advisable in the best interests of the
Lenders.
9.6 Non-Reliance on Administrative Agent and Other Lenders. Each
------------------------------------------------------
Lender expressly acknowledges that neither the Administrative Agent nor any of
its officers, directors, employees, agents, attorneys-in-fact or affiliates has
made any representations or warranties to it and that no act by the
Administrative Agent hereafter taken, including any review of the affairs of a
Loan Party or any affiliate of a Loan Party, shall be deemed to constitute any
representation or warranty by the Administrative Agent to any Lender. Each
Lender represents to the Administrative Agent that it has, independently and
without reliance upon the Administrative Agent or any other Lender, and based on
such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, operations, property,
financial and other condition and creditworthiness of the Loan Parties and their
affiliates and made its own decision to make its Loans hereunder and enter into
this Agreement. Each Lender also represents that it will, independently and
without reliance upon the Administrative Agent or any other Lender, and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, appraisals and decisions in taking or
not taking action under this Agreement and the other Loan Documents, and to make
such investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the
Loan Parties and their affiliates. Except for notices, reports and other
documents expressly required to be furnished to the Lenders by the
Administrative Agent hereunder, the Administrative Agent shall not have any duty
or responsibility to provide any Lender with any credit or other information
concerning the business, operations, property, condition (financial or
otherwise), prospects or creditworthiness of any Loan Party or any affiliate of
a Loan Party which may come into the possession of the Administrative Agent or
any of its officers, directors, employees, agents, attorneys-in-fact or
affiliates.
9.7 Indemnification. The Lenders agree to indemnify the
---------------
Administrative Agent in its capacity as such (to the extent not reimbursed by
the Borrower and without limiting the obligation of the Borrower to do so),
ratably according to their respective Revolving Credit Percentages, Tranche A
Term Loan Percentages, Tranche B Term Loan Percentages and Tranche C Term Loan
Percentages in effect on the date on which indemnification is sought under this
Section 9.7 (or, if indemnification is sought after the date upon which the
Commitments shall have terminated and the Loans shall have been paid in full,
ratably in accordance with such Percentages immediately prior to such date),
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind whatsoever which may at any time (including, without limitation, at any
time following the payment of the Loans) be imposed on, incurred by or asserted
against the Administrative Agent in any way relating to or arising out of, the
Commitments, this Agreement, any of the other Loan Documents or any documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by the
Administrative Agent under or in connection with any of the foregoing; provided
--------
that no Lender shall be liable for the payment of any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements which are found by a final and nonappealable
decision of a court of competent jurisdiction to have resulted from the
Administrative Agent's gross negligence or willful misconduct. The agreements in
this Section 9.7 shall survive the payment of the Loans and all other amounts
payable hereunder. The Administrative Agent shall have the right to deduct any
amount owed to it by any Lender under this Section from any payment made by it
to such Lender hereunder.
<PAGE>
69
9.8 Administrative Agent in Its Individual Capacity. The
-----------------------------------------------
Administrative Agent and its affiliates may make loans to, accept deposits from
and generally engage in any kind of business with any Loan Party as though the
Administrative Agent were not the Administrative Agent. With respect to its
Loans made or renewed by it and with respect to any Letter of Credit issued or
participated in by it, the Administrative Agent shall have the same rights and
powers under this Agreement and the other Loan Documents as any Lender and may
exercise the same as though it were not the Administrative Agent, and the terms
"Lender" and "Lenders" shall include the Administrative Agent in its individual
capacity.
9.9 Successor Administrative Agent. The Administrative Agent may
------------------------------
resign as Administrative Agent upon 15 days' notice to the Lenders and the
Borrower. If the Administrative Agent shall resign as Administrative Agent
under this Agreement and the other Loan Documents, then the Required Lenders
shall appoint from among the Lenders a successor agent for the Lenders, which
successor agent shall (unless an Event of Default under Section 8(a) or Section
8(f) with respect to the Borrower shall have occurred and be continuing) be
approved by the Borrower (which approval shall not be unreasonably withheld or
delayed), whereupon such successor agent shall succeed to the rights, powers and
duties of the Administrative Agent, and the term "Administrative Agent" shall
mean such successor agent effective upon such appointment and approval, and the
former Administrative Agent's rights, powers and duties as Administrative Agent
shall be terminated, without any other or further act or deed on the part of
such former Administrative Agent or any of the parties to this Agreement or any
holders of the Loans. If no successor agent has accepted appointment as
Administrative Agent by the date that is 15 days following a retiring
Administrative Agent's notice of resignation, the retiring Administrative
Agent's resignation shall nevertheless thereupon become effective and the
Lenders shall assume and perform all of the duties of the Administrative Agent
hereunder until such time, if any, as the Required Lenders appoint a successor
agent as provided for above. After any retiring Administrative Agent's
resignation as Administrative Agent, the provisions of this Section 9 shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was Administrative Agent under this Agreement and the other Loan Documents.
9.10 Authorization to Release Liens. The Administrative Agent is
------------------------------
hereby irrevocably authorized by each of the Lenders to (a) release any Lien
covering any Property of the Borrower or any of its Subsidiaries that is the
subject of a Disposition or an Asset Swap which is permitted by this Agreement
or which has been consented to in accordance with Section 10.1, (b) release any
Lien covering a Pledged Note (as defined in the Guarantee and Collateral
Agreement) if all amounts owing in respect of such Pledged Note have been paid
in full, (c) release a Subsidiary Guarantor from its obligations under the
Guarantee and Collateral Agreement, if all of its Capital Stock has been the
subject of a Disposition or an Asset Swap which is permitted by this Agreement
or which has been consented to in accordance with Section 10.1 or if such
Subsidiary Guarantor has been merged out of existence in accordance with Section
7.4 and (d) release Liens relating to one or more Specified Facilities in
connection with allowing such Specified Facilities to become Substitute Omega
Properties.
SECTION 10. MISCELLANEOUS
10.1 Amendments and Waivers. Other than as contemplated by Section
----------------------
9.10, neither this Agreement, any other Loan Document, nor any terms hereof or
thereof may be amended, supplemented or modified except in accordance with the
provisions of this Section 10.1. The Required Lenders and each Loan Party party
to the relevant Loan Document may, or, with the written consent of the Required
Lenders, the Administrative Agent and each Loan Party party to the relevant Loan
Document may, from time to time, (a) enter into written amendments, supplements
or modifications hereto and to the other Loan Documents for the purpose of
adding any provisions to this Agreement or the other Loan Documents or changing
in any manner the rights of the Lenders or of the Loan Parties
<PAGE>
70
hereunder or thereunder or (b) waive, on such terms and conditions as the
Required Lenders or the Administrative Agent, as the case may be, may specify in
such instrument, any of the requirements of this Agreement or the other Loan
Documents or any Default or Event of Default and its consequences; provided,
--------
however, that no such waiver and no such amendment, supplement or modification
- ------
shall (i) forgive the principal amount or extend the final scheduled date of
maturity of any Loan, extend the scheduled date of any amortization payment in
respect of any Term Loan, reduce the stated rate of any interest, fee or letter
of credit commission payable hereunder or extend the scheduled date of any
payment thereof, or increase the amount or extend the expiration date of any
Lender's Revolving Credit Commitment, in each case without the consent of each
Lender directly affected thereby (it being understood that a waiver of the
application of Section 2.14(c), the last parenthetical contained in the
definition of "Applicable Margin" or the second or third sentences of the
paragraph set forth beneath the Pricing Grid shall not be deemed to be changes
of the type covered by this clause (i)); (ii) amend, modify or waive any
provision of this Section 10.1 or reduce any percentage specified in the
definition of Required Lenders or Required Prepayment Lenders, consent to the
assignment or transfer by the Borrower of any of its rights and obligations
under this Agreement and the other Loan Documents, release all or substantially
all of the Collateral or release all or substantially all of the Subsidiary
Guarantors or GranCare from their or its obligations under the Guarantee and
Collateral Agreement, in each case without the written consent of all Lenders;
(iii) amend, modify or waive any condition precedent to any extension of credit
under the Revolving Credit Facility set forth in Section 5.2 (including, without
limitation, in connection with any waiver of an existing Default or Event of
Default) without the written consent of the Majority Revolving Credit Facility
Lenders; (iv) reduce the percentage specified in the definition of Majority
Facility Lenders without the written consent of all Lenders under each affected
Facility; (v) amend, modify or waive any provision of Section 9 without the
written consent of the Administrative Agent; (vi) amend, modify or waive any
provision of Section 2.6 or 2.7 without the written consent of the Swing Line
Lender; (vii) amend, modify or waive any provision of Section 3 without the
written consent of the Issuing Lender; or (viii) amend, modify or waive any
provision of Section 2.17 providing for the application of any optional or
mandatory prepayments which would reduce the amount or delay the application of
any payment to be applied to any Facility without the written consent of the
Majority Facility Lenders in respect of such Facility. Any such waiver and any
such amendment, supplement or modification shall apply equally to each of the
Lenders and shall be binding upon the Loan Parties, the Lenders, the
Administrative Agent and all future holders of the Loans. In the case of any
waiver, the Loan Parties, the Lenders and the Administrative Agent shall be
restored to their former position and rights hereunder and under the other Loan
Documents, and any Default or Event of Default waived shall be deemed to be
cured and not continuing, but no such waiver shall extend to any subsequent or
other Default or Event of Default, or impair any right consequent thereon.
10.2 Notices. Unless otherwise expressly provided herein, all
-------
notices, requests and demands to or upon the respective parties hereto to be
effective shall be in writing (including by telecopy), and shall be deemed to
have been duly given or made when delivered, or three Business Days after being
deposited in the mail, certified mail, return receipt requested, postage
prepaid, or, in the case of telecopy notice, when received, addressed as follows
in the case of the Borrower and the Administrative Agent, and as set forth in an
administrative questionnaire delivered to the Administrative Agent in the case
of the Lenders, or to such other address as may be hereafter notified by the
respective parties hereto:
<PAGE>
71
The Borrower: Paragon Health Network, Inc.
One Ravinia Drive, 15th Floor
Atlanta, Georgia 30346
Attention: Treasurer
Telecopy: (770) 393-8599
with a copy to: Paragon Health Network, Inc.
One Ravinia Drive, 15th Floor
Atlanta, Georgia 30346
Attention: Chief Financial Officer
Telecopy: (770) 393-8599
The Administrative Agent: The Chase Manhattan Bank
270 Park Avenue
48th Floor
New York, New York 10017
Attention: Dawn Lee Lum
Telecopy: (212) 270-3279
with a copy to: The Chase Manhattan Bank
Agent Bank Services Group
One Chase Manhattan Plaza
8th Floor
New York, New York 10081
Attention: Joseph Brusco
Telecopy: (212) 552-7500
provided that any notice, request or demand to or upon the Administrative Agent
- --------
or the Lenders shall not be effective until received.
10.3 No Waiver; Cumulative Remedies. No failure to exercise and no
------------------------------
delay in exercising, on the part of the Administrative Agent or any Lender, any
right, remedy, power or privilege hereunder or under the other Loan Documents
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, remedy, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, power or privilege.
The rights, remedies, powers and privileges herein provided are cumulative and
not exclusive of any rights, remedies, powers and privileges provided by law.
10.4 Survival of Representations and Warranties. All representations
------------------------------------------
and warranties made hereunder, in the other Loan Documents and in any document,
certificate or statement delivered pursuant hereto or in connection herewith
shall survive the execution and delivery of this Agreement and the making of the
Loans hereunder.
10.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay
-----------------------------
or reimburse the Administrative Agent for all its out-of-pocket costs and
expenses incurred in connection with the development, preparation and execution
of, and any amendment, supplement or modification to, this Agreement and the
other Loan Documents and any other documents prepared in connection herewith or
therewith, and the consummation and administration of the transactions
contemplated hereby and thereby, including, without limitation, the reasonable
fees and disbursements of counsel to the Administrative Agent (provided that the
Borrower shall not be required to reimburse the Administrative
<PAGE>
72
Agent for expenses associated with any general inspection of the Borrower and
its Subsidiaries conducted by the Administrative Agent pursuant to Section 6.7
(other than one such general inspection per fiscal year of the Borrower) unless
any such inspection is conducted at any time when a Default or Event of Default
has occurred and is continuing), (b) to pay or reimburse each Lender and the
Administrative Agent for all its out-of-pocket costs and expenses incurred in
connection with the enforcement or preservation of any rights under this
Agreement, the other Loan Documents and any such other documents, including,
without limitation, the reasonable fees and disbursements of counsel to each
Lender and of counsel to the Administrative Agent, (c) to pay, indemnify, and
hold each Lender and the Administrative Agent harmless from, any and all
recording and filing fees and any and all liabilities with respect to, or
resulting from any delay in paying, stamp, excise and other taxes, if any, which
may be payable or determined to be payable in connection with the execution and
delivery of, or consummation or administration of any of the transactions
contemplated by, or any amendment, supplement or modification of, or any waiver
or consent under or in respect of, this Agreement, the other Loan Documents and
any such other documents, and (d) to pay, indemnify, and hold each Lender and
the Administrative Agent and their respective officers, directors, trustees,
investment advisors, employees, affiliates, agents and controlling persons
(each, an "indemnitee") harmless from and against any and all other liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever with respect to the
execution, delivery, enforcement, performance and administration of this
Agreement, the other Loan Documents and any such other documents, including,
without limitation, any of the foregoing relating to the use of proceeds of the
Loans or the violation of, noncompliance with or liability under, any
Environmental Law applicable to the operations of the Borrower any of its
Subsidiaries or any of the Properties (all the foregoing in this clause (d),
collectively, the "indemnified liabilities"), provided, that the Borrower shall
--------
have no obligation hereunder to any indemnitee with respect to indemnified
liabilities to the extent such indemnified liabilities are found by a final and
nonappealable decision of a court of competent jurisdiction to have resulted
from the gross negligence or willful misconduct of such indemnitee. The
agreements in this Section 10.5 shall survive repayment of the Loans and all
other amounts payable hereunder.
10.6 Successors and Assigns; Participations and Assignments. (a)
------------------------------------------------------
This Agreement shall be binding upon and inure to the benefit of the Borrower,
the Lenders, the Administrative Agent, all future holders of the Loans and their
respective successors and assigns, except that the Borrower may not assign or
transfer any of its rights or obligations under this Agreement without the prior
written consent of each Lender.
(b) Any Lender may, without the consent of the Borrower, in
accordance with applicable law, at any time sell to one or more banks, financial
institutions or other entities (each, a "Participant") participating interests
-----------
in any Loan owing to such Lender, any Commitment of such Lender or any other
interest of such Lender hereunder and under the other Loan Documents. In the
event of any such sale by a Lender of a participating interest to a Participant,
such Lender's obligations under this Agreement to the other parties to this
Agreement shall remain unchanged, such Lender shall remain solely responsible
for the performance thereof, such Lender shall remain the holder of any such
Loan for all purposes under this Agreement and the other Loan Documents, and the
Borrower and the Administrative Agent shall continue to deal solely and directly
with such Lender in connection with such Lender's rights and obligations under
this Agreement and the other Loan Documents. In no event shall any Participant
under any such participation have any right to approve any amendment or waiver
of any provision of any Loan Document, or any consent to any departure by any
Loan Party therefrom, except to the extent that such amendment, waiver or
consent would reduce the principal of, or interest on, the Loans or any fees
payable hereunder, or postpone the date of the final maturity of the Loans, in
each case to the extent subject to such participation. The Borrower agrees that
if amounts outstanding under this
<PAGE>
73
Agreement and the Loans are due or unpaid, or shall have been declared or shall
have become due and payable upon the occurrence of an Event of Default, each
Participant shall, to the maximum extent permitted by applicable law, be deemed
to have the right of setoff in respect of its participating interest in amounts
owing under this Agreement to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under this
Agreement, provided that, in purchasing such participating interest, such
--------
Participant shall be deemed to have agreed to share with the Lenders the
proceeds thereof as provided in Section 10.7(a) as fully as if it were a Lender
hereunder. The Borrower also agrees that each Participant shall be entitled to
the benefits of Sections 2.18, 2.19 and 2.20 with respect to its participation
in the Commitments and the Loans outstanding from time to time as if it was a
Lender; provided that, in the case of Section 2.19, such Participant shall have
--------
complied with the requirements of said Section and provided, further, that no
-------- -------
Participant shall be entitled to receive any greater amount pursuant to any such
Section than the transferor Lender would have been entitled to receive in
respect of the amount of the participation transferred by such transferor Lender
to such Participant had no such transfer occurred.
(c) Any Lender (an "Assignor") may, in accordance with applicable
--------
law, at any time and from time to time assign to any Lender, any affiliate or
any Related Fund thereof or, with the consent of the Borrower and the
Administrative Agent (which, in each case, shall not be unreasonably withheld or
delayed), to an additional bank, financial institution or other entity (an
"Assignee") all or any part of its rights and obligations under this Agreement
- ---------
pursuant to an Assignment and Acceptance, substantially in the form of Exhibit
E, executed by such Assignee and such Assignor (and, in the case of an Assignee
that is not then a Lender or an affiliate thereof, by the Borrower and the
Administrative Agent) and delivered to the Administrative Agent for its
acceptance and recording in the Register; provided that no such assignment to an
--------
Assignee (other than any Lender, any affiliate or any Related Fund thereof)
shall be in an aggregate principal amount of less than $5,000,000 (other than in
the case of an assignment of all of a Lender's interests under this Agreement),
unless otherwise agreed by the Borrower and the Administrative Agent. Any such
assignment need not be ratable as among the Facilities. Upon such execution,
delivery, acceptance and recording, from and after the effective date determined
pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be
a party hereto and, to the extent provided in such Assignment and Acceptance,
have the rights and obligations of a Lender hereunder with a Commitment and/or
Loans as set forth therein, and (y) the Assignor thereunder shall, to the extent
provided in such Assignment and Acceptance, be released from its obligations
under this Agreement (and, in the case of an Assignment and Acceptance covering
all of an Assignor's rights and obligations under this Agreement, such assigning
Lender shall cease to be a party hereto). Notwithstanding any provision of this
Section 10.6, the consent of the Borrower shall not be required, and, unless
requested by the Assignee and/or the Assignor, new Notes shall not be required
to be executed and delivered by the Borrower, for any assignment which occurs at
any time when any of the events described in Section 8(f) shall have occurred
and be continuing.
(d) The Administrative Agent shall maintain at its address referred
to in Section 10.2 a copy of each Assignment and Acceptance delivered to it and
a register (the "Register") for the recordation of the names and addresses of
--------
the Lenders and the Commitments of, and the principal amount of the Loans owing
to, each Lender from time to time. The entries in the Register shall be
conclusive, in the absence of manifest error, and the Borrower, each other Loan
Party, the Administrative Agent and the Lenders shall treat each Person whose
name is recorded in the Register as the owner of the Loan recorded therein for
all purposes of this Agreement.
(e) Upon its receipt of an Assignment and Acceptance executed by an
Assignor and an Assignee (and, in the case of an Assignee that is not then a
Lender or an affiliate thereof, by the Borrower and the Administrative Agent)
together with payment to the Administrative Agent of a
<PAGE>
74
registration and processing fee of $3,500, the Administrative Agent shall (i)
promptly accept such Assignment and Acceptance and (ii) record the information
contained therein in the Register on the effective date determined pursuant
thereto.
(f) (i) Upon request of any Lender, the Loans made by such Lender
shall be evidenced by a Note issued by the Borrower, substantially in the form
of Exhibit G-1, G-2, G-3, G-4 or G-5, as the case may be, payable to the order
of such Lender (or, in the case of any Alternative Note, payable to such Lender
or its registered assigns). Each Lender is hereby authorized to record, on the
schedule annexed to and constituting a part of the relevant Note, information
regarding the relevant Loans made by such Lender, and any such recordation shall
constitute prima facie evidence of the accuracy of the information so recorded,
----- -----
provided that the failure to make any such recordation or any error in such
- --------
recordation shall not affect the Borrower's obligations hereunder or under any
Note. On or prior to the effective date of an Assignment and Acceptance, the
Borrower, at its own expense, shall execute and deliver to the Administrative
Agent, in exchange for the relevant Notes, new Notes to the order of the
Assignee and, if applicable, the Assignor. Such new Notes shall be dated the
Closing Date and shall otherwise be in the form of the Notes replaced thereby.
(ii) Any Non-U.S. Lender that could become completely exempt from
withholding of any tax, assessment or other charge or levy imposed by or on
behalf of the United States or any taxing authority thereof ("U.S. Taxes") in
----------
respect of payment of any Obligations due to such Non-U.S. Lender under this
Agreement if the Obligations were in registered form for U.S. federal income tax
purposes may request the Borrower (through the Administrative Agent), and the
Borrower agrees thereupon, to exchange any promissory note(s) evidencing such
Obligations for promissory note(s) substantially in the form of Exhibit G-4 or
G-5, as the case may be (each, an "Alternative Note"). Alternative Notes may
----------------
not be exchanged for promissory notes that are not Alternative Notes. Each Non-
U.S. Lender that holds Alternative Note(s) (an "Alternative Noteholder") (or, if
----------------------
such Alternative Noteholder is not the beneficial owner thereof, such beneficial
owner) shall deliver to the Borrower prior to or at the time such Non-U.S.
Lender becomes an Alternative Noteholder each of the forms and certifications
required by Section 2.19(b). An Alternative Note and the Obligation(s)
evidenced thereby may be assigned or otherwise transferred in whole or in part
only by registration of such assignment or transfer of such Alternative Note and
the Obligation(s) evidenced thereby on the Register (and each Alternative Note
shall expressly so provide). Any assignment or transfer of all or part of such
Obligation(s) and the Alternative Note(s) evidencing the same shall be
registered on the Register only upon surrender for registration of assignment or
transfer of the Alternative Note(s) evidencing such Obligation(s), duly endorsed
by (or accompanied by a written instrument of assignment or transfer duly
executed by) the Alternative Noteholder thereof, and thereupon one or more new
Alternative Note(s) in the same aggregate principal amount shall be issued to
the designated Assignee(s). No assignment of an Alternative Note and the
Obligations evidenced thereby shall be effective unless it has been recorded in
the Register.
(g) Notwithstanding the limitations set forth in paragraph (b)
above, (i) any Lender may at any time assign or pledge all or any portion of its
rights under this Agreement or any Note to a Federal Reserve Bank and (ii) any
Lender which is a "fund" may at any time assign or pledge all or any portion of
its rights under this Agreement to secure such Lender's indebtedness, in each
case without the prior written consent of any Borrower or the Administrative
Agent; provided that each such assignment shall be made in accordance with
--------
applicable law and no such assignment shall release a Lender from any of its
obligations hereunder.
10.7 Adjustments; Set-off. (a) Except to the extent that this
--------------------
Agreement provides for payments to be allocated to the Lenders under a
particular Facility, if any Lender (a "Benefitted Lender") shall at any time
-----------------
receive any payment of all or part of its Loans or the Reimbursement Obligations
owing
<PAGE>
75
to it, or interest thereon, or receive any collateral in respect thereof
(whether voluntarily or involuntarily, by set-off, pursuant to events or
proceedings of the nature referred to in Section 8(f), or otherwise), in a
greater proportion than any such payment to or collateral received by any other
Lender, if any, in respect of such other Lender's Loans or the Reimbursement
Obligations owing to such other Lender, or interest thereon, such Benefitted
Lender shall purchase for cash from the other Lenders a participating interest
in such portion of each such other Lender's Loan and/or of the Reimbursement
Obligations owing to each such other Lender, or shall provide such other Lenders
with the benefits of any such collateral, or the proceeds thereof, as shall be
necessary to cause such Benefitted Lender to share the excess payment or
benefits of such collateral or proceeds ratably with each of the Lenders;
provided, however, that if all or any portion of such excess payment or benefits
- -------- -------
is thereafter recovered from such Benefitted Lender, such purchase shall be
rescinded, and the purchase price and benefits returned, to the extent of such
recovery, but without interest.
(b) In addition to any rights and remedies of the Lenders provided
by law, each Lender shall have the right, without prior notice to the Borrower,
any such notice being expressly waived by the Borrower to the extent permitted
by applicable law, upon any amount becoming due and payable by the Borrower
hereunder (whether at the stated maturity, by acceleration or otherwise) to set
off and appropriate and apply against such amount any and all deposits (general
or special, time or demand, provisional or final), in any currency, and any
other credits, indebtedness or claims, in any currency, in each case whether
direct or indirect, absolute or contingent, matured or unmatured, at any time
held or owing by such Lender or any branch or agency thereof to or for the
credit or the account of the Borrower. Each Lender agrees promptly to notify the
Borrower and the Administrative Agent after any such setoff and application made
by such Lender, provided that the failure to give such notice shall not affect
--------
the validity of such setoff and application.
10.8 Counterparts. This Agreement may be executed by one or more of
------------
the parties to this Agreement on any number of separate counterparts (including
by telecopy), and all of said counterparts taken together shall be deemed to
constitute one and the same instrument. A set of the copies of this Agreement
signed by all the parties shall be lodged with the Borrower and the
Administrative Agent.
10.9 Severability. Any provision of this Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
10.10 Integration. This Agreement and the other Loan Documents
-----------
represent the agreement of the Borrower, the Administrative Agent and the
Lenders with respect to the subject matter hereof, and there are no promises,
undertakings, representations or warranties by the Administrative Agent or any
Lender relative to subject matter hereof not expressly set forth or referred to
herein or in the other Loan Documents.
10.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS
-------------
OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK (WITHOUT REGARD
FOR THE CONFLICT OF LAWS PRINCIPLES THEREOF).
<PAGE>
76
10.12 Submission To Jurisdiction; Waivers. The Borrower hereby
-----------------------------------
irrevocably and unconditionally:
(a) submits for itself and its Property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to which
it is a party, or for recognition and enforcement of any judgment in
respect thereof, to the non-exclusive general jurisdiction of the Courts of
the State of New York, the courts of the United States of America for the
Southern District of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have to
the venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not to
plead or claim the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to the
Borrower at its address set forth in Section 10.2 or at such other address
of which the Administrative Agent shall have been notified pursuant
thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to
in this Section 10.12 any special, exemplary, punitive or consequential
damages.
10.13 Acknowledgements. The Borrower hereby acknowledges that:
----------------
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Loan Documents;
(b) neither the Administrative Agent nor any Lender has any fiduciary
relationship with or duty to the Borrower arising out of or in connection
with this Agreement or any of the other Loan Documents, and the
relationship between Administrative Agent and Lenders, on one hand, and the
Borrower, on the other hand, in connection herewith or therewith is solely
that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan Documents
or otherwise exists by virtue of the transactions contemplated hereby among
the Lenders or among the Borrower and the Lenders.
10.14 WAIVERS OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT
---------------------
AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN
ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
10.15 Confidentiality. Each of the Administrative Agent and each
---------------
Lender agrees to keep confidential all non-public information provided to it by
any Loan Party pursuant to this Agreement that is designated by such Loan Party
as confidential; provided that nothing herein shall prevent the
--------
<PAGE>
77
Administrative Agent or any Lender from disclosing any such information (a) to
the Administrative Agent, any other Lender or any affiliate of any Lender, (b)
to any Participant or Assignee (each, a "Transferee") or prospective Transferee
---------
which agrees to comply with the provisions of this Section 10.15, (c) to the
employees, directors, agents, attorneys, accountants and other professional
advisors of such Lender or its affiliates, (d) upon the request or demand of any
Governmental Authority having jurisdiction over the Administrative Agent or such
Lender, (e) in response to any order of any court or other Governmental
Authority or as may otherwise be required pursuant to any Requirement of Law,
(f) if requested or required to do so in connection with any litigation or
similar proceeding, provided, however, that in the case of any such request or
-------- -------
requirement, the Administrative Agent or Lender (as applicable) so requested or
required to make such disclosure shall as soon as practicable notify the
Borrower thereof and provide the Borrower with copies of all pleadings, orders
or other documents evidencing or purportedly substantiating such request or
requirement which it has received, (g) which has been publicly disclosed other
than in breach of this Section 10.15, (h) to the National Association of
Insurance Commissioners or any similar organization or any nationally recognized
rating agency that requires access to information about a Lender's investment
portfolio in connection with ratings issued with respect to such Lender, or (i)
in connection with the exercise of any remedy hereunder or under any other Loan
Document.
<PAGE>
78
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
PARAGON HEALTH NETWORK, INC.
By: /s/ Charles B. Carden
-------------------------------------
Name: Charles B. Carden
Title: Executive Vice President,
Chief Financial Officer
THE CHASE MANHATTAN BANK, as Administrative
Agent and as a Lender
By: /s/ Bruce S. Borden
-------------------------------------
Name: Bruce S. Borden
Title: Vice President
<PAGE>
79
Annex A
-------
PRICING GRID FOR REVOLVING CREDIT LOANS, SWING LINE LOANS
TRANCHE A TERM LOANS AND COMMITMENT FEES
<TABLE>
<CAPTION>
=================================================================================================================================
Consolidated Leverage Ratio Applicable Margin Applicable Margin Commitment
for ABR Loans for Eurodollar Loans Fee Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
greater than and equal to 5.25 to 1.0 1.25% 2.25% .50%
- ---------------------------------------------------------------------------------------------------------------------------------
less than 5.25 to 1.0 and greater than and equal to 4.75 to 1.0 1.00% 2.00% .50%
- ---------------------------------------------------------------------------------------------------------------------------------
less than 4.75 to 1.0 and greater than and equal to 4.25 to 1.0 .75% 1.75% .375%
- ---------------------------------------------------------------------------------------------------------------------------------
less than 4.25 to 1.0 and greater than and equal to 3.75 to 1.0 .50% 1.50% .375%
- ---------------------------------------------------------------------------------------------------------------------------------
less than 3.75 to 1.0 and greater than and equal to 3.25 to 1.0 .25% 1.25% .30%
- ---------------------------------------------------------------------------------------------------------------------------------
less than 3.25 to 1.0 and greater than and equal to 2.75 to 1.0 0% 1.00% .30%
- ---------------------------------------------------------------------------------------------------------------------------------
less than 2.75 to 1.0 0% .75% .25%
=================================================================================================================================
</TABLE>
Changes in the Applicable Margin with respect to Revolving Credit Loans, Tranche
A Term Loans or in the Commitment Fee Rate resulting from changes in the
Consolidated Leverage Ratio shall become effective on the date (the "Adjustment
----------
Date") on which financial statements are delivered to the Lenders pursuant to
- ----
Section 6.1 (but in any event not later than the 45th day after the end of each
of the first three quarterly periods of each fiscal year or the 90th day after
the end of each fiscal year, as the case may be) and shall remain in effect
until the next change to be effected pursuant to this paragraph. If any
financial statements referred to above are not delivered within the time periods
specified above, then, until such financial statements are delivered, the
Consolidated Leverage Ratio as at the end of the fiscal period that would have
been covered thereby shall for the purposes hereunder be deemed to be greater
than or equal to 5.25 to 1.0. In addition, at all times while an Event of
Default shall have occurred and be continuing, the Consolidated Leverage Ratio
shall for the purposes hereunder be deemed to be greater than or equal to 5.25
to 1.0. Each determination of the Consolidated Leverage Ratio hereunder shall
be made with respect to the period of four consecutive fiscal quarters of the
Borrower ending at the end of the period covered by the relevant financial
statements.
<PAGE>
EXHIBIT 10.49
EXECUTION COPY
================================================================================
GUARANTEE AND COLLATERAL AGREEMENT
made by
PARAGON HEALTH NETWORK, INC.
and certain of its Subsidiaries
in favor of
THE CHASE MANHATTAN BANK,
as Collateral Agent
Dated as of November 4, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. DEFINED TERMS................................................................................ 2
1.1 Definitions.................................................................................... 2
-----------
1.2 Other Definitional Provisions.................................................................. 5
-----------------------------
SECTION 2. GUARANTEE.................................................................................... 7
2.1 Guarantee...................................................................................... 7
---------
2.2 Right of Contribution.......................................................................... 7
---------------------
2.3 No Subrogation................................................................................. 7
--------------
2.4 Amendments, etc. with respect to the Borrower Obligations...................................... 8
---------------------------------------------------------
2.5 Guarantee Absolute and Unconditional........................................................... 8
------------------------------------
2.6 Reinstatement.................................................................................. 9
-------------
2.7 Payments....................................................................................... 9
--------
SECTION 3. GRANT OF SECURITY INTEREST................................................................... 9
SECTION 4. REPRESENTATIONS AND WARRANTIES............................................................... 10
4.1 Representations in Corporate Credit Agreement.................................................. 10
---------------------------------------------
4.2 Title; No Other Liens.......................................................................... 10
---------------------
4.3 Perfected First Priority Liens................................................................. 10
------------------------------
4.4 Chief Executive Office......................................................................... 11
----------------------
4.5 Inventory and Equipment........................................................................ 11
-----------------------
4.6 Farm Products.................................................................................. 11
-------------
4.7 Pledged Securities............................................................................. 11
------------------
4.8 Receivables.................................................................................... 11
-----------
4.9 Intellectual Property.......................................................................... 11
---------------------
SECTION 5. COVENANTS.................................................................................... 12
5.1 Covenants in Corporate Credit Agreement........................................................ 12
---------------------------------------
5.2 Delivery of Instruments and Chattel Paper...................................................... 12
-----------------------------------------
5.3 Maintenance of Insurance....................................................................... 12
------------------------
5.4 Payment of Obligations......................................................................... 13
----------------------
5.5 Maintenance of Perfected Security Interest; Further Documentation.............................. 13
-----------------------------------------------------------------
5.6 Changes in Locations, Name, etc................................................................ 13
-------------------------------
5.7 Notices........................................................................................ 14
-------
5.8 Pledged Securities............................................................................. 14
------------------
5.9 Receivables.................................................................................... 15
-----------
5.10 Intellectual Property......................................................................... 15
---------------------
SECTION 6. REMEDIAL PROVISIONS.......................................................................... 16
6.1 Certain Matters Relating to Receivables........................................................ 16
---------------------------------------
6.2 Communications with Obligors; Grantors Remain Liable........................................... 17
----------------------------------------------------
6.3 Pledged Stock.................................................................................. 17
-------------
6.4 Proceeds to be Turned Over To Collateral Agent................................................. 18
----------------------------------------------
6.5 Application of Proceeds........................................................................ 18
-----------------------
6.6 Code and Other Remedies........................................................................ 19
-----------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.7 Registration Rights.......................................................................... 19
-------------------
6.8 Waiver; Deficiency........................................................................... 20
------------------
6.9 Governmental Obligor Limited Receivables..................................................... 20
----------------------------------------
SECTION 7. THE COLLATERAL AGENT....................................................................... 21
7.1 Collateral Agent's Appointment as Attorney-in-Fact, etc...................................... 21
-------------------------------------------------------
7.2 Duty of Collateral Agent..................................................................... 22
------------------------
7.3 Execution of Financing Statements............................................................ 22
---------------------------------
7.4 Authority of Collateral Agent................................................................ 23
-----------------------------
SECTION 8. MISCELLANEOUS.............................................................................. 23
8.1 Amendments in Writing........................................................................ 23
---------------------
8.2 Notices...................................................................................... 23
-------
8.3 No Waiver by Course of Conduct; Cumulative Remedies.......................................... 23
---------------------------------------------------
8.4 Enforcement Expenses; Indemnification........................................................ 23
-------------------------------------
8.5 Successors and Assigns....................................................................... 24
----------------------
8.6 Set-Off...................................................................................... 24
-------
8.7 Counterparts................................................................................. 24
------------
8.8 Severability................................................................................. 24
------------
8.9 Section Headings............................................................................. 25
----------------
8.10 Integration................................................................................. 25
-----------
8.11 GOVERNING LAW............................................................................... 25
-------------
8.12 Submission To Jurisdiction; Waivers......................................................... 25
-----------------------------------
8.13 Acknowledgements............................................................................ 25
----------------
8.14 WAIVER OF JURY TRIAL........................................................................ 26
--------------------
8.15 Additional Grantors......................................................................... 26
-------------------
8.16 Releases.................................................................................... 26
---------
</TABLE>
<PAGE>
1
GUARANTEE AND COLLATERAL AGREEMENT, dated as of November 4, 1997, made
by each of the signatories hereto (together with any other entity that may
become a party hereto as provided herein, the "Grantors"), in favor of THE CHASE
--------
MANHATTAN BANK, as collateral agent (in such capacity, the "Collateral Agent")
----------------
for
(i) the banks and other financial institutions or entities (the
"Corporate Lenders") from time to time parties to the Credit Agreement,
------------------
dated as of the date hereof (as amended, supplemented or otherwise modified
from time to time, the "Corporate Credit Agreement"), among Paragon Health
--------------------------
Network, Inc. (the "Borrower"), the Corporate Lenders, The Chase Manhattan
--------
Bank, as administrative agent for the Corporate Lenders (in such capacity,
the "Administrative Agent"), and NationsBank, N.A., as documentation agent
--------------------
(in such capacity, the "Documentation Agent"); and
-------------------
(ii) the banks and other financial institutions (the "Synthetic
---------
Lenders"; collectively with the Corporate Lenders, the "Lenders") from time
------- -------
to time parties to the Amended and Restated Credit Agreement, dated as of
the date hereof (as amended, supplemented or otherwise modified from time
to time, the "Synthetic Credit Agreement"; collectively with the Corporate
--------------------------
Credit Agreement, the "Credit Agreements"), among FBTC Leasing Corp.
-----------------
("FBTC"), the Synthetic Lenders and The Chase Manhattan Bank, as
----
administrative agent for the Synthetic Lenders (in such capacity, the
"Synthetic Agent"; collectively with the Administrative Agent, the
----------------
"Agents").
------
W I T N E S S E T H:
-------------------
WHEREAS, pursuant to the Corporate Credit Agreement, the Corporate
Lenders have severally agreed to make extensions of credit to the Borrower upon
the terms and subject to the conditions set forth therein;
WHEREAS, the Borrower is a member of an affiliated group of companies
that includes each other Grantor;
WHEREAS, the proceeds of the extensions of credit under the Corporate
Credit Agreement will be used in part to enable the Borrower to make valuable
transfers to one or more of the other Grantors in connection with the operation
of their respective businesses;
WHEREAS, the Borrower and the other Grantors are engaged in related
businesses, and each Grantor will derive substantial direct and indirect benefit
from the making of the extensions of credit under the Corporate Credit
Agreement;
WHEREAS, pursuant to the Synthetic Credit Agreement, the Synthetic
Lenders have severally agreed to make extensions of credit to FBTC upon the
terms and subject to the conditions set forth therein;
WHEREAS, the Grantors (in such capacity, the "Synthetic Guarantors"),
--------------------
under the Amended and Restated Guarantee, dated as of the date hereof (the
"Synthetic Guarantee"), in favor of the Synthetic Agent for the benefit of the
- --------------------
Synthetic Lenders, have guaranteed the obligations of the FBTC under the
Synthetic Credit Agreement, subject to certain limitations set forth therein;
WHEREAS, it is a condition precedent to the obligation of the Lenders
to make their respective extensions of credit to the Borrower and FBTC under the
respective Credit Agreements that
<PAGE>
2
the Grantors shall have executed and delivered this Agreement to the Collateral
Agent for the ratable benefit of the Lenders;
NOW, THEREFORE, in consideration of the premises and to induce the
Agents and the Lenders to enter into the respective Credit Agreements and to
induce the Lenders to make their respective extensions of credit to the Borrower
and FBTC thereunder (as applicable), each Grantor hereby agrees with the
Collateral Agent, for the ratable benefit of the Lenders, as follows:
SECTION 1. DEFINED TERMS
1.1 Definitions. (a) Unless otherwise defined herein, terms defined
-----------
in the Corporate Credit Agreement and used herein shall have the meanings given
to them in the Corporate Credit Agreement, and the following terms which are
defined in the Uniform Commercial Code in effect in the State of New York on the
date hereof are used herein as so defined: Accounts, Chattel Paper, Documents,
Equipment, Farm Products, Instruments, Inventory and Investment Property.
(b) The following terms shall have the following meanings:
"Agreement": this Guarantee and Collateral Agreement, as the same may
---------
be amended, supplemented or otherwise modified from time to time.
"Borrower Obligations": the collective reference to the unpaid
--------------------
principal of and interest on the Loans and Reimbursement Obligations and
all other obligations and liabilities of the Borrower (including, without
limitation, interest accruing at the then applicable rate provided in the
Corporate Credit Agreement after the maturity of the Loans and
Reimbursement Obligations and interest accruing at the then applicable rate
provided in the Corporate Credit Agreement after the filing of any petition
in bankruptcy, or the commencement of any insolvency, reorganization or
like proceeding, relating to the Borrower, whether or not a claim for post-
filing or post-petition interest is allowed in such proceeding) to the
Administrative Agent, any Lender or the Collateral Agent (or, in the case
of any Hedge Agreement referred to below, any Affiliate of any Lender),
whether direct or indirect, absolute or contingent, due or to become due,
or now existing or hereafter incurred, which may arise under, out of, or in
connection with, the Corporate Credit Agreement, this Agreement, the other
Loan Documents, any Letter of Credit or any Hedge Agreement entered into by
the Borrower with any Lender (or any Affiliate of any Lender) or any other
document made, delivered or given in connection therewith, in each case
whether on account of principal, interest, reimbursement obligations, fees,
indemnities, costs, expenses or otherwise (including, without limitation,
all fees and disbursements of counsel to the Administrative Agent, to the
Lenders or to the Collateral Agent that are required to be paid by the
Borrower pursuant to the terms of any of the foregoing agreements).
"Collateral": as defined in Section 3.
----------
"Collateral Account": any collateral account established by the
------------------
Collateral Agent as provided in Section 6.1, 6.4 or 6.9.
"Collateral Agent Agreement": the Collateral Agent Agreement, dated as
--------------------------
of the date hereof, among the Corporate Lenders, the Corporate Agent, the
Synthetic Lenders, the Synthetic Agent, FBTC and the Collateral Agent.
<PAGE>
3
"Copyrights": (i) all copyrights arising under the laws of the United
----------
States, any other country or any political subdivision thereof, whether
registered or unregistered and whether published or unpublished (including,
without limitation, those listed in Schedule 6), all registrations and
----------
recordings thereof, and all applications in connection therewith,
including, without limitation, all registrations, recordings and
applications in the United States Copyright Office, and (ii) the right to
obtain all renewals thereof.
"Copyright Licenses": any written agreement naming any Grantor as
------------------
licensor or licensee (including, without limitation, those listed in
Schedule 6), granting any right under any Copyright, including, without
----------
limitation, the grant of rights to manufacture, distribute, exploit and
sell materials derived from any Copyright, to the extent, in each case
where any Grantor is a licensee under any such written agreement, the grant
by such Grantor of a security interest pursuant to this Agreement is not
prohibited by such written agreement.
"General Intangibles": all "general intangibles" as such term is
-------------------
defined in Section 9-106 of the Uniform Commercial Code in effect in the
State of New York on the date hereof and, in any event, including, without
limitation, with respect to any Grantor, all contracts, agreements,
instruments and indentures in any form, and portions thereof, to which such
Grantor is a party or under which such Grantor has any right, title or
interest or to which such Grantor or any property of such Grantor is
subject, as the same may from time to time be amended, supplemented or
otherwise modified, including, without limitation, (i) all rights of such
Grantor to receive moneys due and to become due to it thereunder or in
connection therewith, (ii) all rights of such Grantor to damages arising
thereunder and (iii) all rights of such Grantor to perform and to exercise
all remedies thereunder, in each case to the extent the grant by such
Grantor of a security interest pursuant to this Agreement in its right,
title and interest in such contract, agreement, instrument or indenture is
not prohibited by such contract, agreement, instrument or indenture without
the consent of any other party thereto, would not give any other party to
such contract, agreement, instrument or indenture the right to terminate
its obligations thereunder, or is permitted with consent if all necessary
consents to such grant of a security interest have been obtained from the
other parties thereto (it being understood that the foregoing shall not be
deemed to obligate such Grantor to obtain such consents); provided, that
--------
the foregoing limitation shall not affect, limit, restrict or impair the
grant by such Grantor of a security interest pursuant to this Agreement in
any Receivable or any money or other amounts due or to become due under any
such contract, agreement, instrument or indenture.
"Governmental Obligor Limited Receivables": any amount payable to a
----------------------------------------
Grantor under or in connection with any Receivable where the obligor on any
such Receivable is a Governmental Authority or a governmental program
(including, but not limited to, Medicare and Medicaid) which pursuant to
applicable law (including, but not limited to, the Federal Assignment of
Claims Act) may not be sold by any Grantor or collected directly from, or
enforced directly against, such obligor or Account holder by the holder of
a security interest therein.
"Guarantor Obligations": with respect to any Guarantor, the
---------------------
collective reference to (i) the Borrower Obligations and (ii) all
obligations and liabilities of such Guarantor which may arise under or in
connection with this Agreement or any other Loan Document to which such
Guarantor is a party, in each case whether on account of guarantee
obligations, reimbursement obligations, fees, indemnities, costs, expenses
or otherwise (including, without limitation, all fees and disbursements of
counsel to the Collateral Agent, to the Administrative Agent or to the
Lenders that are required to be paid by such Guarantor pursuant to the
terms of this Agreement or any other Loan Document).
<PAGE>
4
"Guarantors": the collective reference to each Grantor other than the
----------
Borrower.
"Hedge Agreements": as to any Person, all interest rate swaps, caps
----------------
or collar agreements or similar arrangements entered into by such Person
providing for protection against fluctuations in interest rates or currency
exchange rates or the exchange of nominal interest obligations, either
generally or under specific contingencies.
"Intellectual Property": the collective reference to all rights,
---------------------
priorities and privileges relating to intellectual property, whether
arising under United States, multinational or foreign laws or otherwise,
including, without limitation, the Copyrights, the Copyright Licenses, the
Patents, the Patent Licenses, the Trademarks and the Trademark Licenses,
and all rights to sue at law or in equity for any infringement or other
impairment thereof, including the right to receive all proceeds and damages
therefrom.
"Intercompany Note": any promissory note evidencing loans made by any
-----------------
Grantor to the Borrower or any of its Subsidiaries.
"Issuers": the collective reference to each issuer of a Pledged
-------
Security.
"New York UCC": the Uniform Commercial Code as from time to time in
------------
effect in the State of New York.
"Obligations": (i) in the case of the Borrower, the Borrower
-----------
Obligations, (ii) in the case of each Guarantor, its Guarantor Obligations
and (iii) the Synthetic Obligations.
"Patents": (i) all letters patent of the United States, any other
-------
country or any political subdivision thereof, all reissues and extensions
thereof and all goodwill associated therewith, including, without
limitation, any of the foregoing referred to in Schedule 6, (ii) all
----------
applications for letters patent of the United States or any other country
and all divisions, continuations and continuations-in-part thereof,
including, without limitation, any of the foregoing referred to in Schedule
--------
6, and (iii) all rights to obtain any reissues or extensions of the
-
foregoing.
"Patent License": all agreements, whether written or oral, providing
--------------
for the grant by or to any Grantor of any right to manufacture, use or sell
any invention covered in whole or in part by a Patent, including, without
limitation, any of the foregoing referred to in Schedule 6, to the extent,
----------
in each case where any Grantor is a grantee under any such agreement, the
grant by such Grantor of a security interest pursuant to this Agreement is
not prohibited by such agreement.
"Pledged Notes": all promissory notes listed on Schedule 2, all
------------- ----------
Intercompany Notes at any time issued to any Grantor and all other
promissory notes issued to or held by any Grantor (other than promissory
notes issued in connection with extensions of trade credit by any Grantor
in the ordinary course of business) or any Investment Property.
"Pledged Securities": the collective reference to the Pledged Notes
------------------
and the Pledged Stock.
"Pledged Stock": the shares of Capital Stock listed on Schedule 2,
------------- ----------
together with any other shares, stock certificates, options or rights of
any nature whatsoever in respect of the Capital Stock of any Person that
may be issued or granted to, or held by, any Grantor while this Agreement
is in effect or any Investment Property.
<PAGE>
5
"Proceeds": all "proceeds" as such term is defined in Section 9-
--------
306(1) of the Uniform Commercial Code in effect in the State of New York on
the date hereof and, in any event, shall include, without limitation, all
dividends or other income from the Pledged Securities, collections thereon
or distributions or payments with respect thereto.
"Receivable": any right to payment for goods sold or leased or for
----------
services rendered, whether or not such right is evidenced by an Instrument
or Chattel Paper and whether or not it has been earned by performance
(including, without limitation, any Account).
"Securities Act": the Securities Act of 1933, as amended.
--------------
"Support Letter of Credit": an irrevocable letter of credit delivered
------------------------
pursuant to Section 8.16 to an Issuing Lender in connection with any Letter
of Credit which shall remain outstanding after the termination of this
Agreement naming such Issuing Lender as beneficiary thereunder, and which
letter of credit shall in all respects be satisfactory to such Issuing
Lender and the Collateral Agent.
"Synthetic Obligations": with respect to any Grantor, all obligations
---------------------
and liabilities of such Grantor which may arise under or in connection with
the Synthetic Guarantee whether on account of guarantee obligations,
reimbursement obligations, fees, indemnities, costs, expenses or otherwise
(including, without limitation, all fees and disbursements of counsel to
the Synthetic Agent or to the Synthetic Lenders that are required to be
paid by such Grantor pursuant to the terms of this Agreement or the
Synthetic Guarantee).
"Trademarks": (i) all trademarks, trade names, corporate names,
----------
company names, business names, fictitious business names, trade styles,
service marks, logos and other source or business identifiers, and all
goodwill associated therewith, now existing or hereafter adopted or
acquired, all registrations and recordings thereof, and all applications in
connection therewith, whether in the United States Patent and Trademark
Office or in any similar office or agency of the United States, any State
thereof or any other country or any political subdivision thereof, or
otherwise, and all common-law rights related thereto, including, without
limitation, any of the foregoing referred to in Schedule 6, and (ii) the
----------
right to obtain all renewals thereof.
"Trademark License": any agreement, whether written or oral,
-----------------
providing for the grant by or to any Grantor of any right to use any
Trademark, including, without limitation, any of the foregoing referred to
in Schedule 6, to the extent, in each case where any Grantor is a grantee
----------
under any such agreement, the grant by such Grantor of a security interest
pursuant to this Agreement is not prohibited by such agreement.
"Vehicles": all cars, trucks, trailers, construction and earth moving
--------
equipment and other vehicles covered by a certificate of title law of any
state and all tires and other appurtenances to any of the foregoing.
1.2 Other Definitional Provisions. (a) The words "hereof,"
-----------------------------
"herein", "hereto" and "hereunder" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement, and Section and Schedule references are to this
Agreement unless otherwise specified.
(b) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
<PAGE>
6
(c) Where the context requires, terms relating to the Collateral or
any part thereof, when used in relation to a Grantor, shall refer to such
Grantor's Collateral or the relevant part thereof.
<PAGE>
7
SECTION 2. GUARANTEE
2.1 Guarantee. (a) Each of the Guarantors hereby, jointly and
---------
severally, unconditionally and irrevocably, guarantees to the Collateral Agent,
for the ratable benefit of the Corporate Lenders and their respective
successors, indorsees, transferees and assigns, the prompt and complete payment
and performance by the Borrower when due (whether at the stated maturity, by
acceleration or otherwise) of the Borrower Obligations.
(b) Anything herein or in any other Loan Document to the contrary
notwithstanding, the maximum liability of each Guarantor hereunder and under the
other Loan Documents shall in no event exceed the amount which can be guaranteed
by such Guarantor under applicable federal and state laws relating to the
insolvency of debtors (after giving effect to the right of contribution
established in Section 2.2).
(c) Each Guarantor agrees that the Borrower Obligations may at any
time and from time to time exceed the amount of the liability of such Guarantor
hereunder without impairing the guarantee contained in this Section 2 or
affecting the rights and remedies of the Collateral Agent, the Administrative
Agent or any Corporate Lender hereunder.
(d) The guarantee contained in this Section 2 shall remain in full
force and effect until all the Borrower Obligations and the obligations of each
Guarantor under the guarantee contained in this Section 2 shall have been
satisfied by payment in full, no Letter of Credit shall be outstanding and the
Commitments shall be terminated, notwithstanding that from time to time during
the term of the Corporate Credit Agreement the Borrower may be free from any
Borrower Obligations.
(e) No payment made by the Borrower, any of the Guarantors, any other
guarantor or any other Person or received or collected by the Administrative
Agent, the Collateral Agent or any Corporate Lender from the Borrower, any of
the Guarantors, any other guarantor or any other Person by virtue of any action
or proceeding or any set-off or appropriation or application at any time or from
time to time in reduction of or in payment of the Borrower Obligations shall be
deemed to modify, reduce, release or otherwise affect the liability of any
Guarantor hereunder which shall, notwithstanding any such payment (other than
any payment made by such Guarantor in respect of the Borrower Obligations or any
payment received or collected from such Guarantor in respect of the Borrower
Obligations), remain liable for the Borrower Obligations up to the maximum
liability of such Guarantor hereunder until the Borrower Obligations are paid in
full, no Letter of Credit shall be outstanding and the Commitments are
terminated.
2.2 Right of Contribution. Each Guarantor hereby agrees that to the
---------------------
extent that a Guarantor shall have paid more than its proportionate share of any
payment made hereunder, such Guarantor shall be entitled to seek and receive
contribution from and against any other Guarantor hereunder which has not paid
its proportionate share of such payment. Each Guarantor's right of contribution
shall be subject to the terms and conditions of Section 2.3. The provisions of
this Section 2.2 shall in no respect limit the obligations and liabilities of
any Guarantor to the Collateral Agent, Administrative Agent and the Corporate
Lenders, and each Guarantor shall remain liable to the Collateral Agent, the
Administrative Agent and the Corporate Lenders for the full amount guaranteed by
such Guarantor hereunder.
2.3 No Subrogation. Notwithstanding any payment made by any
--------------
Guarantor hereunder or any set-off or application of funds of any Guarantor by
the Collateral Agent, the Administrative Agent or any Corporate Lender, no
Guarantor shall be entitled to be subrogated to any of the rights of the
<PAGE>
8
Collateral Agent, the Administrative Agent or any Corporate Lender against the
Borrower or any other Guarantor or any collateral security or guarantee or right
of offset held by the Collateral Agent, the Administrative Agent or any
Corporate Lender for the payment of the Borrower Obligations, nor shall any
Guarantor seek or be entitled to seek any contribution or reimbursement from the
Borrower or any other Guarantor in respect of payments made by such Guarantor
hereunder, until all amounts owing to the Collateral Agent, the Administrative
Agent and the Corporate Lenders by the Borrower on account of the Borrower
Obligations are paid in full, no Letter of Credit shall be outstanding and the
Commitments are terminated. If any amount shall be paid to any Guarantor on
account of such subrogation rights at any time when all of the Borrower
Obligations shall not have been paid in full, such amount shall be held by such
Guarantor in trust for the Collateral Agent, the Administrative Agent and the
Corporate Lenders, segregated from other funds of such Guarantor, and shall,
forthwith upon receipt by such Guarantor, be turned over to the Collateral Agent
in the exact form received by such Guarantor (duly indorsed by such Guarantor to
the Collateral Agent, if required), to be applied against the Borrower
Obligations, whether matured or unmatured, in such order as the Collateral Agent
may determine.
2.4 Amendments, etc. with respect to the Borrower Obligations. Each
---------------------------------------------------------
Guarantor shall remain obligated hereunder notwithstanding that, without any
reservation of rights against any Guarantor and without notice to or further
assent by any Guarantor, any demand for payment of any of the Borrower
Obligations made by the Collateral Agent, the Administrative Agent or any
Corporate Lender may be rescinded by the Collateral Agent, the Administrative
Agent or such Corporate Lender and any of the Borrower Obligations continued,
and the Borrower Obligations, or the liability of any other Person upon or for
any part thereof, or any collateral security or guarantee therefor or right of
offset with respect thereto, may, from time to time, in whole or in part, be
renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by the Collateral Agent, the Administrative Agent or any
Corporate Lender, and the Corporate Credit Agreement and the other Loan
Documents and any other documents executed and delivered in connection therewith
may be amended, modified, supplemented or terminated, in whole or in part, as
the Administrative Agent (or the requisite number of Lenders under the Corporate
Credit Agreement, as the case may be) may deem advisable from time to time, and
any collateral security, guarantee or right of offset at any time held by the
Collateral Agent, the Administrative Agent or any Corporate Lender for the
payment of the Borrower Obligations may be sold, exchanged, waived, surrendered
or released. Neither the Collateral Agent, the Administrative Agent nor any
Corporate Lender shall have any obligation to protect, secure, perfect or insure
any Lien at any time held by it as security for the Borrower Obligations or for
the guarantee contained in this Section 2 or any property subject thereto.
2.5 Guarantee Absolute and Unconditional. Each Guarantor waives any
------------------------------------
and all notice of the creation, renewal, extension or accrual of any of the
Borrower Obligations and notice of or proof of reliance by the Collateral Agent,
the Administrative Agent or any Corporate Lender upon the guarantee contained in
this Section 2 or acceptance of the guarantee contained in this Section 2; the
Borrower Obligations, and any of them, shall conclusively be deemed to have been
created, contracted or incurred, or renewed, extended, amended or waived, in
reliance upon the guarantee contained in this Section 2; and all dealings
between the Borrower and any of the Guarantors, on the one hand, and the
Collateral Agent, the Administrative Agent and the Corporate Lenders, on the
other hand, likewise shall be conclusively presumed to have been had or
consummated in reliance upon the guarantee contained in this Section 2. Each
Guarantor waives diligence, presentment, protest, demand for payment and notice
of default or nonpayment to or upon the Borrower or any of the Guarantors with
respect to the Borrower Obligations. Each Guarantor understands and agrees that
the guarantee contained in this Section 2 shall be construed as a continuing,
absolute and unconditional guarantee of payment without regard to (a) the
validity or enforceability of the Corporate Credit Agreement or any other Loan
Document, any of the Borrower Obligations or any other collateral security
therefor or guarantee or right of offset with respect
<PAGE>
9
thereto at any time or from time to time held by the Collateral Agent, the
Administrative Agent or any Corporate Lender, (b) any defense, set-off or
counterclaim (other than a defense of payment or performance) which may at any
time be available to or be asserted by the Borrower or any other Person against
the Collateral Agent, the Administrative Agent or any Corporate Lender, or (c)
any other circumstance whatsoever (with or without notice to or knowledge of the
Borrower or such Guarantor) which constitutes, or might be construed to
constitute, an equitable or legal discharge of the Borrower for the Borrower
Obligations, or of such Guarantor under the guarantee contained in this Section
2, in bankruptcy or in any other instance. When making any demand hereunder or
otherwise pursuing its rights and remedies hereunder against any Guarantor, the
Collateral Agent, the Administrative Agent or any Corporate Lender may, but
shall be under no obligation to, make a similar demand on or otherwise pursue
such rights and remedies as it may have against the Borrower, any other
Guarantor or any other Person or against any collateral security or guarantee
for the Borrower Obligations or any right of offset with respect thereto, and
any failure by the Collateral Agent, the Administrative Agent or any Corporate
Lender to make any such demand, to pursue such other rights or remedies or to
collect any payments from the Borrower, any other Guarantor or any other Person
or to realize upon any such collateral security or guarantee or to exercise any
such right of offset, or any release of the Borrower, any other Guarantor or any
other Person or any such collateral security, guarantee or right of offset,
shall not relieve any Guarantor of any obligation or liability hereunder, and
shall not impair or affect the rights and remedies, whether express, implied or
available as a matter of law, of the Collateral Agent, the Administrative Agent
or any Corporate Lender against any Guarantor. For the purposes hereof "demand"
shall include the commencement and continuance of any legal proceedings.
2.6 Reinstatement. The guarantee contained in this Section 2 shall
-------------
continue to be effective, or be reinstated, as the case may be, if at any time
payment, or any part thereof, of any of the Borrower Obligations is rescinded or
must otherwise be restored or returned by the Collateral Agent, the
Administrative Agent or any Corporate Lender upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Borrower or any Guarantor, or
upon or as a result of the appointment of a receiver, intervenor or conservator
of, or trustee or similar officer for, the Borrower or any Guarantor or any
substantial part of its property, or otherwise, all as though such payments had
not been made.
2.7 Payments. Each Guarantor hereby guarantees that payments
--------
hereunder will be paid to the Collateral Agent without set-off or counterclaim
in Dollars at the office of the Collateral Agent located at 270 Park Avenue, New
York, New York 10017.
SECTION 3. GRANT OF SECURITY INTEREST
Each Grantor hereby assigns and transfers to the Collateral Agent, and
hereby grants to the Collateral Agent, for the ratable benefit of the Lenders, a
security interest in, all of the following property now owned or at any time
hereafter acquired by such Grantor or in which such Grantor now has or at any
time in the future may acquire any right, title or interest (collectively, the
"Collateral"), as collateral security for the prompt and complete payment and
- -----------
performance when due (whether at the stated maturity, by acceleration or
otherwise) of such Grantor's Obligations:
(a) all Accounts;
(b) all Chattel Paper;
(c) all Documents;
<PAGE>
10
(d) all Equipment;
(e) all General Intangibles;
(f) all Instruments;
(g) all Intellectual Property;
(h) all Inventory;
(i) all Investment Property;
(j) all Pledged Securities;
(k) all books and records pertaining to the Collateral; and
(l) to the extent not otherwise included, all Proceeds and products
of any and all of the foregoing and all collateral security and guarantees
given by any Person with respect to any of the foregoing.
SECTION 4. REPRESENTATIONS AND WARRANTIES
To induce the Agents and the Lenders to enter into the Credit
Agreements and to induce the Lenders to make their respective extensions of
credit to the Borrower or FBTC, as the case may be, thereunder, each Grantor
hereby represents and warrants to each Agent and each Lender that:
4.1 Representations in Corporate Credit Agreement. In the case of
---------------------------------------------
each Guarantor, the representations and warranties set forth in Section 4 of the
Corporate Credit Agreement as they relate to such Guarantor or to the Loan
Documents to which such Guarantor is a party, each of which is hereby
incorporated herein by reference, are true and correct, and the Collateral
Agent, the Agents and each Lender shall be entitled to rely on each of them as
if they were fully set forth herein, provided that each reference in each such
--------
representation and warranty to the Borrower's knowledge shall, for the purposes
of this Section 4.1, be deemed to be a reference to such Guarantor's knowledge.
4.2 Title; No Other Liens. Except for the security interest granted
---------------------
to the Collateral Agent for the ratable benefit of the Lenders pursuant to this
Agreement and the other Liens permitted to exist on the Collateral by the
Corporate Credit Agreement, such Grantor owns each item of the Collateral free
and clear of any and all Liens or claims of others. No financing statement or
other public notice with respect to all or any part of the Collateral is on file
or of record in any public office, except such as have been filed in favor of
the Collateral Agent, for the ratable benefit of the Lenders, pursuant to this
Agreement or as are permitted by the Corporate Credit Agreement.
4.3 Perfected First Priority Liens. The security interests granted
------------------------------
pursuant to this Agreement (a) upon delivery to the Collateral Agent of stock
certificates or other documents representing the Pledged Stock (together with
undated stock powers duly executed in blank relating thereto), delivery to the
Collateral Agent of the Pledged Notes, duly endorsed in blank by the appropriate
Grantor and completion of the filings specified on Schedule 3 (which, in the
----------
case of all filings referred to on said Schedule, have been delivered to the
Collateral Agent in completed and duly executed form) will constitute valid
perfected security interests in all of the Collateral in favor of the Collateral
Agent, for the
<PAGE>
11
ratable benefit of the Lenders, as collateral security for such Grantor's
Obligations, enforceable in accordance with the terms hereof against all
creditors of such Grantor and any Persons purporting to purchase any Collateral
from such Grantor (except, in each case, under the circumstances provided to the
contrary in the New York UCC or in the Uniform Commercial Code in effect in any
applicable jurisdiction) and (b) are prior to all other Liens on the Collateral
in existence on the date hereof except for (i) unrecorded Liens permitted by the
Corporate Credit Agreement which have priority over the Liens on the Collateral
by operation of law and (ii) Liens described on Schedule 7.
----------
4.4 Chief Executive Office. On the date hereof, such Grantor's
----------------------
jurisdiction of organization and the location of such Grantor's chief executive
office or sole place of business are specified on Schedule 4.
----------
4.5 Inventory and Equipment. On the date hereof, the Inventory and
-----------------------
the Equipment (other than mobile goods) are kept at the locations listed on
Schedule 5.
- ----------
4.6 Farm Products. None of the Collateral constitutes, or is the
-------------
Proceeds of, Farm Products.
4.7 Pledged Securities. (a) The shares of Pledged Stock pledged by
------------------
such Grantor hereunder constitute all the issued and outstanding shares of all
classes of the Capital Stock of each Issuer owned by such Grantor in the case of
Domestic Subsidiaries, and 65% of the issued and outstanding shares of all
classes of the Capital Stock of each Issuer that is a Foreign Subsidiary which
is owned by such Grantor.
(b) All the shares of the Pledged Stock have been duly and validly
issued and are fully paid and nonassessable.
(c) Each of the Pledged Notes constitutes the legal, valid and
binding obligation of the obligor with respect thereto, enforceable in
accordance with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing.
(d) Such Grantor is the record and beneficial owner of, and has good
and marketable title to, the Pledged Securities pledged by it hereunder, free of
any and all Liens or options in favor of, or claims of, any other Person, except
the security interest created by this Agreement.
4.8 Receivables. (a) No amount payable to such Grantor under or in
-----------
connection with any Receivable is evidenced by any Instrument or Chattel Paper
which has not been delivered to the Collateral Agent.
(b) The amounts represented by such Grantor to the Lenders from time
to time as owing to such Grantor in respect of the Receivables will at such
times be accurate (except for immaterial inadvertent inaccuracies).
4.9 Intellectual Property. (a) Schedule 6 lists all Intellectual
--------------------- ----------
Property owned by such Grantor in its own name on the date hereof.
<PAGE>
12
(b) On the date hereof, all material Intellectual Property is valid,
subsisting, unexpired and enforceable, has not been abandoned and, to the best
of such Grantor's knowledge, does not infringe the intellectual property rights
of any other Person, subject to the disclosure made in Schedule 6.
----------
(c) Except as set forth in Schedule 6, on the date hereof, none of
----------
the Intellectual Property is the subject of any licensing or franchise agreement
pursuant to which such Grantor is the licensor or franchisor.
(d) No holding, decision or judgment has been rendered by any
Governmental Authority which would limit, cancel or question the validity of, or
such Grantor's rights in, any Intellectual Property in any respect that could
reasonably be expected to have a Material Adverse Effect.
(e) Except as disclosed in Schedule 6, no action or proceeding is
----------
pending, or, to the knowledge of such Grantor, threatened, on the date hereof
(i) seeking to limit, cancel or question the validity of any Intellectual
Property or such Grantor's ownership interest therein, or (ii) which, if
adversely determined, would have a material adverse effect on the value of any
Intellectual Property.
SECTION 5. COVENANTS
Each Grantor covenants and agrees with the Collateral Agent, the
Agents and the Lenders that, from and after the date of this Agreement until the
Obligations shall have been paid in full, no Letter of Credit shall be
outstanding and the Commitments shall have terminated:
5.1 Covenants in Corporate Credit Agreement. In the case of each
---------------------------------------
Guarantor, such Guarantor shall take, or shall refrain from taking, as the case
may be, each action that is necessary to be taken or not taken, as the case may
be, so that no Default or Event of Default is caused by the failure to take such
action or to refrain from taking such action by such Guarantor or any of its
Subsidiaries, subject in each instance to the applicable grace and cure periods,
if any, provided in the Corporate Credit Agreement or any other Loan Document to
which such Guarantor is a party.
5.2 Delivery of Instruments and Chattel Paper. If any amount payable
-----------------------------------------
under or in connection with any of the Collateral shall be or become evidenced
by any Instrument or Chattel Paper not constituting Investment Property, such
Instrument or Chattel Paper shall promptly be delivered to the Collateral Agent,
duly indorsed in a manner satisfactory to the Collateral Agent, to be held as
Collateral pursuant to this Agreement.
5.3 Maintenance of Insurance. (a) Such Grantor will maintain, with
------------------------
financially sound and reputable companies, insurance policies (i) insuring the
Inventory, Equipment and Vehicles against loss by fire, explosion, theft and
such other casualties as may be reasonably satisfactory to the Collateral Agent
and (ii) insuring such Grantor, the Collateral Agent, the Agents and the Lenders
against liability for personal injury and property damage relating to such
Inventory, Equipment and Vehicles, such policies to comply with the requirements
of Section 6.5 of the Corporate Credit Agreement and to be in such form as may
be reasonably satisfactory to the Collateral Agent. The Collateral Agent
acknowledges that such policies in effect as of the date hereof are reasonably
satisfactory with respect to coverages, forms and amounts.
(b) All such insurance shall (i) provide that no cancellation,
material reduction in amount or material change in coverage thereof shall be
effective until at least 30 days after receipt by the Collateral Agent of
written notice thereof, (ii) name the Collateral Agent as an additional insured
party or
<PAGE>
13
loss payee, (iii) if reasonably requested by the Collateral Agent, include a
breach of warranty clause and (iv) be reasonably satisfactory in all other
respects to the Collateral Agent.
(c) The Borrower shall annually deliver to the Collateral Agent, the
Agents and the Lenders a renewal notice of a reputable insurance broker with
respect to such insurance at least 15 days prior to the expiration of such
insurance and reports of a reputable insurance broker with respect to such
insurance as the Collateral Agent may from time to time reasonably request.
5.4 Payment of Obligations. Such Grantor will pay and discharge or
----------------------
otherwise satisfy at or before maturity or before they become delinquent, as the
case may be, all taxes, assessments and governmental charges or levies imposed
upon the Collateral or in respect of income or profits therefrom, as well as all
claims of any kind (including, without limitation, claims for labor, materials
and supplies) against or with respect to the Collateral, except that no such
charge need be paid if the amount or validity thereof is currently being
contested in good faith by appropriate proceedings, reserves in conformity with
GAAP with respect thereto have been provided on the books of such Grantor and
such proceedings could not reasonably be expected to result in the sale,
forfeiture or loss of any material portion of the Collateral or any interest
therein.
5.5 Maintenance of Perfected Security Interest; Further
---------------------------------------------------
Documentation. (a) Such Grantor shall maintain the security interest created
by this Agreement as a perfected security interest (to the extent the security
interest in such Collateral can be perfected by filing of one or more financing
statements or by possession of such Collateral by the Collateral Agent) having
at least the priority described in Section 4.3 and shall defend such security
interest against the claims and demands of all Persons whomsoever, except for
Permitted Liens.
(b) Such Grantor will furnish to the Collateral Agent, the Agents and
the Lenders from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as the Collateral Agent may reasonably request, all in reasonable
detail.
(c) At any time and from time to time, upon the written request of
the Collateral Agent, and at the sole expense of such Grantor, such Grantor will
promptly and duly execute and deliver, and have recorded, such further
instruments and documents and take such further actions as the Collateral Agent
may reasonably request for the purpose of obtaining or preserving the full
benefits of this Agreement and of the rights and powers herein granted,
including, without limitation, the filing of any financing or continuation
statements under the Uniform Commercial Code (or other similar laws) in effect
in any jurisdiction with respect to the security interests created hereby.
5.6 Changes in Locations, Name, etc. Such Grantor will not, except
--------------------------------
upon 15 days' prior written notice to the Collateral Agent and delivery to the
Collateral Agent of (a) subject to Section 6.10(a) of the Corporate Credit
Agreement, all additional executed financing statements and other documents
requested by the Collateral Agent to maintain the validity, perfection and
priority of the security interests provided for herein and (b) if applicable, a
written supplement to Schedule 5 showing any additional location at which
----------
Inventory or Equipment shall be kept:
(i) permit any of the Inventory or Equipment to be kept at a location
other than those listed on Schedule 5;
----------
<PAGE>
14
(ii) change the location of its chief executive office or sole place
of business, as the case may be, from that referred to in Section 4.4; or
(iii) change its name, identity or corporate structure to such an
extent that any financing statement filed by the Collateral Agent in
connection with this Agreement would become misleading.
5.7 Notices. Such Grantor will advise the Collateral Agent, the
-------
Agents and the Lenders promptly, in reasonable detail, of:
(a) any Lien (other than security interests created hereby or Liens
permitted under the Corporate Credit Agreement) on any of the Collateral which
would adversely affect the ability of the Collateral Agent to exercise any of
its remedies hereunder; and
(b) the occurrence of any other event which could reasonably be
expected to have a material adverse effect on the aggregate value of the
Collateral or on the security interests created hereby.
5.8 Pledged Securities. (a) If such Grantor shall become entitled
------------------
to receive or shall receive any stock certificate (including, without
limitation, any certificate representing a stock dividend or a distribution in
connection with any reclassification, increase or reduction of capital or any
certificate issued in connection with any reorganization), option or rights in
respect of the Capital Stock of any Issuer or any Investment Property, whether
in addition to, in substitution of, as a conversion of, or in exchange for, any
shares of the Pledged Stock, or otherwise in respect thereof, such Grantor shall
accept the same as the agent of the Collateral Agent, the Agents and the
Lenders, hold the same in trust for the Collateral Agent, the Agents and the
Lenders and deliver the same forthwith to the Collateral Agent in the exact form
received, duly indorsed by such Grantor to the Collateral Agent, if required,
together with an undated stock power covering such certificate duly executed in
blank by such Grantor and with, if the Collateral Agent so requests, signature
guaranteed, to be held by the Collateral Agent, subject to the terms hereof, as
additional collateral security for the Obligations. Any sums paid upon or in
respect of the Pledged Securities upon the liquidation or dissolution of any
Issuer shall be paid over to the Collateral Agent to be held by it hereunder as
additional collateral security for the Obligations, and in case any distribution
of capital shall be made on or in respect of the Pledged Securities or any
property shall be distributed upon or with respect to the Pledged Securities
pursuant to the recapitalization or reclassification of the capital of any
Issuer or pursuant to the reorganization thereof, the property so distributed
shall, unless otherwise subject to a perfected security interest in favor of the
Collateral Agent, be delivered to the Collateral Agent to be held by it
hereunder as additional collateral security for the Obligations. If any sums of
money or property so paid or distributed in respect of the Pledged Securities
shall be received by such Grantor, such Grantor shall, until such money or
property is paid or delivered to the Collateral Agent, hold such money or
property in trust for the Lenders, segregated from other funds of such Grantor,
as additional collateral security for the Obligations.
(b) Without the prior written consent of the Collateral Agent, such
Grantor will not (i) vote to enable, or take any other action to permit, any
Issuer to issue any stock or other equity securities of any nature or to issue
any other securities convertible into or granting the right to purchase or
exchange for any stock or other equity securities of any nature of any Issuer,
(ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any
option with respect to, the Pledged Securities or Proceeds thereof (except
pursuant to a transaction expressly permitted by the Corporate Credit
Agreement), (iii) create, incur or permit to exist any Lien or option in favor
of, or any claim of any Person with respect to, any of the Pledged Securities or
Proceeds thereof, or any interest therein, except for the security interests
<PAGE>
15
created by this Agreement or otherwise permitted by the Corporate Credit
Agreement or (iv) enter into any agreement or undertaking restricting the right
or ability of such Grantor or the Collateral Agent to sell, assign or transfer
any of the Pledged Securities or Proceeds thereof.
(c) In the case of each Grantor which is an Issuer, such Issuer
agrees that (i) it will be bound by the terms of this Agreement relating to the
Pledged Securities issued by it and will comply with such terms insofar as such
terms are applicable to it, (ii) it will notify the Collateral Agent promptly in
writing of the occurrence of any of the events described in Section 5.8(a) with
respect to the Pledged Securities issued by it and (iii) the terms of Sections
6.3(c) and 6.7 shall apply to it, mutatis mutandis, with respect to all actions
------- --------
that may be required of it pursuant to Section 6.3(c) or 6.7 with respect to the
Pledged Securities issued by it.
5.9 Receivables. (a) Other than in the ordinary course of business
-----------
consistent with industry standards, such Grantor will not (i) grant any
extension of the time of payment of any Receivable, (ii) compromise or settle
any Receivable for less than the full amount thereof, (iii) release, wholly or
partially, any Person liable for the payment of any Receivable, (iv) allow any
credit or discount whatsoever on any Receivable or (v) amend, supplement or
modify any Receivable in any manner that could adversely affect the value
thereof.
(b) Such Grantor will deliver to the Collateral Agent a copy of each
demand, notice or document received by it that questions or calls into doubt the
validity or enforceability of more than 5% of the aggregate amount (for the
Grantors as a whole) of the then outstanding Receivables.
5.10 Intellectual Property. (a) Such Grantor (either itself or
---------------------
through licensees) will (i) continue to use each material Trademark on each and
every trademark class of goods, if any, or services as reflected in its current
catalogs, brochures and price lists in order to maintain such Trademark in full
force free from any claim of abandonment for non-use, (ii) maintain as in the
past the quality of products, if any, and services offered under such Trademark,
(iii) use such Trademark with the appropriate notice of registration and all
other notices and legends required by applicable Requirements of Law, (iv) not
adopt or use any mark which is confusingly similar or a colorable imitation of
such Trademark unless the Collateral Agent, for the ratable benefit of the
Lenders, shall obtain a perfected security interest in such mark pursuant to
this Agreement, and (v) not do (and use commercially reasonable efforts to
prevent any licensee or sublicensee thereof from doing) any act or knowingly
omit to do any act whereby such Trademark may become invalidated or impaired in
any way.
(b) Such Grantor (either itself or through licensees) will not do any
act, or omit to do any act, whereby any material Patent may become forfeited,
abandoned or dedicated to the public.
(c) Such Grantor (either itself or through licensees) (i) will employ
each material Copyright and (ii) will not do (and will use commercially
reasonable efforts to prevent any licensee or sublicensee thereof from doing)
any act or knowingly omit to do any act whereby any material portion of the
Copyrights may become invalidated or otherwise impaired if such impairment would
have a Material Adverse Effect. Such Grantor will not (either itself or through
licensees) do any act whereby any material portion of the Copyrights may fall
into the public domain.
(d) Such Grantor (either itself or through licensees) will not do any
act that knowingly uses any Intellectual Property to infringe the intellectual
property rights of any other Person if such infringement could reasonably be
expected to have a Material Adverse Effect.
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16
(e) Such Grantor will promptly notify the Collateral Agent if it
knows of any adverse determination or development (including, without
limitation, the institution of, or any such determination or development in, any
proceeding in the United States Patent and Trademark Office, the United States
Copyright Office or any court or tribunal in any country) regarding such
Grantor's ownership of, or the validity of, any material Intellectual Property
or such Grantor's right to register the same or to own and maintain the same.
(f) Whenever such Grantor, either by itself or through any agent,
employee, licensee or designee, shall file an application for the registration
of any Intellectual Property with the United States Patent and Trademark Office,
the United States Copyright Office or any similar office or agency in any other
country or any political subdivision thereof, such Grantor shall report such
filing to the Collateral Agent as part of the Borrower's quarterly Compliance
Certificate required pursuant to Section 6.2(b) of the Corporate Credit
Agreement with respect to the fiscal quarter in which such filing occurs. Upon
request of the Collateral Agent, such Grantor shall execute and deliver, and
have recorded, any and all agreements, instruments, documents, and papers as the
Collateral Agent may request to evidence the Collateral Agent's, the Agents' and
the Lenders' security interest in any Copyright, Patent or Trademark and the
goodwill and general intangibles of such Grantor relating thereto or represented
thereby.
(g) Such Grantor will take all commercially reasonable steps,
including, without limitation, in any proceeding before the United States Patent
and Trademark Office, the United States Copyright Office or any similar office
or agency in any other country or any political subdivision thereof, to maintain
and pursue each application (and to obtain the relevant registration) and to
maintain each registration of the material Intellectual Property, including,
without limitation, filing of applications for renewal, affidavits of use and
affidavits of incontestability.
(h) In the event that any material Intellectual Property is
infringed, misappropriated or diluted by a third party, such Grantor shall (i)
take such actions as such Grantor shall reasonably deem appropriate under the
circumstances to protect such Intellectual Property and (ii) if such
Intellectual Property is of material economic value, promptly notify the
Collateral Agent after it learns thereof and sue for infringement,
misappropriation or dilution, to seek injunctive relief where appropriate and to
recover any and all damages for such infringement, misappropriation or dilution.
(i) Nothing contained in this Section 5.10 shall operate or be
construed to require any Grantor to initiate or file any new applications to
register any Trademark or Copyright.
SECTION 6. REMEDIAL PROVISIONS
6.1 Certain Matters Relating to Receivables. (a) The Collateral
---------------------------------------
Agent shall have the right to make test verifications of the Receivables in any
manner and through any medium that it reasonably considers advisable, and each
Grantor shall furnish all such assistance and information as the Collateral
Agent may reasonably require in connection with such test verifications. At any
time and from time to time, upon the Collateral Agent's reasonable request and
at the expense of the relevant Grantor, such Grantor shall cause independent
public accountants or others satisfactory to the Collateral Agent to furnish to
the Collateral Agent reports showing reconciliations, aging and test
verifications of, and trial balances for, the Receivables.
(b) The Collateral Agent hereby authorizes each Grantor to collect
such Grantor's Receivables, subject to the Collateral Agent's direction and
control, and the Collateral Agent may curtail or terminate said authority at any
time after the occurrence and during the continuance of an Event of
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17
Default. If required by the Collateral Agent at any time after the occurrence
and during the continuance of an Event of Default, any payments of Receivables,
when collected by any Grantor, (i) shall be forthwith (and, in any event, within
two Business Days) deposited by such Grantor in the exact form received, duly
indorsed by such Grantor to the Collateral Agent if required, in a Collateral
Account maintained under the sole dominion and control of the Collateral Agent,
subject to withdrawal by the Collateral Agent for the account of the Lenders
only as provided in Section 65, and (ii) until so turned over, shall be held by
such Grantor in trust for the Collateral Agent, the Agents and the Lenders,
segregated from other funds of such Grantor. Each such deposit of Proceeds of
Receivables shall be accompanied by a report identifying in reasonable detail
the nature and source of the payments included in the deposit.
(c) At the Collateral Agent's request, each Grantor shall deliver to
the Collateral Agent all original and other documents evidencing, and relating
to, the agreements and transactions which gave rise to the Receivables,
including, without limitation, all original orders, invoices and shipping
receipts, though such Grantor may retain copies thereof for its records.
6.2 Communications with Obligors; Grantors Remain Liable. (a) The
----------------------------------------------------
Collateral Agent in its own name or in the name of others may at any time after
the occurrence and during the continuance of an Event of Default communicate
with obligors under the Receivables to verify with them to the Collateral
Agent's satisfaction the existence, amount and terms of any Receivables.
(b) Upon the request of the Collateral Agent at any time after the
occurrence and during the continuance of an Event of Default, each Grantor shall
notify obligors on the Receivables that the Receivables have been assigned to
the Collateral Agent for the ratable benefit of the Lenders and that payments in
respect thereof shall be made directly to the Collateral Agent.
(c) Anything herein to the contrary notwithstanding, each Grantor
shall remain liable under each of the Receivables to observe and perform all the
conditions and obligations to be observed and performed by it thereunder, all in
accordance with the terms of any agreement giving rise thereto. Neither the
Collateral Agent, either Agent nor any Lender shall have any obligation or
liability under any Receivable (or any agreement giving rise thereto) by reason
of or arising out of this Agreement or the receipt by the Collateral Agent,
either Agent or any Lender of any payment relating thereto, nor shall the
Collateral Agent, either Agent or any Lender be obligated in any manner to
perform any of the obligations of any Grantor under or pursuant to any
Receivable (or any agreement giving rise thereto), to make any payment, to make
any inquiry as to the nature or the sufficiency of any payment received by it or
as to the sufficiency of any performance by any party thereunder, to present or
file any claim, to take any action to enforce any performance or to collect the
payment of any amounts which may have been assigned to it or to which it may be
entitled at any time or times.
6.3 Pledged Stock. (a) Unless an Event of Default shall have
-------------
occurred and be continuing and the Collateral Agent shall have given notice to
the relevant Grantor of the Collateral Agent's intent to exercise its
corresponding rights pursuant to Section 6.3(b), each Grantor shall be permitted
to receive all cash dividends paid in respect of the Pledged Stock and all
payments made in respect of the Pledged Notes, in each case paid in the normal
course of business of the relevant Issuer, to the extent permitted in the
Corporate Credit Agreement, and to exercise all voting and corporate rights with
respect to the Pledged Securities; provided, however, that no vote shall be cast
-------- -------
or corporate right exercised or other action taken which, in the Collateral
Agent's reasonable judgment, would impair the Collateral or which would be
inconsistent with or result in any violation of any provision of the Corporate
Credit Agreement, this Agreement or any other Loan Document, the Synthetic
Guarantee or the Collateral Agent Agreement.
<PAGE>
18
(b) If an Event of Default shall occur and be continuing and the
Collateral Agent shall give notice of its intent to exercise such rights to the
relevant Grantor or Grantors, (i) the Collateral Agent shall have the right to
receive any and all cash dividends, payments or other Proceeds paid in respect
of the Pledged Securities and make application thereof to the Obligations in
such order as the Collateral Agent may determine in accordance with the
Collateral Agent Agreement, and (ii) any or all of the Pledged Securities shall
be registered in the name of the Collateral Agent or its nominee, and the
Collateral Agent or its nominee may thereafter exercise (x) all voting,
corporate and other rights pertaining to such Pledged Securities at any meeting
of shareholders of the relevant Issuer or Issuers or otherwise and (y) any and
all rights of conversion, exchange and subscription and any other rights,
privileges or options pertaining to such Pledged Securities as if it were the
absolute owner thereof (including, without limitation, the right to exchange at
its discretion any and all of the Pledged Securities upon the merger,
consolidation, reorganization, recapitalization or other fundamental change in
the corporate structure of any Issuer, or upon the exercise by any Grantor or
the Collateral Agent of any right, privilege or option pertaining to such
Pledged Securities, and in connection therewith, the right to deposit and
deliver any and all of the Pledged Securities with any committee, depositary,
transfer agent, registrar or other designated agency upon such terms and
conditions as the Collateral Agent may determine), all without liability except
to account for property actually received by it, but the Collateral Agent shall
have no duty to any Grantor to exercise any such right, privilege or option and
shall not be responsible for any failure to do so or delay in so doing.
(c) Each Issuer acknowledges and consents to the pledge herein of the
Pledged Stock issued by it. Each Grantor hereby authorizes and instructs each
Issuer of any Pledged Securities pledged by such Grantor hereunder to (i) comply
with any instruction received by it from the Collateral Agent in writing that
(x) states that an Event of Default has occurred and is continuing and (y) is
otherwise in accordance with the terms of this Agreement, without any other or
further instructions from such Grantor, and each Grantor agrees that each Issuer
shall be fully protected in so complying, and (ii) unless otherwise expressly
permitted hereby, pay any dividends or other payments with respect to the
Pledged Securities directly to the Collateral Agent.
6.4 Proceeds to be Turned Over To Collateral Agent. In addition to
----------------------------------------------
the rights of the Collateral Agent, the Agents and the Lenders specified in
Sections 6.1 and 6.9 with respect to payments of Receivables, if an Event of
Default shall occur and be continuing, all Proceeds received by any Grantor
consisting of cash, checks and other near-cash items shall be held by such
Grantor in trust for the Collateral Agent, the Agents and the Lenders,
segregated from other funds of such Grantor, and shall, forthwith upon receipt
by such Grantor, be turned over to the Collateral Agent in the exact form
received by such Grantor (duly indorsed by such Grantor to the Collateral Agent,
if required). All Proceeds received by the Collateral Agent hereunder shall be
held by the Collateral Agent in a Collateral Account maintained under its sole
dominion and control. All Proceeds while held by the Collateral Agent in a
Collateral Account (or by such Grantor in trust for the Collateral Agent, the
Agents and the Lenders) shall continue to be held as collateral security for all
the Obligations and shall not constitute payment thereof until applied as
provided in Section 65.
6.5 Application of Proceeds. If an Event of Default shall have
-----------------------
occurred and be continuing, at any time at the Collateral Agent's election, the
Collateral Agent may apply all or any part of Proceeds held in any Collateral
Account in payment of the Obligations in such order as the Collateral Agent may
elect in accordance with the Collateral Agent Agreement, and any part of such
funds which the Collateral Agent elects not so to apply and deems not required
as collateral security for the Obligations shall be paid over from time to time
by the Collateral Agent to the Borrower or to whomsoever may be lawfully
entitled to receive the same. Any balance of such Proceeds remaining after the
Obligations shall have been paid in full, no Letters of Credit shall be
outstanding and the
<PAGE>
19
Commitments shall have terminated shall be paid over to the Borrower or to
whomsoever may be lawfully entitled to receive the same.
6.6 Code and Other Remedies. If an Event of Default shall occur and
-----------------------
be continuing, the Collateral Agent, on behalf of the Lenders, may exercise, in
addition to all other rights and remedies granted to them in this Agreement and
in any other instrument or agreement securing, evidencing or relating to the
Obligations, all rights and remedies of a secured party under the New York UCC
or any other applicable law. Without limiting the generality of the foregoing,
the Collateral Agent, without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below or any notice otherwise expressly required in
the Loan Documents) to or upon any Grantor or any other Person (all and each of
which demands, defenses, advertisements and notices are hereby waived), may in
such circumstances forthwith collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give
option or options to purchase, or otherwise dispose of and deliver the
Collateral or any part thereof (or contract to do any of the foregoing), in one
or more parcels at public or private sale or sales, at any exchange, broker's
board or office of the Collateral Agent, either Agent or any Lender or elsewhere
upon such terms and conditions as it may deem advisable and at such prices as it
may deem best, for cash or on credit or for future delivery without assumption
of any credit risk. The Collateral Agent, either Agent or any Lender shall have
the right upon any such public sale or sales, and, to the extent permitted by
law, upon any such private sale or sales, to purchase the whole or any part of
the Collateral so sold, free of any right or equity of redemption in any
Grantor, which right or equity is hereby waived and released. Each Grantor
further agrees, at the Collateral Agent's request, to assemble the Collateral
and make it available to the Collateral Agent at places which the Collateral
Agent shall reasonably select, whether at such Grantor's premises or elsewhere.
The Collateral Agent shall apply the net proceeds of any action taken by it
pursuant to this Section 6.6, after deducting all reasonable costs and expenses
of every kind incurred in connection therewith or incidental to the care or
safekeeping of any of the Collateral or in any way relating to the Collateral or
the rights of the Collateral Agent, the Agents and the Lenders hereunder,
including, without limitation, reasonable attorneys' fees and disbursements, to
the payment in whole or in part of the Obligations, in such order as the
Collateral Agent may elect in accordance with the Collateral Agent Agreement,
and only after such application and after the payment by the Collateral Agent of
any other amount required by any provision of law, including, without
limitation, Section 9-504(1)(c) of the New York UCC, need the Collateral Agent
account for the surplus, if any, to any Grantor. To the extent permitted by
applicable law, each Grantor waives all claims, damages and demands it may
acquire against the Collateral Agent, either Agent or any Lender arising out of
the exercise by them of any rights hereunder. If any notice of a proposed sale
or other disposition of Collateral shall be required by law, such notice shall
be deemed reasonable and proper if given at least 10 days before such sale or
other disposition.
6.7 Registration Rights. (a) If the Collateral Agent shall
-------------------
determine to exercise its right to sell any or all of the Pledged Stock pursuant
to Section 6.6, and if in the opinion of the Collateral Agent it is necessary or
advisable to have the Pledged Stock, or that portion thereof to be sold,
registered under the provisions of the Securities Act, the relevant Grantor will
cause the Issuer thereof to (i) execute and deliver, and cause the directors and
officers of such Issuer to execute and deliver, all such instruments and
documents, and do or cause to be done all such other acts as may be, in the
opinion of the Collateral Agent, necessary or advisable to register the Pledged
Stock, or that portion thereof to be sold, under the provisions of the
Securities Act, (ii) use its best efforts to cause the registration statement
relating thereto to become effective and to remain effective for a period of one
year from the date of the first public offering of the Pledged Stock, or that
portion thereof to be sold, and (iii) make all amendments thereto and/or to the
related prospectus which, in the opinion of the Collateral Agent, are necessary
or advisable, all in conformity with the requirements of the Securities Act and
the rules and
<PAGE>
20
regulations of the Securities and Exchange Commission applicable thereto. Each
Grantor agrees to cause such Issuer to comply with the provisions of the
securities or "Blue Sky" laws of any and all jurisdictions which the Collateral
Agent shall designate and to make available to its security holders, as soon as
practicable, an earnings statement (which need not be audited) which will
satisfy the provisions of Section 11(a) of the Securities Act.
(b) Each Grantor recognizes that the Collateral Agent may be unable
to effect a public sale of any or all the Pledged Stock, by reason of certain
prohibitions contained in the Securities Act and applicable state securities
laws or otherwise, and may be compelled to resort to one or more private sales
thereof to a restricted group of purchasers which will be obliged to agree,
among other things, to acquire such securities for their own account for
investment and not with a view to the distribution or resale thereof. Each
Grantor acknowledges and agrees that any such private sale may result in prices
and other terms less favorable than if such sale were a public sale and,
notwithstanding such circumstances, agrees that any such private sale shall be
deemed to have been made in a commercially reasonable manner. The Collateral
Agent shall be under no obligation to delay a sale of any of the Pledged Stock
for the period of time necessary to permit the Issuer thereof to register such
securities for public sale under the Securities Act, or under applicable state
securities laws, even if such Issuer would agree to do so.
(c) Each Grantor agrees to use its best efforts to do or cause to be
done all such other acts as may be necessary to make such sale or sales of all
or any portion of the Pledged Stock pursuant to this Section 6.7 valid and
binding and in compliance with any and all other applicable Requirements of Law.
Each Grantor further agrees that a breach of any of the covenants contained in
this Section 6.7 will cause irreparable injury to the Collateral Agent, the
Agents and the Lenders, that the Collateral Agent, the Agents and the Lenders
have no adequate remedy at law in respect of such breach and, as a consequence,
that each and every covenant contained in this Section 6.7 shall be specifically
enforceable against such Grantor, and such Grantor hereby waives and agrees not
to assert any defenses against an action for specific performance of such
covenants except for a defense that no Event of Default has occurred under the
Corporate Credit Agreement.
6.8 Waiver; Deficiency. Each Grantor waives and agrees not to assert
------------------
any rights or privileges which it may acquire under Section 9-112 of the New
York UCC. Each Grantor shall remain liable for any deficiency if the proceeds
of any sale or other disposition of the Collateral are insufficient to pay its
Obligations and the fees and disbursements of any attorneys employed by the
Collateral Agent, either Agent or any Lender to collect such deficiency.
6.9 Governmental Obligor Limited Receivables. Notwithstanding the
----------------------------------------
provisions of Section 6.1, the Collateral Agent shall not collect or enforce
payment of any Governmental Obligor Limited Receivable if and to the extent that
such collection or enforcement is prohibited under 42 U.S.C. (S)(S) 1395(g) or
1396(a) or under any comparable provision of federal or state law. To the
extent the Collateral Agent's rights as to any Governmental Obligor Limited
Receivable are limited pursuant to this Section 6.9, upon the occurrence and
during the continuation of an Event of Default, each Grantor will (i) use its
reasonable and diligent best efforts to collect and enforce payment of such
Governmental Obligor Limited Receivable, (ii) immediately deposit in the exact
form received, duly indorsed by such Grantor to the Collateral Agent if
required, in a Collateral Account maintained under the sole dominion and control
of the Collateral Agent, subject to withdrawal by the Collateral Agent for the
account of the Lenders only as provided in Section 65, and until so turned over,
shall be held by such Grantor in trust for the Collateral Agent, the Agents and
the Lenders, segregated from other funds of such Grantor and (iii) upon written
demand by the Collateral Agent at any time and from time to time, remit (and
cause the depository bank for such Collateral Account to remit) directly to the
Collateral Agent, as Proceeds of the
<PAGE>
21
Collateral and for application to the payment of the Obligations pursuant to
Section 6.5, all finally collected funds on deposit in such Collateral Account.
SECTION 7. THE COLLATERAL AGENT
7.1 Collateral Agent's Appointment as Attorney-in-Fact, etc. (a)
-------------------------------------------------------
Each Grantor hereby irrevocably constitutes and appoints the Collateral Agent
and any officer or agent thereof, with full power of substitution, as its true
and lawful attorney-in-fact with full irrevocable power and authority in the
place and stead of such Grantor and in the name of such Grantor or in its own
name, for the purpose of carrying out the terms of this Agreement, to take any
and all appropriate action and to execute any and all documents and instruments
which may be necessary or desirable to accomplish the purposes of this
Agreement, and, without limiting the generality of the foregoing, each Grantor
hereby gives the Collateral Agent the power and right, on behalf of such
Grantor, without notice to or assent by such Grantor, to do any or all of the
following:
(i) in the name of such Grantor or its own name, or otherwise, take
possession of and indorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under any
Receivable or with respect to any other Collateral and file any claim or
take any other action or proceeding in any court of law or equity or
otherwise deemed appropriate by the Collateral Agent for the purpose of
collecting any and all such moneys due under any Receivable or with respect
to any other Collateral whenever payable;
(ii) in the case of any Intellectual Property, execute and deliver,
and have recorded, any and all agreements, instruments, documents and
papers as the Collateral Agent may request to evidence the Collateral
Agent's, the Agents' and the Lenders' security interest in such
Intellectual Property and the goodwill and general intangibles of such
Grantor relating thereto or represented thereby;
(iii) pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral, effect any repairs or any insurance
called for by the terms of this Agreement and pay all or any part of the
premiums therefor and the costs thereof;
(iv) execute, in connection with any sale provided for in Section 6.6
or 6.7, any indorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral; and
(v) (i) direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Collateral Agent or as the Collateral Agent
shall direct; (ii) ask or demand for, collect, and receive payment of and
receipt for, any and all moneys, claims and other amounts due or to become
due at any time in respect of or arising out of any Collateral; (iii) sign
and indorse any invoices, freight or express bills, bills of lading,
storage or warehouse receipts, drafts against debtors, assignments,
verifications, notices and other documents in connection with any of the
Collateral; (iv) commence and prosecute any suits, actions or proceedings
at law or in equity in any court of competent jurisdiction to collect the
Collateral or any portion thereof and to enforce any other right in respect
of any Collateral; (v) defend any suit, action or proceeding brought
against such Grantor with respect to any Collateral; (vi) settle,
compromise or adjust any such suit, action or proceeding and, in connection
therewith, give such discharges or releases as the Collateral Agent may
deem appropriate; (vii) assign any Copyright, Patent or Trademark (along
with the goodwill
<PAGE>
22
of the business to which any such Copyright, Patent or Trademark pertains),
throughout the world for such term or terms, on such conditions, and in
such manner, as the Collateral Agent shall in its sole discretion
determine; and (viii) generally, sell, transfer, pledge and make any
agreement with respect to or otherwise deal with any of the Collateral as
fully and completely as though the Collateral Agent were the absolute owner
thereof for all purposes, and do, at the Collateral Agent's option and such
Grantor's expense, at any time, or from time to time, all acts and things
which the Collateral Agent deems necessary to protect, preserve or realize
upon the Collateral and the Collateral Agent's, the Agents' and the
Lenders' security interests therein and to effect the intent of this
Agreement, all as fully and effectively as such Grantor might do.
Anything in this Section 7.1(a) to the contrary notwithstanding, the
Collateral Agent agrees that it will not exercise any rights under the power of
attorney provided for in this Section 7.1(a) unless an Event of Default shall
have occurred and be continuing.
(b) If any Grantor fails to perform or comply with any of its
agreements contained herein, the Collateral Agent, at its option, but without
any obligation so to do, may perform or comply, or otherwise cause performance
or compliance, with such agreement.
(c) The expenses of the Collateral Agent incurred in connection with
actions undertaken as provided in this Section 7.1, together with interest
thereon at a rate per annum equal to the rate per annum at which interest would
then be payable on past due ABR Loans under the Corporate Credit Agreement, from
the date of payment by the Collateral Agent to the date reimbursed by the
relevant Grantor, shall be payable by such Grantor to the Collateral Agent on
demand.
(d) Each Grantor hereby ratifies all that said attorneys shall
lawfully do or cause to be done by virtue hereof. All powers, authorizations
and agencies contained in this Agreement are coupled with an interest and are
irrevocable until this Agreement is terminated and the security interests
created hereby are released.
7.2 Duty of Collateral Agent. The Collateral Agent's sole duty with
------------------------
respect to the custody, safekeeping and physical preservation of the Collateral
in its possession, under Section 9-207 of the New York UCC or otherwise, shall
be to deal with it in the same manner as the Collateral Agent deals with similar
property for its own account. Neither the Collateral Agent, either Agent, any
Lender nor any of their respective officers, directors, employees or agents
shall be liable for failure to demand, collect or realize upon any of the
Collateral or for any delay in doing so or shall be under any obligation to sell
or otherwise dispose of any Collateral upon the request of any Grantor or any
other Person or to take any other action whatsoever with regard to the
Collateral or any part thereof. The powers conferred on the Collateral Agent,
the Agents and the Lenders hereunder are solely to protect the Collateral
Agent's, the Agents' and the Lenders' interests in the Collateral and shall not
impose any duty upon the Collateral Agent, either Agent or any Lender to
exercise any such powers. The Collateral Agent, the Agents and the Lenders
shall be accountable only for amounts that they actually receive as a result of
the exercise of such powers, and neither they nor any of their officers,
directors, employees or agents shall be responsible to any Grantor for any act
or failure to act hereunder, except for their own gross negligence or willful
misconduct.
7.3 Execution of Financing Statements. Pursuant to Section 9-402 of
---------------------------------
the New York UCC and any other applicable law, each Grantor authorizes the
Collateral Agent to file or record financing statements and other filing or
recording documents or instruments with respect to the Collateral without the
signature of such Grantor in such form and in such offices as the Collateral
Agent reasonably determines appropriate to perfect the security interests of the
Collateral Agent under this
<PAGE>
23
Agreement. A photographic or other reproduction of this Agreement shall be
sufficient as a financing statement or other filing or recording document or
instrument for filing or recording in any jurisdiction.
7.4 Authority of Collateral Agent. Each Grantor acknowledges that
-----------------------------
the rights and responsibilities of the Collateral Agent under this Agreement
with respect to any action taken by the Collateral Agent or the exercise or non-
exercise by the Collateral Agent of any option, voting right, request, judgment
or other right or remedy provided for herein or resulting or arising out of this
Agreement shall, as among the Collateral Agent, the Agents and the Lenders, be
governed by the Corporate Credit Agreement or the Synthetic Guarantee (as the
case may be) and the Collateral Agent Agreement, and by such other agreements
with respect thereto as may exist from time to time among them, but, as between
the Collateral Agent and the Grantors, the Collateral Agent shall be
conclusively presumed to be acting as agent for the Lenders with full and valid
authority so to act or refrain from acting, and no Grantor shall be under any
obligation, or entitlement, to make any inquiry respecting such authority.
SECTION 8. MISCELLANEOUS
8.1 Amendments in Writing. None of the terms or provisions of this
---------------------
Agreement may be waived, amended, supplemented or otherwise modified except in
accordance with subsection 10.1 of the Corporate Credit Agreement.
8.2 Notices. All notices, requests and demands to or upon the
-------
Collateral Agent or any Grantor hereunder shall be effected in the manner
provided for in subsection 10.2 of the Corporate Credit Agreement; provided that
--------
any such notice, request or demand to or upon any Guarantor shall be addressed
to such Guarantor at its notice address set forth on Schedule 1 and provided,
---------- ---------
further, that each reference in such subsection to the Administrative Agent
- --------
shall, for the purposes of this Section 8.2, be deemed to be a reference to the
Collateral Agent.
8.3 No Waiver by Course of Conduct; Cumulative Remedies. Neither the
---------------------------------------------------
Collateral Agent, either Agent nor any Lender shall by any act (except by a
written instrument pursuant to Section 8.1), delay, indulgence, omission or
otherwise be deemed to have waived any right or remedy hereunder or to have
acquiesced in any Default or Event of Default. No failure to exercise, nor any
delay in exercising, on the part of the Collateral Agent, either Agent or any
Lender, any right, power or privilege hereunder shall operate as a waiver
thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver by the Collateral Agent,
either Agent or any Lender of any right or remedy hereunder on any one occasion
shall not be construed as a bar to any right or remedy which the Collateral
Agent, such Agent or such Lender would otherwise have on any future occasion.
The rights and remedies herein provided are cumulative, may be exercised singly
or concurrently and are not exclusive of any other rights or remedies provided
by law.
8.4 Enforcement Expenses; Indemnification. (a) Each Guarantor
-------------------------------------
agrees to pay or reimburse each Lender, each Agent and the Collateral Agent for
all its costs and expenses incurred in collecting against such Guarantor under
the guarantee contained in Section 2 or otherwise enforcing or preserving any
rights under this Agreement, the other Loan Documents to which such Guarantor is
a party, the Synthetic Guarantee and the Collateral Agent Agreement, including,
without limitation, the fees and disbursements of counsel to each of the
Lenders, the Agents and the Collateral Agent.
<PAGE>
24
(b) Each Guarantor agrees to pay, and to save the Collateral Agent,
the Agents and the Lenders and their respective officers, directors, trustees,
investment advisors, employees, affiliates, agents and controlling persons
harmless from, any and all liabilities with respect to, or resulting from any
delay in paying, any and all stamp, excise, sales or other taxes which may be
payable or determined to be payable with respect to any of the Collateral or in
connection with any of the transactions contemplated by this Agreement.
(c) Each Guarantor agrees to pay, and to save the Collateral Agent,
the Agents and the Lenders and their respective officers, directors, trustees,
investment advisors, employees, affiliates, agents and controlling persons
harmless from, any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever with respect to the execution, delivery, enforcement,
performance and administration of this Agreement to the extent the Borrower
would be required to do so pursuant to subsection 10.5 of the Corporate Credit
Agreement.
(d) The agreements in this Section 8.4 shall survive repayment of the
Obligations and all other amounts payable under the Corporate Credit Agreement,
the other Loan Documents and the Synthetic Guarantee.
8.5 Successors and Assigns. This Agreement shall be binding upon the
----------------------
successors and assigns of each Grantor and shall inure to the benefit of the
Collateral Agent, the Agents and the Lenders and their successors and assigns;
provided that no Grantor may assign, transfer or delegate any of its rights or
- --------
obligations under this Agreement without the prior written consent of the
Collateral Agent.
8.6 Set-Off. Each Grantor hereby irrevocably authorizes the
-------
Collateral Agent, the Agents and each Lender at any time and from time to time
during the continuance of an Event of Default, without prior notice to such
Grantor or any other Grantor, any such notice being expressly waived by each
Grantor, to set-off and appropriate and apply any and all deposits (general or
special, time or demand, provisional or final), in any currency, and any other
credits, indebtedness or claims, in any currency, in each case whether direct or
indirect, absolute or contingent, matured or unmatured, at any time held or
owing by the Collateral Agent, such Agent or such Lender to or for the credit or
the account of such Grantor, or any part thereof in such amounts as the
Collateral Agent, such Agent or such Lender may elect, against and on account of
the obligations and liabilities of such Grantor to the Collateral Agent, such
Agent or such Lender hereunder and claims of every nature and description of the
Collateral Agent, such Agent or such Lender against such Grantor, in any
currency, whether arising hereunder, under the Corporate Credit Agreement, any
other Loan Document, the Synthetic Guarantee, the Collateral Agent Agreement or
otherwise, as the Collateral Agent, such Agent or such Lender may elect, whether
or not the Collateral Agent, either Agent or any Lender has made any demand for
payment and although such obligations, liabilities and claims may be contingent
or unmatured. The Collateral Agent, each Agent and each Lender shall notify
such Grantor promptly of any such set-off and the application made by the
Collateral Agent, such Agent or such Lender of the proceeds thereof, provided
--------
that the failure to give such notice shall not affect the validity of such set-
off and application. The rights of the Collateral Agent, each Agent and each
Lender under this Section 8.6 are in addition to other rights and remedies
(including, without limitation, other rights of set-off) which the Collateral
Agent, such Agent or such Lender may have.
8.7 Counterparts. This Agreement may be executed by one or more of
------------
the parties to this Agreement on any number of separate counterparts (including
by telecopy), and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
<PAGE>
25
8.8 Severability. Any provision of this Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
8.9 Section Headings. The Section headings used in this Agreement
----------------
are for convenience of reference only and are not to affect the construction
hereof or be taken into consideration in the interpretation hereof.
8.10 Integration. This Agreement, the other Loan Documents, the
-----------
Synthetic Guarantee and the Collateral Agent Agreement represent the agreement
of the Grantors, the Collateral Agent, the Agents and the Lenders with respect
to the subject matter hereof and thereof, and there are no promises,
undertakings, representations or warranties by the Collateral Agent, either
Agent or any Lender relative to subject matter hereof and thereof not expressly
set forth or referred to herein, in the other Loan Documents, the Synthetic
Guarantee or the Collateral Agent Agreement.
8.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
8.12 Submission To Jurisdiction; Waivers. Each Grantor hereby
-----------------------------------
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement, the other Loan Documents to which it
is a party and the Synthetic Guarantee or for recognition and enforcement
of any judgment in respect thereof, to the non-exclusive general
jurisdiction of the Courts of the State of New York, the courts of the
United States of America for the Southern District of New York, and
appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have to
the venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not to
plead or claim the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to such
Grantor at its address referred to in Section 8.2 or at such other address
of which the Collateral Agent shall have been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to
in this Section any special, exemplary, punitive or consequential damages.
<PAGE>
26
8.13 Acknowledgements. Each Grantor hereby acknowledges that:
----------------
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Loan Documents to which it is a
party and the Synthetic Guarantee;
(b) neither the Collateral Agent, either Agent nor any Lender has any
fiduciary relationship with or duty to any Grantor arising out of or in
connection with this Agreement, any of the other Loan Documents, the
Synthetic Guarantee or the Collateral Agent Agreement, and the relationship
between the Grantors, on the one hand, and the Collateral Agent, the Agents
and the Lenders, on the other hand, in connection herewith or therewith is
solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan Documents
or the Synthetic Guarantee or otherwise exists by virtue of the
transactions contemplated hereby among the Lenders or among the Grantors
and the Lenders.
8.14 WAIVER OF JURY TRIAL. EACH GRANTOR HEREBY IRREVOCABLY AND
--------------------
UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING
TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, THE SYNTHETIC GUARANTEE, OR THE
COLLATERAL AGENT AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.
8.15 Additional Grantors. Each Subsidiary of the Borrower that is
-------------------
required to become a party to this Agreement pursuant to subsection 6.10 of the
Corporate Credit Agreement shall become a Grantor for all purposes of this
Agreement and party to the Collateral Agent Agreement upon execution and
delivery by such Subsidiary of an Assumption Agreement in the form of Annex 1
hereto.
8.16 Releases. (a) At such time as the Loans, the Reimbursement
--------
Obligations and the other Obligations shall have been paid in full, the
Commitments have been terminated and no Letters of Credit shall be outstanding
(except, with respect to any outstanding Letter of Credit, to the extent a
corresponding Support Letter of Credit has been delivered to the Issuing Lender
of such Letter of Credit and delivery thereof has been confirmed in writing to
the Collateral Agent by such Issuing Lender), the Collateral shall be released
from the Liens created hereby, and this Agreement and all obligations (other
than those expressly stated to survive such termination) of the Collateral Agent
and each Grantor hereunder shall terminate, all without delivery of any
instrument or performance of any act by any party, and all rights to the
Collateral, except any Support Letter of Credit, shall revert to the Grantors.
At the request and sole expense of any Grantor following any such termination,
the Collateral Agent shall deliver to such Grantor any Collateral held by the
Collateral Agent hereunder, and execute and deliver to such Grantor such
documents as such Grantor shall reasonably request to evidence such termination.
(b) If any of the Collateral shall be sold, transferred or otherwise
disposed of by any Grantor in a transaction permitted by the Corporate Credit
Agreement, then the Collateral Agent, at the request and sole expense of such
Grantor, shall execute and deliver to such Grantor all releases or other
documents reasonably necessary or desirable for the release of the Liens created
hereby on such Collateral. At the request and sole expense of the Borrower, a
Guarantor shall be released from its obligations hereunder in the event that all
the Capital Stock of such Guarantor shall be sold, transferred or otherwise
disposed of in a transaction permitted by the Corporate Credit Agreement;
provided that the Borrower shall have delivered to the Collateral Agent, at
- --------
least ten Business Days prior to the date of the proposed release, a written
request for release identifying the relevant Guarantor and the terms of the sale
or other disposition in reasonable detail, including the price thereof and any
expenses in connection
<PAGE>
27
therewith, together with a certification by the Borrower stating that such
transaction is in compliance with the Corporate Credit Agreement, the other Loan
Documents and the Synthetic Guarantee.
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee
and Collateral Agreement to be duly executed and delivered as of the date first
above written.
PARAGON HEALTH NETWORK, INC.
By: /s/ Charles B. Carden
---------------------------------
Title: Executive Vice President
and Chief Financial Officer
<PAGE>
AMERICAN-CAL MEDICAL SERVICES, INC.
AMS GREEN TREE, INC.
AMS PROPERTIES, INC.
CONNERWOOD HEALTHCARE, INC.
COORDINATED HOME HEALTH SERVICES, INC.
CORNERSTONE HEALTH MANAGEMENT COMPANY
EH ACQUISITION CORP.
EH ACQUISITION CORP. II
EH ACQUISITION CORP. III
EVERGREEN HEALTHCARE, INC.
EVERGREEN HEALTHCARE LTD., L.P.
GC SERVICES, INC.
GCI BELLA VITA, INC.
GCI CAMELLIA CARE CENTER, INC.
GCI COLTER VILLAGE, INC.
GCI EAST VALLEY MEDICAL & REHABILITATION CENTER, INC.
GCI FAITH NURSING HOME, INC.
GCI HEALTH CARE CENTERS, INC.
GCI JOLLEY ACRES, INC.
GCI PALM COURT, INC.
GCI PRINCE GEORGE, INC.
GCI REALTY, INC.
GCI REHAB, INC.
GCI SPRINGDALE VILLAGE, INC.
GCI THERAPIES, INC.
GCI VALLEY MANOR HEALTH CARE CENTER, INC.
GCI VILLAGE GREEN, INC.
GCI-CAL HEALTH CARE CENTERS, INC.
GCI-CAL THERAPIES COMPANY
GCI-WISCONSIN PROPERTIES, INC.
GRANCARE GPO SERVICES, INC.
GRANCARE HOME HEALTH SERVICES, INC.
GRANCARE, INC.
GRANCARE NURSING SERVICES AND HOSPICE, INC.
GRANCARE OF MICHIGAN, INC.
GRANCARE OF NORTH CAROLINA, INC.
GRANCARE OF NORTHERN CALIFORNIA, INC.
GRANCARE SOUTH CAROLINA, INC.
GRANCARE TRADING, INC.
HERITAGE OF LOUISIANA, INC.
HMI CONVALESCENT CARE, INC.
HOSTMASTERS, INC.
NATIONAL HERITAGE REALTY, INC.
OMEGA/INDIANA CARE CORPORATION
RENAISSANCE MENTAL HEALTH CENTER, INC.
STONECREEK MANAGEMENT COMPANY, INC.
By: /s/ Everett W. Benton
---------------------------------
Title: Vice President
<PAGE>
AMERICAN PHARMACEUTICAL SERVICES, INC.
AMERICAN REHABILITY MANAGEMENT, INC.
AMERICAN REHABILITY SERVICES, INC.
AMERICAN SENIOR HEALTH SERVICES, INC.
APS HOLDING COMPANY, INC.
APS PHARMACY MANAGEMENT, INC.
BRIAN CENTER HEALTH & REHABILITATION/TAMPA, INC.
BRIAN CENTER HEALTH & RETIREMENT/ALLEGHANY, INC.
BRIAN CENTER HEALTH & RETIREMENT/BASTIAN, INC.
BRIAN CENTER HEALTH & RETIREMENT/WALLACE, INC.
BRIAN CENTER MANAGEMENT CORPORATION
BRIAN CENTER NURSING CARE/AUSTELL, INC.
BRIAN CENTER NURSING CARE/FINCASTLE, INC.
BRIAN CENTER NURSING CARE/HICKORY, INC.
BRIAN CENTER NURSING CARE/POWDER SPRINGS, INC.
BRIAN CENTER OF ASHEBORO, INC.
BRIAN CENTER OF CENTRAL COLUMBIA, INC.
BRIAN CENTERS HEALTH & RETIREMENT/WALLACE, INC.
DEVCON HOLDING COMPANY
EXTENDED ACUTE HOSPITALS OF AMERICA, INC.
GULF COAST PHYSICAL THERAPY GROUP, INC.
HOME HEALTH MANAGEMENT ASSOCIATES OF AMERICA, INC.
HOMECARE ASSOCIATES OF AMERICA, INC.
HOSPICE ASSOCIATES OF AMERICA, INC.
HOSPICE CARE OF TENNESSEE, INC.
HOSPICE MANAGEMENT PARTNERS, INC.
LC MANAGEMENT COMPANY
LCA OPERATIONAL HOLDING COMPANY
LCR, INC.
LIVING CENTERS DEVELOPMENT COMPANY
LIVING CENTERS - EAST, INC.
LIVING CENTERS HOLDING COMPANY
LIVING CENTERS LTCP DEVELOPMENT COMPANY
LIVING CENTERS OF TEXAS, INC.
LIVING CENTERS - ROCKY MOUNTAIN, INC.
LIVING CENTERS - SOUTHEAST DEVELOPMENT CORPORATION
LIVING CENTERS - SOUTHEAST, INC.
MED-CARE SALES AND RENTALS, INC.
MED-THERAPY REHABILITATION SERVICES, INC.
PROFESSIONAL RX SYSTEMS, INC.
PROGRESSIVE CARE CENTERS OF AMERICA, INC.
REHABILITY HEALTH SERVICES, INC.
REHABILITY HOSPITAL SERVICES, INC.
THERACARE HOME HEALTH AGENCY, INC.
THERAPY MANAGEMENT INNOVATIONS, INC.
TOICA, INC.
WORKHEALTH HEALTHCARE MANAGEMENT INC.
By: /s/ Sydney Boone
-----------------------------------
Title: Vice President
<PAGE>
Schedule 1
----------
NOTICE ADDRESSES OF GUARANTORS
<PAGE>
Schedule 2
----------
DESCRIPTION OF PLEDGED SECURITIES
PLEDGED STOCK:
<TABLE>
<CAPTION>
Issuer Class of Stock Stock Certificate No. No. of Shares
----------------------------- ------------------- --------------------------------- -------------------
<S> <C> <C> <C>
</TABLE>
PLEDGED NOTES:
<TABLE>
<CAPTION>
Issuer Payee Principal Amount
- --------------------------------- ------------------- ------------------------------
<S> <C> <C>
</TABLE>
<PAGE>
Schedule 3
----------
FILINGS AND OTHER ACTIONS
REQUIRED TO PERFECT SECURITY INTERESTS
Uniform Commercial Code Filings
-------------------------------
See Annex A to this Schedule 3
Patent and Trademark Filings
----------------------------
Notice of the Collateral Agent's security interest in the Intellectual
Property listed on Schedule 6 shall be filed with the PTO and/or USCO,
as the case may be.
<PAGE>
Schedule 4
----------
LOCATION OF JURISDICTION OF ORGANIZATION AND CHIEF EXECUTIVE OFFICE
Grantor Location
------- --------
<PAGE>
Schedule 5
----------
LOCATION OF INVENTORY AND EQUIPMENT
Grantor Locations
------- ---------
<PAGE>
Schedule 6
----------
COPYRIGHTS AND COPYRIGHT LICENSES
PATENTS AND PATENT LICENSES
TRADEMARKS AND TRADEMARK LICENSES
<PAGE>
Schedule 7
----------
EXISTING PRIOR LIENS
<PAGE>
Annex 1 to
Guarantee and Collateral Agreement
----------------------------------
ASSUMPTION AGREEMENT, dated as of ________________, _____, made by
______________________________, a ______________ corporation (the "Additional
----------
Grantor"), in favor of THE CHASE MANHATTAN BANK, as collateral agent (in such
- -------
capacity, the "Collateral Agent") for the Lenders. All capitalized terms not
----------------
defined herein shall have the meaning ascribed to them in the Guarantee and
Collateral Agreement referred to below.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Borrower, the Corporate Lenders, the Administrative Agent
and the Documentation Agent have entered into the Corporate Credit Agreement;
WHEREAS, FBTC, the Synthetic Lenders and the Synthetic Agent have
entered into the Synthetic Credit Agreement;
WHEREAS, in connection with the Corporate Credit Agreement and the
Synthetic Guarantee, the Borrower and certain of its Affiliates (other than the
Additional Grantor) have entered into the Guarantee and Collateral Agreement,
dated as of November 4, 1997 (as amended, supplemented or otherwise modified
from time to time, the "Guarantee and Collateral Agreement"), in favor of the
----------------------------------
Collateral Agent for the benefit of the Lenders;
WHEREAS, the Corporate Credit Agreement requires the Additional
Grantor to become a party to the Guarantee and Collateral Agreement and to the
Collateral Agent Agreement; and
WHEREAS, the Additional Grantor has agreed to execute and deliver this
Assumption Agreement in order to become a party to the Guarantee and Collateral
Agreement and the Collateral Agent Agreement;
NOW, THEREFORE, IT IS AGREED:
1. Guarantee and Collateral Agreement. By executing and delivering
----------------------------------
this Assumption Agreement, the Additional Grantor, as provided in Section 8.15
of the Guarantee and Collateral Agreement, hereby becomes a party to the
Guarantee and Collateral Agreement as a Grantor thereunder and to the Collateral
Agent Agreement, in each case with the same force and effect as if originally
named therein as a Grantor or a party thereto and, without limiting the
generality of the foregoing, hereby expressly assumes all obligations and
liabilities of a Grantor under the Guarantee and Collateral Agreement and a
party to the Collateral Agent Agreement. The information set forth in Annex 1-A
hereto is hereby added to the information set forth in Schedules ____________/*/
to the Guarantee and Collateral Agreement. The Additional Grantor hereby
represents and warrants that each of the representations and warranties
contained in Section 4 of the Guarantee and Collateral Agreement is true and
correct on and as the date hereof (after giving effect to this Assumption
Agreement) as if made on and as of such date.
_______________________________
* Refer to each Schedule which needs to be supplemented.
<PAGE>
2
2. GOVERNING LAW. THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY,
-------------
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW
YORK.
IN WITNESS WHEREOF, the undersigned has caused this Assumption
Agreement to be duly executed and delivered as of the date first above written.
[ADDITIONAL GRANTOR]
By:______________________
Name:
Title:
<PAGE>
ACKNOWLEDGEMENT AND CONSENT*
The undersigned hereby acknowledges receipt of a copy of the Guarantee and
Collateral Agreement, dated as of November 4, 1997 (the "Agreement"), made by
---------
the Grantors parties thereto for the benefit of The Chase Manhattan Bank, as
Collateral Agent. The undersigned agrees for the benefit of the Collateral
Agent, the Agents and the Lenders as follows:
1. The undersigned will be bound by the terms of the Agreement and will
comply with such terms insofar as such terms are applicable to the undersigned.
2. The undersigned will notify the Collateral Agent promptly in writing of
the occurrence of any of the events described in Section 5.8(a) of the
Agreement.
3. The terms of Sections 6.3 and 6.7 of the Agreement shall apply to it,
mutatis mutandis, with respect to all actions that may be required of it
- ------- --------
pursuant to Section 6.3 or 6.7 of the Agreement.
[NAME OF ISSUER]
By _______________________________
Title ____________________________
Address for Notices:
__________________________________
__________________________________
Fax: _____________________________
* To be delivered by any Issuer which is not party to this Guarantee and
Collateral Agreement.
<PAGE>
EXHIBIT 10.50
================================================================================
AMENDED AND RESTATED
PARTICIPATION AGREEMENT
among
LIVING CENTERS HOLDING COMPANY,
as Lessee,
FBTC LEASING CORP.,
a New York corporation,
as Lessor,
THE CHASE MANHATTAN BANK,
as Agent for the
Lenders,
THE FUJI BANK, LIMITED (HOUSTON AGENCY),
as Co-Agent
and
THE LENDERS PARTIES HERETO
______________________________
Dated as of November 4, 1997
______________________________
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. THE LOANS......................................................... 2
SECTION 2. LESSOR CONTRIBUTION.............................................. 2
2.1. Lessor Contribution.............................................. 2
2.2. Allocated Lessor Yield........................................... 3
SECTION 3. SUMMARY OF THE TRANSACTIONS...................................... 3
3.1. Operative Agreements............................................. 3
3.2. Property Purchase and Lease...................................... 3
3.3. Construction of Improvements; Lease of Improvements.............. 4
3.4. Aggregate Tranche A Percentage; Tranche A Percentage............. 4
SECTION 4. THE CLOSINGS..................................................... 5
4.1. Initial Closing Date; Reorganization Closing Date................ 5
4.2. Subsequent Funding Dates......................................... 5
SECTION 5. FUNDING OF ADVANCES.............................................. 5
5.1. General.......................................................... 5
5.2. Procedures for Funding........................................... 5
5.3. Substitute Properties............................................ 6
SECTION 6. CONDITIONS OF THE CLOSING........................................ 6
6.1. Conditions to Loans and Lessor Contributions..................... 6
6.2. Conditions to the Lessor's and the Lenders' Obligations to Make
Advances to pay Property Acquisition Costs....................... 10
6.3. Conditions to the Lessor's and the Lenders' Obligations to Make
Advances to pay Project Costs for Construction on any Property... 13
SECTION 7. REPRESENTATIONS AND WARRANTIES................................... 14
7.1. Representations and Warranties of Lessor on the Reorganization
Closing Date..................................................... 14
7.2. Representations and Warranties of the Lessee on the Reorganization
Closing Date..................................................... 16
7.3. Representations and Warranties of the Lessee on Property Closing
Dates............................................................ 20
7.4. Representations and Warranties of the Lessee Upon each Funding
Date............................................................. 23
SECTION 8. PAYMENT OF CERTAIN EXPENSES...................................... 25
8.1. Transaction Expenses............................................. 25
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.2. Brokers' Fees and Stamp Taxes..................................... 25
8.3. Certain Fees and Expenses......................................... 26
8.4. Credit Agreement and Related Obligations.......................... 26
8.5. Commitment Fees................................................... 26
SECTION 9. OTHER COVENANTS AND AGREEMENTS.................................... 26
9.1. Covenants of the Lessor........................................... 26
9.2. Repayment of Certain Amounts on Maturity Date..................... 27
9.3. Amendment of Certain Documents.................................... 27
9.4. Proceeds of Casualty or Condemnation.............................. 28
SECTION 10. CREDIT AGREEMENT................................................ 28
10.1. Lessee's Credit Agreement Rights................................. 28
SECTION 11. TRANSFER OF INTEREST............................................. 29
11.1. Restrictions on Transfer......................................... 29
11.2. Effect of Transfer............................................... 30
SECTION 12. INDEMNIFICATION................................................. 30
12.1. General Indemnity................................................ 30
12.2. General Tax Indemnity............................................ 31
SECTION 13. MISCELLANEOUS................................................... 35
13.1. Survival of Agreements........................................... 35
13.2. No Broker, etc................................................... 35
13.3. Notices.......................................................... 36
13.4. Counterparts..................................................... 37
13.5. Amendments and Termination....................................... 37
13.6. Headings, etc.................................................... 38
13.7. Parties in Interest.............................................. 38
13.8. GOVERNING LAW.................................................... 38
13.9. Severability..................................................... 38
13.10. Rights of Lessee................................................ 38
13.11. Rights of Lessor................................................ 38
13.12. Further Assurances.............................................. 38
13.13. Successors and Assigns.......................................... 39
13.14. No Representation or Warranty................................... 39
13.15. Confidentiality................................................. 39
</TABLE>
-ii-
<PAGE>
Exhibits
- --------
Exhibit A-1 Form of Mortgage and Security Agreement
Exhibit A-2 Form of Deed of Trust and Security Agreement
Exhibit B Form of Assignment of Leases
Exhibit C Form of Requisition
Exhibit D-1 Form of Opinion of Local Counsel
-iii-
<PAGE>
AMENDED AND RESTATED PARTICIPATION AGREEMENT, dated as of November 4,
1997 (this "Agreement"), among LIVING CENTERS HOLDING COMPANY, a Delaware
---------
corporation (the "Lessee"); FBTC LEASING CORP., a New York corporation (the
------
"Lessor"); THE CHASE MANHATTAN BANK, a New York banking corporation, as agent
------
(in such capacity, the "Agent") for each of the financial institutions listed on
-----
the signature pages hereof and for the financial institutions from time to time
parties hereto (each, a "Lender"; collectively, the "Lenders") and THE FUJI
------ -------
BANK, LIMITED (HOUSTON AGENCY), as co-agent (in such capacity, the "Co-Agent").
---------
Capitalized terms used but not otherwise defined in this Agreement shall have
the meanings set forth in Annex A hereto.
Recitals
--------
Pursuant to that certain Participation Agreement dated as of October
10, 1996 (the "Original Participation Agreement") among the Lessee, the Lessor,
--------------------------------
the Agent and certain banks and financial institutions (the "Prior Lenders"),
-------------
the parties thereto agreed to participate in a transaction in which, among other
things, (i) the Prior Lenders agreed to make certain loans to the Lessor
pursuant to the Credit Agreement; (ii) the Lessor agreed to use the proceeds of
the Loans to acquire and construct the Properties; and (iii) the Lessor agreed
to lease the Properties to Lessee pursuant to the Lease.
The obligations of the Lessor under the Credit Agreement and the other
Operative Agreements are guaranteed by Living Centers of America, Inc. (the
"Original Guarantor") together with certain of its subsidiaries.
------------------
Upon the consummation of the transactions contemplated in the
Recapitalization Agreement, the Original Guarantor will be known as Paragon
Health Network, Inc., a Delaware corporation (the "Guarantor").
---------
To evidence the foregoing agreements, the Lessee, the Lessor, the
Agent and the Lenders are amending and restating the terms and conditions of the
Original Participation Agreement as of the date hereof upon the terms and
conditions set forth herein.
Preliminary Statement
---------------------
In consideration of the mutual agreements herein contained and other
good and valuable consideration, receipt of which is hereby acknowledged, the
parties hereto hereby agree that (i) all of the covenants, conditions and
stipulations contained in the Original Participation Agreement are hereby
ratified and confirmed in all respects as of the date hereof and (ii) the terms,
covenants and provisions of the Original Participation Agreement are hereby
modified, amended, reaffirmed and restated in their entirety and the terms,
covenants and conditions set forth herein supersede, amend, modify and restate
all provisions of the Original Participation Agreement in its entirety as
follows:
<PAGE>
2
SECTION 1. THE LOANS.
The Lenders have agreed to make loans to the Lessor in an aggregate
principal amount of up to $97,000,000 in order for the Lessor to acquire the
Properties, to develop and construct the Improvements (if such Property is not a
Completed Property) in accordance with the Construction Contract and the Agency
Agreement, and to pay other Project Costs, and in consideration of the receipt
of the proceeds of such Loans, the Lessor will issue the Tranche A Notes and the
Tranche B Notes.
The Loans shall be made and the Notes shall be issued pursuant to the
Credit Agreement. Pursuant to this Agreement and the Credit Agreement, the
Loans will be made to the Lessor from time to time at the request of the Lessee
for the purpose of providing funds to the Lessor to acquire one or more parcels
of Land, and, if such Property is not a Completed Property, to construct the
Improvements in accordance with the Plans and Specifications.
The Loans and the obligations of the Lessor under the Credit Agreement
shall be secured by, inter alia, (i) a first priority assignment of the Lease,
----- ----
granted pursuant to the Assignment of Leases and consented to by the Lessee
pursuant to the Consent to Assignment (in each case in the respective forms set
forth in Exhibit B hereto), (ii) a first priority assignment of the Agency
---------
Agreement, granted pursuant to the Contract Assignment and consented to by the
Construction Agent pursuant to the Consent to Contract Assignment; and (iii) a
first priority mortgage lien on each Property pursuant to a Mortgage in the form
set forth on Exhibit A-1 or Exhibit A-2 hereto, as applicable.
----------- -----------
The obligations of the Lessor under the Credit Agreement and the
obligations of the Lessee under each of the Operative Agreements to which it is
a party shall be guaranteed by each of the Guarantors to the extent provided in
the Guarantee.
SECTION 2. LESSOR CONTRIBUTION.
2.1. Lessor Contribution. Subject to the terms and conditions of
-------------------
this Agreement, and in reliance on the representations and warranties of each of
the parties hereto contained herein or made pursuant hereto, on each Funding
Date the Lessor shall make an equity contribution (each, a "Lessor
------
Contribution") in an amount equal to 3% of the amount of the Advance requested
- ------------
by the Construction Agent in the Requisition for such Funding Date. The
aggregate amount of Lessor Contributions made by the Lessor shall not exceed the
Lessor Commitment. The Lessor shall use the Lessor Contributions to pay a
portion of the Project Costs simultaneously and pro rata with the fundings by
the Lenders.
2.2. Allocated Lessor Yield. With respect to each Construction
----------------------
Period Property, on each date which is one Business Day prior to any date on
which the Lessor is entitled to a payment on account of the Lessor Yield, the
Construction Agent shall be deemed to have requested that the Lessor make a
Lessor Contribution in an amount equal to the Lessor Yield due and payable on
<PAGE>
3
such date with respect to the Construction Period Properties solely for the
purpose of paying such Lessor Yield which is then due and payable.
SECTION 3. SUMMARY OF THE TRANSACTIONS.
3.1. Operative Agreements. (a) On the Initial Closing Date, each of
--------------------
the respective parties thereto executed and delivered the Lease, the
Construction Contract, the Agency Agreement, the Contract Assignment, the
Consent to Contract Assignment and such other documents, instruments,
certificates and opinions of counsel as agreed to by the parties hereto.
(b) On the Reorganization Closing Date, each of the respective
parties thereto shall execute and deliver this Agreement, the Notes, the
Guarantee, the Credit Agreement, the Completion Guarantee and such other
documents, instruments, certificates and opinions of counsel as agreed to by the
parties hereto.
3.2. Property Purchase and Lease. (a) On each Property Closing
---------------------------
Date and subject to the terms and conditions of this Agreement and the Credit
Agreement (i) the Lessor will make a Lessor Contribution in accordance with
Section 2 hereof, (ii) the Lenders will make loans in accordance with Section 5
hereof and the terms and provisions of the Credit Agreement, (iii) the Lessor
will purchase all right, title and interest in and to each Property identified
by the Construction Agent pursuant to the Agency Agreement with respect to such
Property Closing Date, and (iv) the Lessor will simultaneously lease (or
sublease, as the case may be) all of its right, title and interest in the
Property to the Lessee by delivering a Lease Supplement pursuant to the Lease.
(b) On each Property Closing Date, the Lessee shall certify to the
Agent on the Property Closing Certificate, delivered pursuant to Section 6.2(a),
the Maximum Residual Guarantee Amount for each Property being acquired on such
Property Closing Date. The Maximum Residual Guarantee Amount so certified shall
be the Maximum Residual Guarantee Amount for such Properties for the duration of
the Term.
(c) No Property Closing Date shall occur after the fifth anniversary
of the Reorganization Closing Date.
3.3. Construction of Improvements; Lease of Improvements. (a) On
---------------------------------------------------
each Property Closing Date (provided such Property is not a Completed Property),
the Lessor and Lessee will execute and deliver an Agency Agreement Supplement,
dated as of such Property Closing Date, pursuant to which Living Centers
Development Company will agree to act as Construction Agent and to perform the
Lessor's obligations under the Construction Contract in connection with the
completion of the construction of the Improvements on such Property.
(b) On each Property Closing Date or the Construction Commencement
Date, if later, provided that the applicable Property Closing Certificate
indicates that the cost of the Land is greater
<PAGE>
4
than or equal to 25% of the Property Cost for such Property (a "Twenty-Five
-----------
Percent Property"), the Lessor and the Lessee shall execute and deliver an
- ----------------
additional Lease Supplement pursuant to which the Lessor will lease (or
sublease, as the case may be) all of its right, title and interest in such
Improvements to the Lessee. Notwithstanding that the Improvements on a Twenty-
Five Percent Property (whether existing on the date of acquisition of the Land
or to be constructed pursuant to the Agency Agreement) may be leased by a
separate Lease Supplement, the term "Property" shall include the Land and the
Improvements.
(c) If the Property Closing Certificate indicates that the cost of
the Land is less than 25% of the Property Cost, no additional Lease Supplement
will be required to be delivered and the Land and the Improvements will be
leased on the Property Closing Date under the Lease Supplement delivered
pursuant to Section 6.2(d) and the term "Property" will be deemed to mean Land
and Improvements.
(d) On each Property Closing Date, the Lessor and Lessee will execute
and deliver a Memorandum of Lease which will be recorded in the real estate
records in the county where such Property is located.
3.4. Aggregate Tranche A Percentage; Tranche A Percentage.
----------------------------------------------------
(a) Notwithstanding any other provision of this Agreement or the
other Operative Agreements, the Lessee agrees that in no event shall the Lessee
specify a Property for the Lessor to acquire and lease pursuant to the execution
and delivery of a Lease Supplement if the Aggregate Tranche A Percentage after
giving effect to the acquisition and lease pursuant to the execution and
delivery of a Lease Supplement of such Property would be less than 85%.
(b) Notwithstanding any other provision of this Agreement or the
other Operative Agreements, the Lessee agrees that in no event shall the Lessee
specify a Property for the Lessor to acquire and lease pursuant to the execution
and delivery of a Lease Supplement if the Tranche A Percentage with respect to
such Property would be less than 85% of Budgeted Total Property Costs with
respect to such Property upon the acquisition of such Property.
SECTION 4. THE CLOSINGS.
4.1. Initial Closing Date; Reorganization Closing Date. All
-------------------------------------------------
documents and instruments required to be delivered on either the Initial Closing
Date or the Reorganization Closing Date have been or shall be delivered at the
offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York,
or at such other location as may be determined by the Agent and the Lessee.
4.2. Subsequent Funding Dates. The Lessee shall deliver to the
------------------------
Lessor and the Agent a Requisition appropriately completed, in connection with
each Funding Date.
<PAGE>
5
SECTION 5. FUNDING OF ADVANCES.
5.1. General. To the extent funds have been made available to the
-------
Borrower under the Credit Agreement, such funds, along with the Lessor
Contributions, will be applied by the Construction Agent from time to time in
accordance with the terms and conditions of this Agreement and the other
Operative Agreements in order to: (i) allow the Lessor, at the direction of the
Lessee, to acquire the Land in accordance with the terms of this Agreement and
the other Operative Agreements; (ii) allow the Lessor, on behalf of the Lessee,
to pay Transaction Expenses; (iii) permit the Construction Agent to construct
the Improvements (provided that such Property is not a Completed Property) in
accordance with the Plans and Specifications and the terms of the Construction
Contract, the Agency Agreement, the Lease and the other Operative Agreements;
and (iv) pay all other Project Costs.
5.2. Procedures for Funding. (a) Not less than three Business Days
----------------------
prior to each proposed Funding Date, the Construction Agent shall deliver to the
Lessor and the Agent, a requisition (a "Requisition"), appropriately completed,
-----------
in the form of Exhibit C hereto.
---------
(b) Each Requisition shall: (i) be irrevocable; and (ii) request
funds in an amount of at least $500,000 (or such lesser amount as shall be equal
to the total aggregate of the Available Commitments plus the Available Lessor
Commitment at such time) for the payment of Property Acquisition Costs or other
Project Costs which have previously been incurred and were not the subject of
and funded pursuant to a prior Requisition, in each case as specified in the
Requisition.
(c) So long as no Default or Event of Default has occurred and is
continuing and subject to the satisfaction of the conditions set forth in
Sections 6.1, 6.2 and/or 6.3, as applicable, on each Funding Date (i) the
Lenders shall make Loans to the Lessor in an aggregate amount equal to 97% of
the funds specified in any Requisition, up to an aggregate principal amount
equal to the aggregate Available Commitments; (ii) the Lessor shall make a
Lessor Contribution in an amount equal to 3% of the funds specified in any
Requisition, up to an amount equal to the Available Lessor Commitment; and (iii)
the total amount of such Loans and Lessor Contribution made on such date shall
be paid to the Disbursement Account, provided, however, amounts requested to be
-------- -------
disbursed into the Disbursement Account may be used to pay Project Costs
reasonably anticipated by the Construction Agent to be incurred within 60 days
of the applicable Funding Date. There shall in no event be an amount in excess
of $2,600,000 in the Disbursement Account and the Agent shall at all times
retain the right to demand that funds remaining in the Disbursement Account,
after outstanding checks have cleared, be immediately returned to the Agent for
distribution to the Lenders and the Lessor. So long as no Default or Event of
Default has occurred and is continuing and subject to the satisfaction of the
conditions set forth in Sections 6.1, 6.2 and/or 6.3, as applicable, on each
date on which the Construction Agent is required to pay Project Costs the
Construction Agent shall cause funds to be disbursed from the Disbursement
Account to pay such Project Costs. The Construction Agent may cause funds on
account in the Disbursement Account to be invested in Permitted Investments.
<PAGE>
6
5.3. Substitute Properties. If, prior to the expiration of the
---------------------
Commitment Period, the Lessee purchases one or more Properties (each, a
"Purchased Property") pursuant to the provisions of the Lease and a portion of
- -------------------
the Loans are prepaid in accordance with Section 2.5 of the Credit Agreement,
the Lessee may cause the Lessor to purchase one or more substitute Properties
(each, a "Substitute Property", collectively, the "Substitute Properties"),
------------------- ---------------------
provided that (a) the aggregate Property Cost of all Substitute Properties may
not exceed $20,000,000, (b) Lessee shall cause the Lessor to purchase the
applicable Substitute Property within one year from the date that the Lessee
purchased the applicable Purchased Property and (c) all of the conditions to the
making of Advances and Lessor Contributions contained in this Agreement, the
Credit Agreement and any other Operative Agreement shall have been satisfied on
or prior to the applicable Funding Date for the purchase of the Substitute
Property.
SECTION 6. CONDITIONS OF THE CLOSINGS AND ADVANCES
6.1. Conditions to Loans and Lessor Contributions. The agreement of
--------------------------------------------
each Lender to make and continue its Loans and the Lessor to make and continue
its Lessor Contributions, is subject to the satisfaction, immediately prior to
or concurrently with the making and continuation of such Loans and Lessor
Contribution, of the following conditions precedent:
(a) Operative Agreements. Each of the Operative Agreements shall have
--------------------
been duly authorized, executed, acknowledged and delivered by the parties
thereto and shall be in full force and effect, and no default shall exist
thereunder (both before and after giving effect to the transactions
contemplated by the Operative Agreements), and the Agent, the Lenders and
the Lessor shall have received a fully executed copy of each of the
Operative Agreements (other than the Notes of which the Agent shall have
received the originals thereof);
(b) Taxes. All taxes, fees and other charges in connection with the
-----
execution, delivery, and, where applicable, recording, filing and
registration of the Operative Agreements shall have been paid or provisions
for such payment shall have been made to the satisfaction of the Agent and
the Lessor;
(c) Governmental Approvals. All necessary (or, in the reasonable
----------------------
opinion of the Agent, the Lessor and their respective counsel, advisable)
Governmental Actions, in each case required by any law or regulation
enacted, imposed or adopted on or after the date hereof or by any change in
fact or circumstances since the date hereof, shall have been obtained or
made and be in full force and effect;
(d) Litigation. No action or proceeding shall have been instituted,
----------
nor to the knowledge of the Lessee shall any action or proceeding be
threatened before any Governmental Authority, nor shall any order, judgment
or decree have been issued or proposed to be issued by any Governmental
Authority (i) to set aside, restrain, enjoin or prevent the full
<PAGE>
7
performance of this Agreement, any other Operative Agreement or any of the
transactions contemplated hereby or thereby or (ii) which is reasonably
likely to have a Material Adverse Effect;
(e) Legal Requirements. In the reasonable opinion of the Agent, the
------------------
Lessor and their respective counsel, the transactions contemplated by the
Operative Agreements do not and will not violate in any respect any Legal
Requirements and do not and will not subject the Agent, any Lender or the
Lessor to any adverse regulatory prohibitions or constraints;
(f) Corporate Proceedings of the Lessee, the Construction Agent and
---------------------------------------------------------------
the Guarantors. On the Reorganization Closing Date, the Agent and the
--------------
Lessor shall have received a copy of the resolutions or minutes, in form
and substance satisfactory to the Agent and the Lessor, of the Board of
Directors of each of the Lessee, the Construction Agent and the Guarantors
authorizing the execution, delivery and performance of this Agreement, the
Guarantee and the other Operative Agreements to which they are parties,
certified by the Secretary or an Assistant Secretary of the Lessee, the
Construction Agent and each Guarantor as of the Reorganization Closing
Date, which certificate shall be in form and substance satisfactory to the
Agent and the Lessor and shall state that the resolutions or minutes
thereby certified have not been amended, modified, revoked or rescinded;
(g) Lessee, Construction Agent and Guarantor Incumbency Certificate.
---------------------------------------------------------------
On the Reorganization Closing Date, the Agent and the Lessor shall have
received a certificate of the Lessee, the Construction Agent and each
Guarantor, dated the Reorganization Closing Date, as to the incumbency and
signature of the officers of the Lessee, the Construction Agent and such
Guarantor executing any Operative Agreement satisfactory in form and
substance to the Agent and the Lessor, executed by the President or any
Vice President and the Secretary or any Assistant Secretary of the Lessee,
the Construction Agent and such Guarantor;
(h) Lessor Incumbency Certificate. On the Reorganization Closing
-----------------------------
Date, the Agent and the Lessee shall have received a certificate of the
Lessor, dated the Initial Closing Date, as to the incumbency and signature
of the officers of the Lessor executing any Operative Agreements
satisfactory in form and substance to the Agent and the Lessee, executed by
a Vice President and the Secretary or an Assistant Secretary of the Lessor;
(i) Corporate Proceedings of the Lessor. On the Reorganization
-----------------------------------
Closing Date, the Agent and the Lessee shall have received a copy of the
resolutions, in form and substance satisfactory to the Agent and the
Lessee, of the Board of Directors of the Lessor authorizing the execution,
delivery and performance of the Operative Agreements to which it is a
party, certified by the Secretary or an Assistant Secretary of the Lessor
as of the Reorganization Closing Date, which certificate shall be in form
and substance satisfactory to the Agent and the Lessee and shall state that
the resolutions thereby certified have not been amended, modified, revoked
or rescinded;
<PAGE>
8
(j) Corporate Documents. On the Reorganization Closing Date the Agent
-------------------
and the Lessor shall have received true and complete copies of the articles
of incorporation and by-laws of the Lessee and each Guarantor, certified as
of the Reorganization Closing Date as complete and correct copies thereof
by the Secretary or an Assistant Secretary of the Lessee and such
Guarantor;
(k) Consents, Licenses and Approvals. The Agent and the Lessor shall
--------------------------------
have received a certificate of the Vice President of the Lessee stating
that all consents, authorizations and filings required to consummate the
transaction contemplated by this Agreement have been obtained and are in
full force and effect, and each such consent, authorization and filing
shall be in form and substance reasonably satisfactory to the Agent and the
Lessor;
(l) Fees. The Agent and the Arranger shall have received the fees to
----
be paid on the Reorganization Closing Date pursuant to the Fee Letter and
the Lessor shall have received the upfront fees agreed to between the
Lessor and Living Centers to be paid on the Reorganization Closing Date,
which fees shall not be paid using the proceeds of the Loans or Lessor
Contributions;
(m) Legal Opinions. On the Reorganization Closing Date (i) the Agent,
--------------
the Lenders and the Lessor shall have received the executed legal opinion
of Powell, Goldstein, Frazer & Murphy, counsel to the Lessee and the
Guarantors; and
(ii) the Agent and the Lessee shall have received the executed legal
opinion of Porter & Hedges, counsel to the Lessor;
(n) Insurance. The Agent and the Lessor shall have received evidence
---------
in form and substance satisfactory to them that all of the requirements of
Section 14 of the Lease shall have been satisfied;
(o) Representations and Warranties. The representations and
------------------------------
warranties of the Lessor, the Lessee and each of the Guarantors contained
herein and in each of the other Operative Agreements shall be true and
correct in all material respects on and as of such Funding Date as if made
on and as of such Funding Date;
(p) Performance of Operative Agreements. The parties hereto (other
-----------------------------------
than the Lenders) shall have performed their respective agreements
contained herein and in the other Operative Agreements on or prior to each
such Funding Date;
(q) Default. There shall not have occurred and be continuing any
-------
Default or Event of Default under any of the Operative Agreements and no
Default or Event of Default under any of the Operative Agreements will have
occurred after giving effect to the Advance requested by such Requisition;
and
<PAGE>
9
(r) Material Adverse Change. As of such Funding Date, there shall not
-----------------------
have occurred any Material Adverse Change.
6.2. Conditions to the Lessor's and the Lenders' Obligations to Make
---------------------------------------------------------------
Advances to pay Property Acquisition Costs.
- ------------------------------------------
The obligations of the Lessor to make each Lessor Contribution, and of
the Lenders to make Loans to the Lessor, on a Property Closing Date for the
purpose of providing funds to the Lessor necessary to acquire a Property are
subject to the satisfaction or waiver of the following conditions precedent:
(a) Requisition; Property Closing Certificate. The Agent shall have
-----------------------------------------
received (i) a fully executed counterpart of the Requisition dated as of
such Property Closing Date (but delivered at least two Business Days prior
to the Property Closing Date), appropriately completed; and (ii) a Property
Closing Certificate dated as of such Property Closing Date, appropriately
completed;
(b) Deed; Ground Lease. There shall have been delivered to the
------------------
Lessor (i) a bargain and sale deed with a covenant against grantor's acts
(or local equivalent) (a "Deed"), in form and substance appropriate for
----
recording with the applicable Governmental Authorities, with respect to
each Property (and all Improvements located thereon) being purchased on
such Property Closing Date, conveying fee simple title to such Property to
the Lessor, subject only to the Permitted Exceptions, or (ii) a Ground
Lease with respect to each Property being ground leased on such Property
Closing Date (such Ground Lease, or a Memorandum of Ground Lease, as
appropriate under applicable Legal Requirements, to be in form and
substance appropriate for recording with the applicable Governmental
Authorities), and the Agent and the Lessor shall have received a fully
executed counterpart of such Ground Lease and, if applicable, such
Memorandum of Ground Lease;
(c) Title; Location. Title to all of the Properties shall conform to
---------------
the representations and warranties set forth in Section 7.4(g) and each
Property shall be located in the United States;
(d) Lease Supplement and Memorandum of Lease. The Lessee shall have
----------------------------------------
delivered a Lease Supplement and a Memorandum of Lease executed by the
Lessee and the Lessor with respect to each Property being acquired on such
Property Closing Date to the Agent;
(e) Mortgage. The Lessee shall have recorded in the real estate
--------
records of the county where each Property is located an original of the
Mortgage executed by the Lessor and Lessee with respect to each Property
being acquired on such Property Closing Date;
(f) Assignment of Lease. The Lessee shall have recorded in the real
-------------------
estate
<PAGE>
10
records of the county where each Property is located an original of an
Assignment of Lease executed by the Lessor with respect to each Property
being acquired on such Property Closing Date;
(g) Consent to Assignment of Lease. The Lessee shall have delivered
------------------------------
to the Agent a consent to the Assignment of Lease executed by the Lessee
with respect to each Property being acquired on such Property Closing Date;
(h) Environmental Audit. (i) The Agent, the Lenders and the Lessor
-------------------
shall have received not less than 60 days prior to such Property Closing
Date an Environmental Audit with respect to each Property being acquired on
such Property Closing Date, prepared by an environmental engineer (the
"Environmental Engineer") reasonably satisfactory to the Agent and the
----------------------
Lessor and the results of the Environmental Audit shall be in form and
substance reasonably satisfactory to the Agent, the Lenders and the Lessor;
and
(ii) the Agent, the Lenders and the Lessor shall have received
letters from the Environmental Engineer stating, among other things, that
the Agent, the Lenders and the Lessor may rely on the Environmental Audit
with respect to each Property being acquired on such Property Closing Date
which were prepared by such firm as if they were originally addressed to
them in all respects;
(i) Appraisal. The Agent, the Lenders and the Lessor shall have
---------
received an Appraisal of each Property being acquired on such Property
Closing Date and such Appraisal shall indicate a value (assuming Completion
of the Improvements on such Property) of at least six times the amount of
the Tranche B Loans which will be allocable to such Property (based on the
Budgeted Total Property Costs for such Property as of such Property Closing
Date or the Property Cost, as applicable) and otherwise be in form and
substance reasonably acceptable to each Lender and the Lessor;
(j) Survey. The Agent, the Lenders and the Lessor shall have
------
received, and the Title Company shall have received, a survey of each
Property being acquired on such Property Closing Date, certified to the
Agent, the Lenders, the Lessor and the Title Company in a manner
satisfactory to them, dated as of a date within ninety days of the Property
Closing Date, by an independent professionally licensed land surveyor
satisfactory to the Agent and the Lessor, which survey shall be made in
accordance with the Minimum Standard Detail Requirements for Land Title
Surveys jointly established and adopted by the American Land Title
Association and the American Congress on Surveying and Mapping in 1992,
and, without limiting the generality of the foregoing, there shall be
surveyed and shown on such survey the following: (i) the locations on such
Property of all the buildings, structures and other improvements, if any,
and the established building setback lines; (ii) the lines of streets
abutting such Property; (iii) all access and other easements appurtenant to
such Property; (iv) all roadways, paths, driveways, easements,
encroachments and overhanging projections and similar encumbrances
affecting such Property, whether recorded, apparent from a physical
<PAGE>
11
inspection of the Property or otherwise known to the surveyor; (v) any
encroachments on any adjoining property by the building, structures and
improvements on such Property; and (vi) if such Property is described as
being on a filed map, a legend relating the survey to said map;
(k) Mortgagee's Title Insurance Policy. With respect to each Property
----------------------------------
being acquired on such Property Closing Date, the Agent shall have received
with respect to the Mortgage a mortgagee's title policy or marked up
unconditional binder for such insurance dated the Property Closing Date;
such policy shall (i) be in an amount equal to the aggregate amount shown
on the Budget for such Property (with a pending disbursements clause, if
applicable) or if such Property is a Completed Property, in the amount of
the Acquisition Cost of such Property; (ii) be issued at ordinary rates;
(iii) insure that the Mortgage insured thereby creates a valid first Lien
on such Property, free and clear of all defects and encumbrances, except
Permitted Exceptions; (iv) name the Agent for the benefit of the Lenders as
the insured thereunder; (v) be in the form of ALTA Loan Policy - 1970
(Amended 10/17/70), if available or another form of lenders' policy
customarily used in commercial transactions in the jurisdiction where such
Property is located; (vi) contain comprehensive, zoning, access,
subdivision, tax lot, revolving credit and such other endorsements and
affirmative coverage as the Agent may reasonably request (if available and
customarily issued in the jurisdiction where the Property is located); and
(vii) be issued by the Title Company; the Agent shall have received
evidence reasonably satisfactory to it that all premiums in respect of such
policy, and all charges for any mortgage recording tax with respect to the
Mortgage have been paid or provision made therefor;
(l) Owner's Title Insurance Policy. The Lessor shall have received an
------------------------------
owner's title policy, or marked up unconditional binder for such insurance,
dated the Property Closing Date for each Property being acquired on such
Property Closing Date; and the Lessor shall have received evidence
reasonably satisfactory to it that all premiums in respect of such policy
have been paid or provision made therefor;
(m) Agency Agreement Supplement. The Lessee shall have delivered an
---------------------------
Agency Agreement Supplement executed by the Lessee and the Lessor with
respect to each Property (other than any Completed Properties) being
acquired on such Property Closing Date to the Agent;
(n) Recorded Documents. The Agent and the Lessor shall have received
------------------
a legible copy of all recorded documents referred to, or listed as
exceptions to title in, the title policy referred to above;
(o) Legal Opinions. With respect to (i) any Property or (ii) any
--------------
group of Properties which are acquired on the same Property Closing Date or
from the same seller and are located in the same state, and which Property
or group of Properties have an estimated aggregate Property Cost in excess
of $5 million, the Agent, the Lenders and the Lessor shall have received an
executed legal opinion of local counsel to the Lessee and the Guarantors
for
<PAGE>
12
each state in which such Property or Properties are located,
substantially in the form of Exhibit D-1 hereto; and
-----------
(p) Actions to Perfect Liens. The Agent and the Lessor shall have
------------------------
received evidence in form and substance satisfactory to it that all
filings, recordings, registrations and other actions, including the filing
of duly executed Lender Financing Statements and Lessor Financing
Statements, the Mortgage, and the Memorandum of Lease, necessary or, in the
reasonable opinion of the Agent or the Lessor, desirable to perfect the
Liens created by the Security Documents shall have been completed.
(q) Maximum Property Cost for Construction Period Properties. The
--------------------------------------------------------
aggregate Budgeted Total Property Cost of Construction Period Properties
will not exceed $25,000,000, after giving effect to the Advance being
requested.
6.3. Conditions to the Lessor's and the Lenders' Obligations to Make
---------------------------------------------------------------
Advances to pay Project Costs for Construction on any Property. The obligations
- --------------------------------------------------------------
of the Lessor to make each Lessor Contribution, and of the Lenders to make Loans
to the Lessor on a Funding Date for the purpose of providing funds to the Lessor
necessary to pay for the construction of the Improvements or the payment of
Transaction Costs or other Project Costs (other than Property Acquisition Costs)
are subject to the satisfaction or waiver of the following conditions precedent:
(a) Performance of Obligations. The parties hereto shall have
--------------------------
performed their respective agreements contained herein and in the other
Operative Agreements on or prior to such Funding Date;
(b) Requisition. The Agent shall have received a fully executed
-----------
counterpart of the Requisition, appropriately completed;
(c) Title. Title to all of the Properties shall conform to the
-----
representations set forth in Section 7.4(g);
(d) Budget in Balance. Based upon the Construction Budgets, the
-----------------
Available Commitments and the Available Lessor Commitment will be
sufficient to complete the Improvements for which the Requisition relates
on such Properties.
SECTION 7. REPRESENTATIONS AND WARRANTIES
------------------------------
7.1. Representations and Warranties of Lessor on the Reorganization
--------------------------------------------------------------
Closing Date. Lessor represents and warrants to each of the other parties
- ------------
hereto as of the Reorganization Closing Date as follows:
(a) Due Organization, etc. Lessor is a duly organized and validly
----------------------
existing
<PAGE>
13
corporation in good standing under the laws of the State of New York and
has the power and authority to carry on its business as now conducted and
to enter into and perform its obligations under this Agreement, each
Operative Agreement to which it is or will be a party and each other
agreement, instrument and document executed and delivered or to be executed
and delivered by it in connection with or as contemplated by each such
Operative Agreement.
(b) Authorization; No Conflict. The execution, delivery and
--------------------------
performance of each Operative Agreement to which it is or will be a party
has been duly authorized by all necessary action on its part and neither
the execution and delivery thereof by the Lessor, nor the consummation of
the transactions contemplated thereby by the Lessor, nor compliance by it
with any of the terms and provisions thereof (i) requires or will require
any approval of (which approval has not been obtained) any party or
approval or consent of any trustee or holders of any indebtedness or
obligations of the Lessor (ii) contravenes or will contravene any Legal
Requirement applicable to or binding on it as of the date hereof, (iii)
does or will contravene or result in any breach of or constitute any
default under, or result in the creation of any Lessor Lien upon the
Property or any of the Improvements, any indenture, mortgage, chattel
mortgage, deed of trust, conditional sales contract, bank loan or credit
agreement or other agreement or instrument to which it or its properties
may be bound or (iv) does or will require any Governmental Action by any
Governmental Authority.
(c) Enforceability, etc. Each Operative Agreement to which it is or
--------------------
will be a party has been duly executed and delivered by it and constitutes,
or upon execution and delivery will constitute, a legal, valid and binding
obligation enforceable against it in accordance with the terms thereof,
except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general equitable
principles (whether enforcement is sought by proceedings in equity or at
law).
(d) Litigation. No litigation, investigation or proceeding of or
----------
before any arbitrator or Governmental Authority is pending or, to the
knowledge of the Lessor, threatened by or against the Lessor (a) with
respect to any of the Operative Agreements or any of the transactions
contemplated hereby or thereby, or (b) which could reasonably be expected
to have a material adverse effect on the assets, liabilities, operations,
business or financial condition of the Lessor.
(e) Assignment. Lessor has not assigned or transferred any of its
----------
right, title or interest in or under the Lease, any other Operative
Agreement or any of the Properties, except in accordance with the Operative
Agreements.
(f) No Default. The Lessor is not in default under or with respect to
----------
any of its Contractual Obligations in any respect which could have a
material adverse effect on the assets, liabilities, operations, business or
financial condition of the Lessor. No Default or Event of Default under the
Operative Agreements attributable to it has occurred and is continuing.
<PAGE>
14
(g) Use of Proceeds. The proceeds of the Loans and the Lessor
---------------
Contribution shall be applied by the Lessor solely in accordance with the
provisions of the Operative Agreements.
(h) Chief Place of Business. The Lessor's chief place of business,
-----------------------
chief executive office and office where the documents, accounts and records
relating to the transactions contemplated by this Agreement and each other
Operative Agreement are kept are located at Two World Trade Center, New
York, New York.
(i) Federal Reserve Regulations. The Lessor is not engaged
---------------------------
principally in, and does not have as one of its most important activities,
the business of extending credit for the purpose of purchasing or carrying
any margin stock (within the meaning of Regulation U of the Board), and no
part of the proceeds of the Loans will be used by it to purchase or carry
any margin stock or to extend credit to others for the purpose of
purchasing or carrying any such margin stock or for any purpose that
violates, or is inconsistent with, the provisions of Regulations G, T, U or
X of the Board.
(j) Investment Company Act. The Lessor is not an "investment
----------------------
company" or a company controlled by an "investment company" within the
meaning of the Investment Company Act.
(k) Securities Act. Neither the Lessor nor any Person authorized by
--------------
the Lessor to act on its behalf has offered or sold any interest in the
Property or the Notes, or in any similar security or interest relating to
the Property, or in any security the offering of which for the purposes of
the Securities Act would be deemed to be part of the same offering as the
offering of the aforementioned securities to, or solicited any offer to
acquire any of the same from, any Person other than, in the case of the
Notes, the Agent, and neither the Lessor nor any Person authorized by the
Lessor to act on its behalf will take any action which would subject the
issuance or sale of any interest in the Properties or the Notes to the
provisions of Section 5 of the Securities Act or require the qualification
of any Operative Agreement under the Trust Indenture Act of 1939, as
amended.
(l) ERISA. The Lessor is making the Lessor Contribution contemplated
-----
to be made by it hereunder in the ordinary course of its business, and no
part of such amount constitutes the assets of any Employee Benefit Plan.
(m) Lessor Liens. The Property is free and clear of all Lessor Liens.
------------
7.2. Representations and Warranties of the Lessee on the
---------------------------------------------------
Reorganization Closing Date. The Lessee represents and warrants to each of the
- ---------------------------
other parties hereto as of the Reorganization Closing Date as follows:
<PAGE>
15
(a) Corporate Existence; Subsidiaries. The Lessee 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 Lessee 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.
(b) Corporate Power. The execution, delivery, and performance by the
---------------
Lessee of this Agreement and the other Operative Agreements to which the
Lessee is a party and the consummation of the transactions contemplated
hereby and thereby (a) are within the Lessee's corporate powers, (b) have
been duly authorized by all necessary corporate action, (c) do not
contravene (i) the Lessee'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 Lessee, 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.
(c) 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 Lessee of this Agreement or the other Operative Agreements to which the
Lessee is a party.
(d) Enforceable Obligations. This Agreement and the other Operative
-----------------------
Agreements to which the Lessee is a party have been duly executed and
delivered by the Lessee. Each Operative Agreement to which the Lessee is a
party is the legal, valid, and binding obligation of the Lessee enforceable
against the Lessee 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).
(e) Litigation. There is no pending or, to the best knowledge of the
----------
Lessee, threatened action or proceeding affecting the Lessee 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 or any other Operative Agreement or the consummation of
any of the transactions contemplated hereby or thereby.
(f) Investment Company Act. Neither the Lessee nor any of its
----------------------
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company" within the
<PAGE>
16
meaning of the Investment Company Act of 1940, as amended.
(g) Public Utility Holding Company Act. Neither the Lessee 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.
(h) No Defaults. The Lessee is not in default under or with respect
-----------
to any contract, agreement, lease or other instrument to which the Lessee
is a party and which would reasonably be expected to have a Material
Adverse Effect. To the knowledge of a Responsible Officer of the Lessee,
the Lessee has not received any notice of default under any contract,
agreement, lease or other instrument to which the Lessee is a party which
is continuing and which, if not cured, would reasonably be expected to have
a Material Adverse Effect.
(ii) No Default has occurred and is continuing.
(i) Environmental Condition. (i) The Lessee (A) has obtained all
-----------------------
Environmental Permits necessary for the ownership and operation of its
material properties and the conduct of its business of which the failure to
obtain would reasonably be expected to have a Material Adverse Effect; (B)
has been and is 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; (C) has 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 (D) is not subject to any
actual or contingent Environmental Claim, which Environmental Claim would
reasonably be expected to have a Material Adverse Effect.
(ii) To the knowledge of any Responsible Officer of the Lessee, none
of the present or previously owned or operated property of the Lessee,
wherever located, (A) 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; (B)
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 Lessee, wherever located, which Lien would reasonably be expected to
have a Material Adverse Effect; or (C) 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.
<PAGE>
17
(iii) Without limiting the foregoing, the present and, to the best
knowledge of any Responsible Officer of the Lessee, future liability, if
any, of the Lessee, which would reasonably be expected to arise in
connection with requirements under Environmental Laws will not have a
Material Adverse Effect.
(j) Permits, Licenses, etc. The Lessee possesses 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 Lessee
manages and operates its 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.
(k) Health Care Regulatory Matters. Except as disclosed on Schedule
------------------------------
1 hereto:
(i) Except as, in the aggregate, could not reasonably be
expected to have a Material Adverse Effect, (A) the Lessee now has
(after giving effect to the Recapitalization), and has no reason to
believe it will not be able to maintain in effect, all Health Care
Permits necessary for the lawful conduct of its business or operations
wherever now conducted and as planned to be conducted (other than
those Health Care Permits the lack of which could not reasonably be
expected to have a Material Adverse Effect), including, without
limitation, the ownership and operation of its Health Care Facilities
pursuant to all Requirements of Law, (B) all such Health Care Permits
are in full force and effect and have not been amended or otherwise
modified, rescinded, revoked or assigned, (C) the Lessee is
substantially complying with the requirements of each such Health Care
Permit, and no event has occurred, and no condition exists, which,
with the giving of notice, the passage of time, or both, would
constitute a violation thereof, (D) the Lessee has not received any
written notice of any violation of any Requirement of Law, (E) to the
knowledge of Lessee, no condition exists or event has occurred which
in itself or with the giving of notice or the lapse of time, or both,
would result in the suspension, revocation, impairment, forfeiture or
non-renewal of any such Health Care Permit, (F) there is no claim
filed with any Governmental Authority of which Lessee has been
notified challenging the validity of any such Health Care Permit and
(G) the continuation, validity and effectiveness of all such Health
Care Permits will not be adversely affected by the Recapitalization or
the execution and performance of any of the Loan Documents or
Operative Agreements.
(ii) All Health Care Facilities owned, leased, managed or
operated by Lessee are entitled to participate in, and receive payment
under, the appropriate Medicare, Medicaid and related reimbursement
programs, and any similar state or local government-sponsored program,
to the extent that Lessee has decided to participate in any such
program, and to receive reimbursement from private and commercial
payers and health maintenance organizations to the extent applicable
thereto. There are no proceedings pending or, to the knowledge of
Lessee, any proceedings threatened or
<PAGE>
18
investigations pending or threatened, by any Governmental Authority
with respect to the Lessee's participation in the Medicare, Medicaid
or related reimbursement programs and which could reasonably be
expected to have a Material Adverse Effect.
(l) Lease. Upon the execution and delivery of each Lease Supplement
-----
to the Lease, (i) the Lessee will have unconditionally accepted the
Property subject to the Lease Supplement, and will have a valid and
subsisting leasehold interest in the Property and (ii) no offset will exist
with respect to any Rent or other sums payable under the Lease.
7.3. Representations and Warranties of the Lessee on Property
--------------------------------------------------------
Closing Dates. The Lessee hereby represents and warrants as of each Property
- -------------
Closing Date as follows:
(a) Representations and Warranties; No Default. The
------------------------------------------
representations and warranties of the Construction Agent, the Lessee and the
Guarantors set forth in the Operative Agreements are true and correct and to the
best of Lessee's knowledge, the representations and warranties of the Lessor are
true and correct on and as of such date as if made on and as of such date. To
the best of Lessee's knowledge, the Lessor is in compliance with its respective
obligations under the Operative Agreements. The Construction Agent, the Lessee
and the Guarantors are in compliance with their respective obligations under the
Operative Agreements and there exists no Default or Event of Default under any
of the Operative Agreements. No Default or Event of Default will occur under any
of the Operative Agreements as a result of, or after giving effect to, the
Advance requested by the Requisition on such Property Closing Date.
(b) Authorization by the Lessee. The execution and delivery of each
---------------------------
Lease Supplement, Memorandum of Lease, Consent to Assignment and other Operative
Agreement delivered by the Lessee on such Property Closing Date and the
performance of the obligations of the Lessee under each such Lease Supplement,
Memorandum of Lease, Consent to Assignment and other Operative Agreements have
been duly authorized by all requisite corporate action of the Lessee.
(c) Execution and Delivery by the Lessee. Each Lease Supplement,
------------------------------------
Memorandum of Lease, Consent to Assignment and other Operative Agreement
delivered on such Property Closing Date by the Lessee have been duly executed
and delivered by the Lessee.
(d) Valid and Binding Obligations. Each Lease Supplement,
-----------------------------
Memorandum of Lease, Consent to Assignment and other Operative Agreement
delivered by the Lessee on such Property Closing Date is a legal, valid and
binding obligation of the Lessee, enforceable against the Lessee in accordance
with its respective terms.
(e) Recording of Documents. Each of the Deed, the Lease Supplement,
----------------------
the Memorandum of Lease, the Assignment of Lease, the Consent to the Assignment
of Lease and the Mortgage delivered on such Property Closing Date will be filed
for recordation with the appropriate Governmental Authorities in the order set
forth in this paragraph, and the UCC Financing Statements with respect to the
Property being acquired will be filed with the appropriate Governmental
<PAGE>
19
Authorities.
(f) Priority of Liens. (i) Upon proper recordation, each Mortgage,
-----------------
each Assignment of Lease and each Memorandum of Lease delivered on such Property
Closing Date, will constitute a valid and perfected first lien on each
applicable Property and the Improvements located thereon in an amount not less
than the Property Cost with respect to such Property, subject only to the
Permitted Exceptions, and (ii) upon proper filing, the Lessor Financing
Statements will protect the Lessor's interest under the Lease to the extent the
Lease is a security agreement governed by Article 9 of the Uniform Commercial
Code.
(g) Flood Zone. No portion of any Property being acquired by the
----------
Lessor on such Property Closing Date is located in an area identified as a
special flood hazard area by the Federal Emergency Management Agency or other
applicable agency, or if any such Property is located in an area identified as a
special flood hazard area by the Federal Emergency Management Agency or other
applicable agency, then flood insurance has been obtained for such Property in
accordance with Section 14.2(b) of the Lease and in accordance with the National
Flood Insurance Act of 1968, as amended.
(h) Insurance Coverage. The Lessee maintains insurance coverage for
------------------
each Property being acquired by the Lessor on such Property Closing Date which
meets the requirements of Section 14.1 of the Lease and all of such coverage is
in full force and effect.
(i) Legal Requirements. Each Property being acquired by the Lessor
------------------
on such Property Closing Date complies with all Legal Requirements (including
all zoning and land use laws and Environmental Laws) in all material respects.
(j) Consents, etc. All material consents, licenses and building
-------------
permits required by all Legal Requirements for construction, completion,
occupancy and operation, as to be operated by Lessee or Lessee's sublessees, of
each Property being acquired on such Property Closing Date, to the extent such
consents, licenses and building permits are required to have been obtained on or
before such Property Closing Date, have been obtained and are in full force and
effect.
(k) Utilities. All utility services and facilities necessary for the
---------
use of the Improvements existing, or to be constructed, on the Land (including
gas, electrical, water and sewage services and facilities) will be available to
the Property on or prior to the Outside Completion Date.
(l) Environmental Matters. To the best knowledge of the Lessee or
---------------------
Construction Agent:
(i) the Property being acquired on the Property Closing Date
does not contain any Hazardous Substances in amounts or concentrations
which (a) constitute a violation of, or (b) would give rise to liability
under, any Environmental Law.
(ii) the Property and all operations at the Property are in
compliance in all
<PAGE>
20
material respects with all applicable Environmental Laws, and there is no
contamination at, on or under the Property or violation of any
Environmental Law with respect to the Property or the business operated by
Lessee or any of its Subsidiaries at the Property (the "Business") that
--------
would constitute a violation of any applicable Environmental Law.
(iii) neither the Lessee nor any of its Subsidiaries has
received any written notice of violation, alleged violation, non-
compliance, liability or potential liability regarding compliance with
Environmental Laws with regard to the Property, nor does the Lessee have
knowledge that any such notice will be received or is being threatened.
(iv) Hazardous Substances have not been transported or disposed
of from the Property in violation of any Environmental Law, nor have any
Hazardous Substances been generated, treated, stored or disposed of at, on
or under the Property in violation of any applicable Environmental Law.
(v) no judicial proceeding or governmental or administrative
action is pending or, to the best knowledge of the Lessee, threatened,
under any Environmental Law to which the Lessee or any Subsidiary is named
as a party with respect to the Property, nor are there any consent decrees
or other decrees, consent orders, administrative orders or other orders, or
other administrative or judicial requirements outstanding under any
Environmental Law with respect to the Property or the Business.
(vi) there has been no Release of Hazardous Substances at or
from the Property, or arising from or related to the operations of the
Lessee or any Subsidiary in connection with the Property, in violation of
or in amounts or in a manner that could reasonably be expected to give rise
to any material liability under any Environmental Laws.
(m) Title to the Properties. Upon the acquisition of each Property
-----------------------
on such Property Closing Date, the Lessor will have marketable title to the
Property in fee simple, subject only to the Permitted Exceptions. Upon the
acquisition of each Property on such Property Closing Date, the Lessor will have
the right to grant the Mortgage on the Property. The Lessor will at all times
have marketable title to the Building and any other Improvements, subject only
to Permitted Exceptions.
(n) Conditions Precedent in Operative Agreements. All conditions
--------------------------------------------
precedent contained in this Agreement and in the other Operative Agreements to
the acquisition of the Property being acquired on such Property Closing Date by
the Lessor have been satisfied in full.
7.4. Representations and Warranties of the Lessee Upon each
------------------------------------------------------
Funding Date. The Lessee hereby represents and warrants as of each Funding Date
- ------------
as follows:
(a) Representations and Warranties; No Default. The representations
------------------------------------------
and warranties of the Construction Agent, the Lessee and the Guarantors set
forth in the Operative Agreements are true and correct and to the best of
Lessee's knowledge, the representations and
<PAGE>
21
warranties of the Lessor are true and correct, on and as of such date as if made
on and as of such date. To the best of Lessee's knowledge, the Lessor is in
compliance with its respective obligations under the Operative Agreements and
there exists no Default or Event of Default under any of the Operative
Agreements. The Construction Agent, the Lessee and the Guarantors are in
compliance with their respective obligations under the Operative Agreements and
there exists no Default or Event of Default under any of the Operative
Agreements. No Default or Event of Default will occur under any of the Operative
Agreements as a result of, or after giving effect to, the Advance requested by
the Requisition on such date.
(b) Priority of Liens. Each Mortgage, Supplement to the Assignment
-----------------
of Lease and Memorandum of Lease constitutes a valid and perfected first lien on
each applicable Property and the Improvements located thereon in an amount not
less than the Property Cost with respect to such Property, subject only to
Permitted Exceptions.
(c) Execution and Delivery by the Construction Agent. The execution
------------------------------------------------
and delivery of each Operative Agreement delivered by the Construction Agent on
such date and the performance of the Construction Agent's obligations under each
Agency Agreement Supplement and other Operative Agreement have been duly
authorized by all requisite corporate action of the Construction Agent.
(d) Agency Agreement Supplements. Each Operative Agreement delivered
----------------------------
by the Construction Agent on such date has been duly executed and delivered by
the Construction Agent.
(e) Valid and Binding Obligations of the Lessee and the Construction
----------------------------------------------------------------
Agent. Each Operative Agreement delivered by the Lessee and the Construction
- -----
Agent on such date is a legal, valid and binding obligation of the Lessee and
the Construction Agent, enforceable against the Lessee and the Construction
Agent in accordance with its terms.
(f) Insurance. The Construction Agent has obtained insurance
---------
coverage covering the Property which meets the requirements of the Agency
Agreement, the Lease and the other Operative Agreements before commencing
construction, repairs or Modifications, as the case may be, and such coverage is
in full force and effect.
(g) Property-Related Matters. The Property, as improved in
------------------------
accordance with the Plans and Specifications, will comply in all material
respects with all Legal Requirements (including all applicable zoning and land
use laws and Environmental Laws) and Insurance Requirements. The Plans and
Specifications have been or will be prepared so as to comply with all applicable
Legal Requirements (including all applicable Environmental Laws and building,
planning, zoning and fire codes) and upon completion of the applicable
Improvements in accordance with the Plans and Specifications, such Improvements
on the Property will not encroach in any manner onto any adjoining land (except
as permitted by express written easements or variance) and such Improvements and
the use thereof by the Lessee and its agents, assignees, employees, invitees,
lessees, licensees and tenants will comply in all material respects with all
applicable Legal Requirements (including all applicable Environmental Laws and
building, planning, zoning and fire codes). There is no action, suit or
<PAGE>
22
proceeding (including any proceeding in condemnation or eminent domain or under
any applicable Environmental Law) pending or, to the best knowledge of Lessee
threatened which adversely affects the title to, or materially affects the use,
operation or value of, the Properties. No fire or other casualty with respect
to the Properties has occurred which fire or other casualty has had a material
adverse effect on the Lessee's ability to perform its obligations under the
Agency Agreement and the other Operative Agreements. All utilities serving the
Properties, or proposed to serve the Properties in accordance with the Plans and
Specifications, are located in, and in the future will be located in, and
vehicular access to the Improvements on each of the Properties is provided by,
either public rights-of-way abutting the Property or Appurtenant Rights. All
applicable material licenses, approvals, authorizations, consents, permits
(including, without limitation, building, demolition and environmental permits,
licenses, approvals, authorizations and consents), easements and rights-of-way,
including proof of dedication, required for (i) the use, treatment, storage,
transport, disposal or disposition of any Hazardous Substance on, at, under or
from the Properties during the construction of the Improvements thereon and the
use and operation of the Improvements following such construction, (ii) the
construction of the Improvements in accordance with the Plans and Specifications
and the Agency Agreement and (iii) the use and operation of the Improvements
following such construction as permitted pursuant to the Lease have been
obtained, to the extent necessary at the time of this representation, from the
appropriate Governmental Authorities having jurisdiction or from private
parties.
(h) Lease Requirements. The Improvements, when completed, will
------------------
comply in all material respects with all requirements and conditions set forth
in the Lease and all other conditions and requirements of the Operative
Documents.
(i) Conditions Precedent contained in the Operative Agreements. All
----------------------------------------------------------
conditions precedent contained in this Agreement and in the other Operative
Agreements relating to the relevant Advance have been satisfied in full.
(j) Projected Completion Value. The Property Cost of each
--------------------------
Improvement as established by the Construction Budget shall not exceed an amount
equal to the Projected Completion Value.
SECTION 8. PAYMENT OF CERTAIN EXPENSES.
Lessee agrees, for the benefit of the Lessor, the Agent, the Co-Agents and
each of the Lenders, to:
8.1. Transaction Expenses. (a) On the Reorganization Closing Date,
--------------------
pay, or cause to be paid, all fees, expenses and disbursements of each of the
Lessor's and the Agent's counsel in connection with the transactions
contemplated by the Operative Agreements and incurred in connection with such
Reorganization Closing Date, including all Transaction Expenses, and all other
<PAGE>
23
expenses in connection with such Reorganization Closing Date, including all
expenses relating to all fees, taxes and expenses for the recording,
registration and filing of documents.
(b) On each Property Closing Date, pay, or cause to be paid, all
fees, expenses and disbursements of each of the Lessor's and the Agent's counsel
in connection with the transactions contemplated by the Operative Agreements and
incurred in connection with such Property Closing Date, including all
Transaction Expenses arising from such Property Closing Date, and all other
expenses in connection with such Property Closing Date, including all expenses
relating to each Appraisal, and all fees, taxes and expenses for the recording,
registration and filing of documents.
8.2. Brokers' Fees and Stamp Taxes. Pay or cause to be paid brokers'
-----------------------------
fees and any and all stamp, transfer and other similar taxes, fees and excises,
if any, including any interest and penalties, which are payable in connection
with the transactions contemplated by this Agreement and the other Operative
Agreements.
8.3. Certain Fees and Expenses. Pay or cause to be paid (i) all
-------------------------
costs and expenses incurred by the Lessee, the Agent or the Lessor in entering
into any future amendments or supplements with respect to any of the Operative
Agreements, whether or not such amendments or supplements are ultimately entered
into, or giving or withholding of waivers of consents hereto or thereto, which
have been requested by the Lessee, and (ii) all costs and expenses incurred by
the Lessor, the Lessee, or the Agent in connection with any purchase of any
Property by the Lessee pursuant to Article XX of the Lease.
8.4. Credit Agreement and Related Obligations. (a) Pay, before the
----------------------------------------
due date thereof, all costs and expenses (other than principal and interest on
the Loans, but including breakage costs and interest on overdue amounts pursuant
to Section 2.8(c) of the Credit Agreement or otherwise) required to be paid by
the Lessor under the Credit Agreement, the Mortgage, the Assignment of Lease and
the Contract Assignment.
(b) Pay the Agent all fees specified in the Fee Letter at the time
and in the manner required by the Fee Letter, which fees may not be paid by
using the proceeds of the Loans or Lessor Contribution.
8.5. Commitment Fees. Pay to the Agent for the account of each
---------------
Lender and the Lessor the Commitment Fee on each Commitment Fee Payment Date.
SECTION 9. OTHER COVENANTS AND AGREEMENTS.
9.1. Covenants of the Lessor. The Lessor hereby agrees that so long
-----------------------
as this Agreement is in effect:
(a) Discharge of Liens. The Lessor will not create or permit to
------------------
exist at any time, and will, at its own cost and expense, promptly take such
action as may be necessary duly to discharge,
<PAGE>
24
or to cause to be discharged, all Lessor Liens on the Property attributable to
it; provided, however, that the Lessor shall not be required to so discharge any
-------- -------
such Lessor Lien while the same is being contested in good faith by appropriate
proceedings diligently prosecuted so long as such proceedings shall not involve
any material danger of impairment of the Liens of the Security Documents or of
the sale, forfeiture or loss of, and shall not interfere with the use or
disposition of, any Property or title thereto or any interest therein or the
payment of Rent.
(b) No Voluntary Bankruptcy. The Lessor shall not (i) commence any
-----------------------
case, proceeding or other action under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization, arrangement, winding-up, liquidation, dissolution, composition
or other relief with respect to it or its debts, or (ii) seek appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial benefit of its creditors; and the Lessor shall not take any action
in furtherance of, or indicating its consent to, approval of, or acquiescence
in, any of the acts set forth in this paragraph.
(c) Change of Chief Place of Business. The Lessor shall give prompt
---------------------------------
notice to the Lessee and the Agent if the Lessor's chief place of business or
chief executive office, or the office where the records concerning the accounts
or contract rights relating to the Property are kept, shall cease to be located
at Two World Trade Center, New York, New York or if it shall change its name.
(d) Loan Documents. Provided that no Event of Default is
--------------
continuing, none of the Lenders, the Lessor, the Lessee nor the Agent shall
consent to or permit any amendment, supplement, waiver or other modification of
the terms and provisions of the Credit Agreement, the Notes or the Security
Documents, in each case without the prior written consent of the Lessee.
(e) Compliance with Operative Agreements. The Lessor shall at all
------------------------------------
times observe and perform all of the covenants, conditions and obligations
required to be performed by it under each Operative Agreement to which it is a
party.
9.2. Repayment of Certain Amounts on Maturity Date. The Lessor and
---------------------------------------------
the Agent hereby agree that if (i) on the Maturity Date (after giving effect to
all payments made by the Lessee under the Lease and the application of all sales
proceeds pursuant to Section 8 of the Credit Agreement) there remains any
outstanding principal or accrued and unpaid principal under the Tranche B Notes
(the aggregate amount of such outstanding principal, the "Tranche B Deficit")
-----------------
and (ii) during the Marketing Period the Lessor has received any Marketing
Period Equity Return, then on the Maturity Date the Lessor shall pay to the
Agent an amount up to the amount of the Tranche B Deficit, but in no event
greater than the Marketing Period Equity Return received by it.
9.3. Amendment of Certain Documents. The Agent, for itself and on
------------------------------
behalf of the Lenders, hereby agrees for the benefit of the Lessor that it will
not amend, alter or otherwise modify, or consent to any amendment, alteration or
modification of, the Lease (including the definitions of any terms used in such
document) without the prior written consent of the Lessor, if such amendment,
alteration or modification would materially and adversely affect the interests
of the Lessor. Provisions
<PAGE>
25
requiring consent, include any amendment, alteration or modification that would
release the Lessee from any of its obligations in respect of the payment of
Basic Rent, Supplemental Rent, Termination Value, Maximum Residual Guarantee
Amount or the Purchase Option Price or any other payments in respect of the
Properties as set forth in the Lease, or reduce the amount of, or change the
time or manner of payment of, obligations of the Lessee as set forth in the
Lease, or create or impose any obligation on the part of the Lessor under the
Lease, or extend or shorten the duration of the Term, or modify the provisions
of this Section 9.3.
9.4. Proceeds of Casualty or Condemnation. The Lessor agrees, for
------------------------------------
the benefit of the Agent and the Lenders, that if at any time the Lessor
receives any proceeds as a result, directly or indirectly, of any Casualty or
Condemnation with respect to the Property which the Lessor is entitled to retain
and hold in accordance with the terms of the Lease, the Lessor agrees that it
will promptly deposit such amounts in an account with the Agent. The Lessor
also agrees that it will execute and deliver such documents and instruments as
the Agent may request in order to grant the Agent, for the benefit of the
Lenders, a valid and perfected, first priority security interest in such
proceeds.
SECTION 10. CREDIT AGREEMENT.
10.1. Lessee's Credit Agreement Rights. Notwithstanding anything to
--------------------------------
the contrary contained in the Credit Agreement, the Agent, the Lessee and the
Lessor hereby agree that:
(a) the Lessee shall have the right to give the notice referred to in
Section 2.3 of the Credit Agreement;
(b) the Lessee shall have the right to convert or continue Loans in
accordance with Section 2.6 of the Credit Agreement;
(c) the Lessee shall receive copies of all notices delivered to the
Lessor under the Credit Agreement and the other Operative Agreements and such
notices shall not be effective until received;
(d) the Lessee shall have the right to select Interest Periods in
accordance with the terms of the Credit Agreement;
(e) the Lessee shall have the right to give notice of prepayment of
the Loans in accordance with the Credit Agreement;
(f) the Lessee shall have the right to cure, to the extent
susceptible to a cure, any Default or Event of Default of the Lessor under the
Credit Agreement;
(g) the Lessee shall have the right to approve any successor Agent
pursuant to Section 7.9 of the Credit Agreement;
<PAGE>
26
(h) the Lessee shall have the right, on behalf of the Lessor, to
select any person or persons (including the Lessee) to whom funds may be paid at
the discretion of the Lessor in accordance with Sections 8.1 and 8.2 of the
Credit Agreement;
(i) the Lessee shall have the right to consent to any assignment by a
Lender if required pursuant to Section 9.7 of the Credit Agreement; and
(j) the Lessee shall have the right to designate the portion of the
Loans on which interest is due and payable for purposes of the definitions of
"Allocated Interest" and "Allocated Lessor Yield";
(k) the Lessee shall have the right to request that another lending
office be designated pursuant to Section 2.15 of the Credit Agreement;
(l) the Lessee shall have the obligation to notify the Agent of the
amounts or information specified in Section 5.8 of the Credit Agreement; and
(m) without limiting the foregoing clauses (a) through (l), and in
addition thereto, (x) the Lessor shall not exercise any right under the Credit
Agreement without giving the Lessee at least ten (10) Business Days' prior
written notice (or such shorter period as may be required but in no case less
than two (2) Business Days) and, following such notice, the Lessor shall take
such action, or forbear from taking such action, as the Lessee shall direct and
(y) the Lessee shall have the right to exercise any other right of the Lessor
under the Credit Agreement upon not less than two (2) Business Days' prior
written notice from the Lessee to the Lessor.
SECTION 11. TRANSFER OF INTEREST.
11.1. Restrictions on Transfer. (a) The Lessor may not, directly or
------------------------
indirectly, assign, convey or otherwise transfer any of its right, title or
interest in or to any of the Properties without the consent of the Agent, the
Required Lenders and the Lessee, which consent shall not be unreasonably
withheld or delayed. Any transfer by the Lessor as above provided, shall be
effected pursuant to an agreement in form and substance reasonably satisfactory
to the Agent, the Required Lenders, the Lessor, the Lessee and their respective
counsel; provided, however, that no such consent for any such transfer shall be
-------- -------
required if, in the Lessor's sole discretion, the continued ownership of the
Properties, or any part thereof, would violate or conflict with any Requirement
of Law or interpretation thereof, provided, further, however, in such event,
-------- ------- -------
Lessor may only transfer its interest in the Properties upon not less than 30
days prior written notice to the Agent (who will notify the Lenders) and the
Lessee and only to an institutional investor whose net worth is at least
$50,000,000 or whose obligations under the Operative Agreements are guaranteed
by an entity whose net worth is at least $50,000,000.
(b) In the event that the Lessor shall be in breach of any of its
material obligations under the Operative Agreements which breach continues
uncured for a period of 30 days or more after
<PAGE>
27
written notice thereof by the Lessee or the Agent, then at the request of the
Lessee, the Lessor shall promptly transfer and assign its interest in the
Properties to a third party, reasonably acceptable to the Agent and the Required
Lenders, designated by the Lessee. If the Agent has obtained knowledge of a
default by the Lessor, it shall notify the Lessee of such default.
11.2. Effect of Transfer. From and after any transfer effected in
------------------
accordance with this Section 11, the transferor shall be released, to the extent
of such transfer, from its liability hereunder and under the other documents to
which it is a party in respect of obligations to be performed on or after the
date of such transfer. Upon any transfer by the Lessor as above provided, any
such transferee shall assume the obligations of the Lessor, and the Lessor, and
shall be deemed the "Lessor" for all purposes of such documents and each
reference herein to the transferor shall thereafter be deemed a reference to
such transferee for all purposes, except as provided in the preceding sentence.
Notwithstanding any transfer of all or a portion of the transferor's interest as
provided in this Section 11, the transferor shall be entitled to all benefits
accrued and all rights vested prior to such transfer including rights to
indemnification under any such document.
<PAGE>
28
SECTION 12. INDEMNIFICATION.
12.1. General Indemnity. The Lessee, whether or not any of the
-----------------
transactions contemplated hereby shall be consummated, hereby assumes liability
for and agrees to defend, indemnify and hold harmless each Indemnified Person on
an After Tax Basis from and against any Claims which may be imposed on, incurred
by or asserted against an Indemnified Person in any way relating to or arising
or alleged to arise out of (a) the financing, refinancing, purchase, acceptance,
rejection, ownership, design, construction, delivery, acceptance, nondelivery,
leasing, subleasing, possession, use, operation, repair, modification,
transportation, condition, sale, return, repossession (whether by summary
proceedings or otherwise), or any other disposition of the Property or any part
thereof; (b) any latent or other defects in any property whether or not
discoverable by an Indemnified Person or the Lessee; (c) a violation of
Environmental Laws, Environmental Claims or other loss of or damage relating to
the Properties; (d) the Operative Agreements, or any transaction contemplated
thereby; (e) any breach by the Lessee of any of its representations or
warranties under the Operative Agreements or failure by the Lessee to perform
or observe any covenant or agreement to be performed by it under any of the
Operative Agreements; and (f) personal injury, death or property damage relating
to the Properties, including Claims based on strict liability in tort; but in
any event excluding (x) Claims to the extent such Claims arise solely out of
events occurring after the expiration of the Term and after the Lessee's
discharge of all its obligations under the Lease or (y) Claims to the extent
such Claims arise solely out of the gross negligence or willful misconduct of an
Indemnified Person. The Lessee shall be entitled to control, and shall assume
full responsibility for the defense of any Claim; provided, however, that the
-------- -------
Lessor and the Agent named in such Claim, may each retain separate counsel at
the expense of the Lessee in the event of and to the extent of a conflict or a
potential conflict. The Lessee and each Indemnified Person agree to give each
other prompt written notice of any Claim hereby indemnified against but the
giving of any such notice by an Indemnified Person shall not be a condition to
the Lessee's obligations under this Section 12.1, except to the extent failure
to give such notice materially prejudices Lessee's rights hereunder. After an
Indemnified Person has been fully indemnified for a Claim pursuant to this
Section 12.1, and so long as no Event of Default under the Lease shall have
occurred and be continuing, the Lessee shall be subrogated to any right of such
Indemnified Person with respect to such Claim. None of the Indemnified Persons
shall settle a Claim without the consent of the Lessee, which consent shall not
be unreasonably withheld or delayed.
12.2. General Tax Indemnity. (a) The Lessee shall pay and assume
---------------------
liability for, and does hereby agree to indemnify, protect and defend the
Property and all Tax Indemnitees, and hold them harmless against, all
Impositions on an After Tax Basis. Each Tax Indemnitee further agrees to comply
with recommendations made by the Lessee regarding techniques to minimize Taxes
indemnifiable hereunder, provided that (i) the Lessee agrees to make payments to
(or otherwise indemnify) such Tax Indemnitee against any cost or expense arising
from instituting the Lessee's recommendations and (ii) such Tax Indemnitee
determines in its reasonable discretion that such recommendations will not have
an adverse impact on such Tax Indemnitee.
(b) Provided that no Event of Default has occurred and is
continuing, if any Tax Indemnitee obtains a refund or a reduction in a liability
(but only if such reduction relates to a Tax not
<PAGE>
29
otherwise indemnifiable hereunder and has not been taken into account in
determining the amount of a payment on an After Tax Basis) as a result of any
Imposition paid or reimbursed by the Lessee (in whole or in part), such Tax
Indemnitee shall promptly pay to the Lessee the lesser of (x) the amount of such
refund or reduction in liability and (y) the amount previously so paid or
advanced by the Lessee, in each case net of reasonable expenses not already paid
or reimbursed by the Lessee.
(c) (i) Subject to the terms of Section 12.2(g), the Lessee shall
pay or cause to be paid all Impositions directly to the taxing authorities where
feasible and otherwise to the Tax Indemnitee, as appropriate, and the Lessee
shall at its own expense, upon such Tax Indemnitee's reasonable request, furnish
to such Tax Indemnitee copies of official receipts or other satisfactory proof
evidencing such payment.
(ii) In the case of Impositions for which no contest is conducted
pursuant to Section 12.2(g) and which the Lessee pays directly to the taxing
authorities, the Lessee shall pay such Impositions prior to the latest time
permitted by the relevant taxing authority for timely payment. In the case of
Impositions for which the Lessee reimburses a Tax Indemnitee, the Lessee shall
do so within thirty (30) days after receipt by the Lessee of demand by such Tax
Indemnitee describing in reasonable detail the nature of the Imposition and the
basis for the demand (including the computation of the amount payable), but in
no event shall the Lessee be required to pay such reimbursement prior to thirty
(30) days before the latest time permitted by the relevant taxing authority for
timely payment. In the case of Impositions for which a contest is conducted
pursuant to Section 12.2(g), the Lessee shall pay such Impositions or reimburse
such Tax Indemnitee for such Impositions, to the extent not previously paid or
reimbursed pursuant to subsection (a), prior to the latest time permitted by the
relevant taxing authority for timely payment after conclusion of all contests
under Section 12.2(g).
(iii) Impositions imposed for a billing period during which the Lease
expires or terminates with respect to the Property (unless the Lessee has
exercised the Purchase Option with respect to the Properties) shall be adjusted
and prorated by the Agent on a daily basis between the Lessee and the Lessor,
whether or not such Imposition is imposed before or after such expiration or
termination and each party shall pay or reimburse the other for each party's pro
rata share thereof.
(iv) At the Lessee's request, the amount of any indemnification
payment by the Lessee pursuant to subsection (a) shall be verified and certified
by an independent public accounting firm mutually acceptable to the Lessee and
the Tax Indemnitee. The fees and expenses of such independent public accounting
firm shall (i) in the case of the Trust Company or the Lessor, be paid by the
Lessee, and (ii) in the case of all other Tax Indemnitees, be paid by the Lessee
unless such verification shall result in an adjustment in the Lessee's favor of
10% or more of the payment as computed by such Tax Indemnitee, in which case
such fee shall be paid by such Tax Indemnitee.
(d) (i) The Lessee shall be responsible for preparing and filing
any real and personal property or ad valorem tax returns in respect of the
Property. In case any other report or tax return shall be required to be made
with respect to any obligations of the Lessee under or arising out of subsection
(a) and of which the Lessee has knowledge, the Lessee, at its sole cost and
expense, shall
<PAGE>
30
notify the relevant Tax Indemnitee of such requirement and (except if such Tax
Indemnitee notifies the Lessee that such Person intends to file such report or
return) (A) to the extent required or permitted by and consistent with Legal
Requirements, make and file in its own name such return, statement or report;
and (B) in the case of any other such return, statement or report required to be
made in the name of such Tax Indemnitee, advise such Tax Indemnitee of such fact
and prepare such return, statement or report for filing by such Tax Indemnitee
or, where such return, statement or report shall be required to reflect items in
addition to any obligations of the Lessee under or arising out of subsection
(a), provide such Tax Indemnitee at the Lessee's expense with information
sufficient to permit such return, statement or report to be properly made with
respect to any obligations of the Lessee under or arising out of subsection (a).
Such Tax Indemnitee shall, upon the Lessee's request and at the Lessee's
expense, provide any data maintained by such Tax Indemnitee (and not otherwise
within the control of the Lessee) with respect to the Property which the Lessee
may reasonably require to prepare any required tax returns or reports;
(e) If directly as a result of the payment or reimbursement by the
Lessee of any expenses of the Lessor, the Lessor or any of its Affiliates, shall
suffer a net increase ( taking into account any available credits or deductions)
in any federal, state or local income tax liability, the Lessee shall indemnify
the Lessor or its respective Affiliates (without duplication of any
indemnification required by subsection (a)) on an After Tax Basis for the amount
of such increase. The calculation of any such net increase shall take into
account any current or future tax savings realized or reasonably expected to be
realized by the Lessor or such Affiliate, in respect thereof, as well as any
interest, penalties and additions to tax payable by the Lessor or such
Affiliate, in respect thereof;
(f) As between the Lessee and the Lessor, the Lessee shall be
responsible for, and the Lessee shall indemnify and hold harmless the Lessor
(without duplication of any indemnification required by subsection (a)) on an
After Tax Basis against, any obligation for United States withholding taxes
imposed in respect of the interest payable on the Notes to the extent, but only
to the extent, Lessor has actually paid funds to a taxing authority with respect
to such withholding taxes (and, if the Lessor receives a demand for such payment
from any taxing authority, the Lessee shall discharge such demand on behalf of
the Lessor). Notwithstanding the foregoing, the Lessee shall not be responsible
for any obligation for United States withholding taxes imposed in respect of the
interest payable on the Notes or in respect of the Lessor Yield to the extent
the Lessor is not a United States person for purposes of the Code;
(g) (i) If a written claim is made against any Impositions Indemnitee
or if any proceeding shall be commenced against such Impositions Indemnitee
(including a written notice of such proceeding), for any Impositions, such
Impositions Indemnitee shall promptly notify Lessee in writing and shall not
take action with respect to such claim or proceeding without the consent of
Lessee for thirty (30) days after the receipt of such notice by Lessee;
provided, that, in the case of any such claim or proceeding, if action shall be
- --------
required by law regulation to be taken prior to the end of such 30-day period,
such Impositions Indemnitee shall, in such notice to Lessee, inform Lessee, and
no action shall be taken with respect to such claim or proceeding without the
consent of Lessee before the end of such shorter period; provided, further, that
-------- -------
the failure of such Impositions Indemnitee to give
<PAGE>
the notices referred to this sentence shall not diminish Lessee's obligation
hereunder except to the extent such failure adversely affects the ability of the
Lessee to contest all or part of such claim.
(ii) If, within thirty (30) days of receipt of such notice from the
Impositions Indemnitee (or such shorter period as the Impositions Indemnitee has
noticed Lessee is required by law or regulation for the Impositions Indemnitee
to commence such contest), Lessee shall request in writing that such Impositions
Indemnitee contest such Imposition, the Impositions Indemnitee shall, at the
expense of Lessee, in good faith conduct and control such contest (including by
pursuit of appeals) relating to the validity, applicability or amount of such
impositions (provided, however, that (A) if such contest can be pursued
independently from any other proceeding involving a tax liability of such
Impositions Indemnitee, the Impositions Indemnitee, at Lessee's request, shall
allow Lessee to conduct and control such contest and (B) in the case of any
contest that Lessee is not entitled to control, the Impositions Indemnitee may
request Lessee to conduct and control such contest if possible or permissible
under applicable law or regulation) by, in the sole discretion of the Person
conducting and controlling such contest, (1) resisting payment thereof, (2) not
paying the same except under protest, if protest is necessary and proper, (3) if
the payment be made, using reasonable efforts to obtain a refund thereof in
appropriate administrative and judicial proceedings, or (4) taking such other
action as is reasonably requested by Lessee from time to time.
(iii) The party controlling any contest shall consult in good faith
with the non-controlling party and shall keep the non-controlling party
reasonably informed as to the conduct of such contest; provided that all
--------
decisions ultimately shall be made in the sole discretion of the controlling
party. The parties agree that an Impositions Indemnitee may at any time decline
to take further action with respect to the contest of any Imposition and may
settle such contest if such Impositions Indemnitee shall waive its rights to any
indemnity from Lessee that otherwise would be payable in respect of such claim
(and any future claim by any taxing authority with respect to other taxable
periods that are based, in whole or in part, upon the resolution of such claim)
and shall pay to Lessee any amount previously paid or advanced by Lessee
pursuant to this Section 12.2 by way of indemnification or advance for the
payment of an Imposition, and no other then future liability of the Lessee is
likely with respect to such Imposition.
(iv) Notwithstanding the foregoing provisions of this Section 12.2,
an Impositions Indemnitee shall not be required to take any action and Lessee
shall not be permitted to contest any Impositions in its own name or that of the
Impositions Indemnitee unless (A) Lessee shall pay to such Impositions
Indemnitee on demand and on an After Tax Basis all reasonable costs,
losses and expenses that such Impositions Indemnitee actually incurs in
connection with contesting such Impositions, including, without limitation, all
reasonable legal, accounting and investigatory fees and disbursements, (B) in
the case of a claim that must be pursued in the name of an Impositions
Indemnitee (or an Affiliate thereof), the amount of the potential indemnity
(taking into account all similar or logically related claims that have been or
could be raised in any audit involving such Impositions Indemnitee for which
Lessee may be liable to pay an indemnity under this Section 12.2) is less than
$1,000,000, unless the pursuit of such contest is in a manner mutually
satisfactory to the Imposition Indemnitee and the Lessee, but in no event shall
such right prevent the Lessee from prosecuting or continuing such contest,
<PAGE>
32
(C) the Impositions Indemnitee shall have reasonably determined that the action
to be taken will not result in any material danger of sale, forfeiture or loss
of any Property, or any part thereof or interest therein, will not interfere
with the payment of Rent, and will not result in risk of criminal liability, (D)
if such contest shall involve the payment of the Imposition prior to the
contest, Lessee shall provide to the Impositions Indemnitee an interest-free
advance in an amount equal to the Imposition that the Impositions Indemnitee is
required to pay (with no additional net after-tax cost to such Impositions
Indemnitee), (E) in the case of a claim that must be pursued in the name of an
Impositions Indemnitee (or an Affiliate thereof), Lessee shall have provided to
such Impositions Indemnitee an opinion of independent tax counsel selected by
the Lessee and reasonably satisfactory to such Imposition Indemnitee stating
that a reasonable basis exists to contest such claim (or, in the case of an
appeal of an adverse determination, an opinion of such counsel to the effect
that there is substantial authority for the position asserted in such appeal)
and (F) no Event of Default shall have occurred and be continuing.
SECTION 13. MISCELLANEOUS.
13.1. Survival of Agreements. The representations, warranties,
----------------------
covenants, indemnities and agreements of the parties provided for in the
Operative Agreements, and the parties' obligations under any and all thereof,
shall survive the execution and delivery of this Agreement, the transfer of the
Property to the Lessor, the construction of any Improvements, any disposition of
any interest of the Lessor in the Property or the Improvements, the payment of
the Notes and any disposition thereof and shall be and continue in effect
notwithstanding any investigation made by any party and the fact that any party
may waive compliance with any of the other terms, provisions or conditions of
any of the Operative Agreements. Except as otherwise expressly set forth herein
or in other Operative Agreements, the indemnities of the parties provided for in
the Operative Agreements shall survive the expiration or termination of any
thereof.
13.2. No Broker, etc. Each of the parties hereto represents to the
---------------
others that it has not retained or employed any broker, finder or financial
adviser to act on its behalf in connection with this Agreement, nor has it
authorized any broker, finder or financial adviser retained or employed by any
other Person so to act, except for the Arranger, the fees of which shall be paid
by the Lessee. Any party who is in breach of this representation shall indemnify
and hold the other parties harmless from and against any liability arising out
of such breach of this representation.
13.3. Notices. Unless otherwise specifically provided herein, all
-------
notices, consents, directions, approvals, instructions, requests and other
communications required or permitted by the terms hereof to be given to any
Person shall be given in writing by nationally recognized courier service and
any such notice shall become effective five Business Days after being deposited
in the mails, certified or registered with appropriate postage prepaid or one
Business Day after delivery to a nationally recognized courier service
specifying overnight delivery and shall be directed to the address of such
Person as indicated:
<PAGE>
33
If to the Lessee, to it at:
Living Centers Holding Company
15415 Katy Freeway, Suite 800
Houston, Texas 77094
Attn: Mr. Boyd P. Gentry
Telecopy No.: (713) 578-4735
with a copy to:
Powell, Goldstein, Frazer & Murphy LLP
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attn: David Armitage, Esq.
Telecopy No.: (404) 572-6999
If to the Lessor, to it at:
FBTC Leasing Corp.
Two World Trade Center
New York, New York 10048
Attn: Mr. Carl Marcantonio
Telecopy No.: (212) 775-7276
If to the Agent, to it at:
The Chase Manhattan Bank
Agent Lender Services
One Chase Manhattan Plaza, 8th Floor
New York, New York 10081
Attention: Janet Belden
Telecopier: (212) 552-5658
with a copy to:
The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017
Attention: Dawn Lee Lum
Telecopier: (212) 270-3279
<PAGE>
34
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attn: C. Tanner Rose, Jr., Esq.
Telecopy No.: (212) 455-2502
From time to time any party may designate a new address for purposes of notice
hereunder by notice to each of the other parties hereto.
13.4. Counterparts. This Agreement may be executed by the parties
------------
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute but
one and the same instrument.
13.5. Amendments and Termination. Neither this Agreement nor any of
--------------------------
the terms hereof may be terminated, amended, supplemented, waived or modified
except by an instrument in writing signed by the party against which the
enforcement of the termination, amendment, supplement, waiver or modification
shall be sought. This Agreement may be terminated by an agreement signed in
writing by the Lessor, the Lessee, the Agent and the Lenders.
13.6. Headings, etc.. The Table of Contents and headings of the
--------------
various Sections and Subsections of this Agreement are for convenience of
reference only and shall not modify, define, expand or limit any of the terms or
provisions hereof.
13.7. Parties in Interest. Except as expressly provided herein, none
-------------------
of the provisions of this Agreement are intended for the benefit of any Person
except the parties hereto.
13.8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
13.9. Severability. Any provision of this Agreement that is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
13.10. Rights of Lessee. Notwithstanding any provision of the
----------------
Operative Agreements but subject in all respects to the terms of the Collateral
Agent Agreement, if at any time all obligations (i) of the Lessor under the
Credit Agreement and the Security Documents and (ii) of the Lessee under the
Operative Agreements have in each case been satisfied or discharged in full,
then the Lessee shall be
<PAGE>
35
entitled to (a) terminate the Lease (to the extent not previously terminated)
and (b) receive all amounts then held under the Operative Agreements and all
proceeds with respect to the Property. Upon the fulfillment of the obligations
contained in clauses (i) and (ii) above, the Lessor shall transfer to the Lessee
all of its right, title and interest in and to the Property (to the extent not
previously transferred to the Lessee in accordance with the Lease) and any
amounts or proceeds referred to in the foregoing clause (b) shall be paid over
to the Lessee.
13.11. Rights of Lessor. Notwithstanding any provision of the
----------------
Operative Agreements but subject in all respects to the terms of the Collateral
Agent Agreement, if a Lease Event of Default continues for a period exceeding 90
days, the Lessor shall be permitted to send notice to Lessee of such default.
13.12. Further Assurances. The parties hereto shall promptly cause
------------------
to be taken, executed, acknowledged or delivered, at the sole expense of the
Lessee, all such further acts, conveyances, documents and assurances as the
other parties may from time to time reasonably request in order to carry out and
effectuate the intent and purposes of this Agreement, the other Operative
Agreements and the transactions contemplated hereby and thereby (including,
without limitation, the preparation, execution and filing of any and all Uniform
Commercial Code financing statements and other filings or registrations which
the parties hereto may from time to time request to be filed or effected). The
Lessee, at its own expense, shall take such action as may be reasonably
requested in order to maintain and protect all security interests provided for
hereunder or under any other Operative Agreement.
13.13. Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of the parties hereto and their respective successors
and assigns.
13.14. No Representation or Warranty. Nothing contained herein, in
-----------------------------
any other Operative Agreement or in any other materials delivered to the Lessee
in connection with the transactions contemplated hereby or thereby shall be
deemed a representation or warranty by the Agent or the Arranger or any of their
Affiliates as to the proper accounting treatment or tax treatment that should be
afforded to the Lease and the Lessor's ownership of the Properties and the Agent
expressly disclaims any representation or warranty with respect to such matters.
13.15. Confidentiality. Each of the Agent, the Lessor and each
---------------
Lender agrees that it will use its best efforts not to disclose without the
prior consent of Living Centers (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
Lender if the disclosing Lender or the disclosing Lender'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 any Guarantor which is
furnished pursuant to this Agreement or any other Operative Agreement and which
is designated by such party furnishing such information to the Lenders in
writing as confidential, provided that the Agent, the Lessor or any Lender 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
<PAGE>
36
testimony submitted to any municipal, state or federal regulatory body having or
claiming to have jurisdiction over such Lender 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 Lender, and (e) to the
prospective transferee or participant in connection with any contemplated
transfer of any of the Notes or any interest therein by the Person disclosing
such information, provided that such prospective transferee or participant
--------
executes an agreement with such Guarantor containing provisions substantially
identical to those contained in this Section.
<PAGE>
37
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective officers thereunto duly authorized as of
the day and year first above written.
LIVING CENTERS HOLDING COMPANY, as Lessee
By: /s/ Boyd P. Gentry
---------------------------------------
Name: Boyd P. Gentry
Title: Vice President
FBTC LEASING CORP., as Lessor
By: /s/ Akihiro Hashimoto
---------------------------------------
Name: Akihiro Hashimoto
Title: Treasurer
THE CHASE MANHATTAN BANK, as Agent and a
Lender
By: /s/ Dawn Lee Lum
---------------------------------------
Name: Dawn Lee Lum
Title: Vice President
THE FUJI BANK, LIMITED, as Co-Agent and a
Lender
By: /s/ Philip C. Lavinger III
---------------------------------------
Name: Philip C. Lavinger III
Title: Vice President & Manager
Citibank, N.A., as a Lender
By: /s/ Martha Hadeler
---------------------------------------
Name: Martha Hadeler
Title: Attorney in Fact
NATIONSBANK, N.A., as a Lender
<PAGE>
38
By: /s/ Larry J. Gordon
-----------------------------------
Name: Larry J. Gordon
Title: Corporate Banking Officer
THE BANK OF NOVA SCOTIA, as a Lender
By: /s/ W. J. Brown
-----------------------------------
Name: W. J. Brown
Title: Vice President
BANQUE PARIBAS, as a Lender
By: /s/ Glenn E. Mealey
-----------------------------------
Name: Glenn E. Mealey
Title: Director
By: /s/ Timothy A. Dunnon
-----------------------------------
Name: Timothy A. Dunnon
Title: Managing Director
CREDIT LYONNAIS NEW YORK BRANCH, as a Lender
By: /s/ Farboud Tavangar
-----------------------------------
Name: Farboud Tavangar
Title: First Vice President
DRESDNER BANK AG, New York and Grand
Cayman Branches, as a Lender
By: /s/ Felix K. Camacho
-----------------------------------
<PAGE>
39
Name: Felix K. Camacho
Title: Assistant Treasurer
By: /s/ William E. Lambert
---------------------------------
Name: William E. Lambert
Title: Assistant Vice President
FIRST UNION NATIONAL BANK, as a Lender
By: /s/ Michael P. Dohertry
---------------------------------
Name: Michael P. Dohertry
Title: Vice President
THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED,
as a Lender
By: /s/ Philip A. Marsden
---------------------------------
Name: Philip A. Marsden
Title: Senior Vice President
TORONTO DOMINION BANK (Texas), Inc., as a
Lender
By: /s/ Darlene Riedel
---------------------------------
Name: Darlene Riedel
Title: Vice President
THE UNION BANK OF CALIFORNIA, N.A., as a
Lender
By: /s/ Jennifer L. Banks
---------------------------------
Name: Jennifer L. Banks
Title: Vice President
MARINE MIDLAND BANK, as a Lender
By: /s/ Susan L. LeFeure
---------------------------------
Name: Susan L. LeFeure
Title: Authorized Signatory
<PAGE>
Exhibit A-1
-----------
================================================================================
FORM OF
MORTGAGE AND SECURITY AGREEMENT
from
FBTC LEASING CORP.
to
THE CHASE MANHATTAN BANK, as Agent
Dated as of ______________ ___, _____
When recorded return to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Erin L. Rothfuss, Esq.
================================================================================
<PAGE>
MORTGAGE AND SECURITY AGREEMENT
MORTGAGE AND SECURITY AGREEMENT, dated as of ______________ ___, ____
(this "Mortgage"), made by FBTC LEASING CORP., a New York corporation (the
--------
"Mortgagor"), in favor of THE CHASE MANHATTAN BANK, a New York banking
---------
corporation, as collateral agent (in such capacity, the "Mortgagee" or the
---------
"Agent") under the Collateral Agent Agreement, dated as of November 4, 1997 (the
-----
"Collateral Agent Agreement"), among the Mortgagor, the Mortgagee and the
--------------------------
financial institutions from time to time parties thereto (the "Lenders").
-------
Preliminary Statement
---------------------
A. Mortgagor has entered into that certain Amended and Restated
Credit Agreement dated as of November 4, 1997 (as the same may be further
amended, supplemented or otherwise modified from time to time, the "Credit
------
Agreement") with the several lenders from time to time parties thereto (the
- ---------
"Lenders") and Mortgagee.
-------
B. Mortgagor is the owner of the parcel(s) of real property
described on Schedule A attached (such real property, together with all of the
buildings, improvements, structures and fixtures now or subsequently located
thereon (the "Improvements"), being collectively referred to as the "Real
------------ ----
Estate").
- ------
C. Pursuant to the terms and conditions of the Credit Agreement, the
Mortgagee has agreed to make loans to the Mortgagor, in an aggregate principal
amount not to exceed $97,000,000 (the "Loans"). Pursuant to the terms and
-----
conditions of that certain Amended and Restated Guarantee dated as of the date
hereof, Paragon Health Network, Inc. ("Paragon"), as the successor-in-interest
-------
to Living Centers of America, Inc. and certain of Paragon's subsidiaries, have
agreed to amend and restate its obligations under that certain Guarantee dated
as of October 10, 1996 and guarantee the obligations of Mortgagor under the
Credit Agreement.
D. Paragon has entered into that certain Credit Agreement dated as
of November 4, 1997 (as the same may be amended, supplemented or otherwise
modified from time to time, the "Corporate Credit Agreement") with the several
--------------------------
lenders from time to time parties thereto (the "Corporate Lenders") and The
-----------------
Chase Manhattan Bank, as Administrative Agent (in such capacity, "Administrative
--------------
Agent").
- -----
E. Pursuant to the terms and conditions of the Corporate Credit
Agreement, the Corporate Lenders have agreed to make loans to Paragon in an
aggregate principal amount not to exceed $890,000,000 (the "Corporate Loans").
---------------
F. The obligations of (i) the Lenders to make the Loans are
conditioned upon, among other things, that the obligations of Mortgagor under
the Credit Agreement be secured by a mortgage lien upon the Mortgaged Property
and (ii) the Corporate Lenders to make the
<PAGE>
2
Corporate Loans are conditioned upon, among other things, that the
obligations of Paragon under the Corporate Credit Agreement be secured by a
mortgage lien upon the Mortgaged Property.
G. In order to induce (i) the Lenders to make the Loans and (ii) the
Corporate Lenders to make the Corporate Loans, Mortgagor desires to grant
Mortgagee a lien upon the Mortgaged Property upon the terms and conditions
hereinafter set forth.
H. Capitalized terms used but not otherwise defined in this Mortgage
shall have the meanings assigned to them in Annex A attached to the Amended and
Restated Participation Agreement dated as of November 4, 1997 among Living
Centers Holding Company, Mortgagor, Agent, certain co-agents and the Lenders.
The rules of usage and documentary conventions set forth in such Annex are also
applicable hereto.
Granting Clauses
----------------
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Mortgagor agrees that to secure:
(a) (i) the repayment by Mortgagor of all obligations, liabilities
and indebtedness of Mortgagor, whether direct or indirect, absolute or
contingent, due or to become due, or now existing or hereafter incurred,
under, arising out of or in connection with the Credit Agreement, the Notes
or the other Operative Agreements, together with all interest and fees
payable thereon (collectively, the "Mortgagor Indebtedness") and (ii) the
----------------------
payment of all obligations, liabilities and indebtedness of Paragon,
whether direct or indirect, absolute or contingent, due or to become due,
or now existing or hereafter incurred, under, arising out of or in
connection with the Corporate Credit Agreement and the other Loan
Documents, together with all interest and fees payable thereon
(collectively, the "Paragon Indebtedness"; together with the Mortgagor
--------------------
Indebtedness, the "Indebtedness"); and
------------
(b) (i) the performance and observance of all covenants, agreements,
obligations and liabilities of Mortgagor (the "Mortgagor Obligations")
---------------------
under or pursuant to the provisions of the Operative Agreements and any
amendments, supplements, extensions, renewals, restatements, replacements
or modifications of any of the foregoing and (ii) the performance and
observance of all covenants, agreements, obligations and liabilities of
Paragon under the Loan Documents and any amendments, supplements,
extensions, renewals, restatements, replacements or modifications of any of
the foregoing (the "Paragon Obligations"; together with the Mortgagor
-------------------
Obligations, the "Obligations") (the Operative Agreements and the Loan
-----------
Documents and all other documents and instruments from time to time
evidencing, securing or guaranteeing the payment of the Indebtedness or the
performance of the Obligations, as any of the same may be amended,
supplemented, extended, renewed, restated, replaced or modified from time
to time, are collectively referred to as the "Credit Documents");
----------------
MORTGAGOR HEREBY GRANTS TO MORTGAGEE A LIEN UPON AND A SECURITY INTEREST
IN, AND HEREBY MORTGAGES, GRANTS, ASSIGNS, TRANSFERS AND SETS OVER TO
MORTGAGEE:
(A) all right, title and interest of Mortgagor whether now owned or
hereafter
<PAGE>
3
acquired, in and to the parcels of real property described on Schedule A
(together with the Land, the Improvements, the Appurtenant Rights and the
Fixtures relating thereto being collectively referred to as the
"Property");
--------
(B) all the estate, right, title, claim or demand whatsoever of the
Mortgagor, in possession or expectancy, in and to the Property or any part
thereof;
(C) all right, title and interest of Mortgagor whether now owned or
hereafter acquired, in and to the Equipment;
(D) all right, title and interest of Mortgagor, whether now owned or
hereafter acquired, in and to all substitutes and replacements of, and all
additions and improvements to, the Property and the Equipment, subsequently
acquired by or released to Mortgagor or constructed, assembled or placed by
Mortgagor on the Property, immediately upon such acquisition, release,
construction, assembling or placement, including, without limitation, any
and all building materials whether stored at the Property or offsite, and,
in each such case, without any further mortgage, conveyance, assignment or
other act by Mortgagor;
(E) all right, title and interest of Mortgagor, whether now owned or
hereafter acquired, in, to and under all leases, subleases, underlettings,
concession agreements, management agreements, licenses and other agreements
relating to the use or occupancy of the Property or the Equipment or any
part thereof, now existing or subsequently entered into by Mortgagor and
whether written or oral and all guarantees of any of the foregoing
(collectively, as any of the foregoing may be amended, restated, extended,
renewed or modified from time to time, the "Leases"), and all rights of
------
Mortgagor in respect of cash and securities deposited thereunder and the
right to receive and collect the revenues, income, rents, issues and
profits thereof, together with all other rents, royalties, issues, profits,
revenue, income and other benefits arising from the use and enjoyment of
the Mortgaged Property (as defined below) (collectively, the "Rents");
-----
(F) all right, title and interest of Mortgagor in and to all unearned
premiums under insurance policies now or subsequently obtained by Mortgagor
relating to the Property or Equipment and Mortgagor's interest in and to
all proceeds of any such insurance policies (including title insurance
policies) including the right to collect and receive such proceeds; and all
awards and other compensation, including the interest payable thereon and
the right to collect and receive the same, made to the present or any
subsequent owner of the Property or Equipment for the taking by eminent
domain, condemnation or otherwise, of all or any part of the Property or
any easement or other right therein;
(G) all right, title and interest of Mortgagor in and to (i) all
contracts from time to time executed by Mortgagor or any manager or agent
on its behalf relating to the ownership, construction, maintenance, repair,
operation, occupancy, sale or financing of the Property or Equipment or any
part thereof and all agreements relating to the purchase or lease of any
portion of the Property or any property which is adjacent or peripheral to
the Property, together with the right to exercise such options and all
leases of Equipment, (ii) all consents, licenses, building permits,
certificates of occupancy and other governmental approvals relating to
construction, completion, occupancy, use or operation of the Property or
any part thereof and (iii) all drawings, plans, specifications and similar
<PAGE>
4
or related items relating to the Property;
(H) all right, title and interest of Mortgagor in and to any and all
monies now or subsequently on deposit for the payment of real estate taxes
or special assessments against the Property or for the payment of premiums
on insurance policies covering the foregoing property or otherwise on
deposit with or held by Mortgagee as provided in this Mortgage; all
capital, operating, reserve or similar accounts held by or on behalf of
Mortgagor and related to the operation of the Mortgaged Property, whether
now existing or hereafter arising and all monies held in any of the
foregoing accounts and any certificates or instruments related to or
evidencing such accounts; and
(I) all amendments, modifications, substitutions, replacements and
additions of any of the foregoing, and all proceeds, both cash and noncash,
of any of the foregoing;
(All of the foregoing property and rights and interests now owned or
held or subsequently acquired by the Mortgagor and described in the foregoing
clauses (A) through (I) are collectively referred to as the "Mortgaged
---------
Property"); provided that excluded from the Mortgaged Property at all times and
- -------- -------- ---- --------
in all respects shall be all Excepted Rights and the Mortgaged Property shall be
subject at all times and in all respects to all Shared Rights.
TO HAVE AND TO HOLD the Mortgaged Property and the rights and
privileges hereby mortgaged unto the Mortgagee, its successors and assigns for
the uses and purposes set forth, until all of the Indebtedness is paid and the
Obligations are performed, subject however to the matters listed on Schedule B
hereto (the "Permitted Encumbrances and Liens").
[PROVIDED, HOWEVER, that this Mortgage secures a principal amount of
the Obligations not to exceed $______________ (the "Maximum Secured Amount");
----------------------
and
PROVIDED FURTHER, that payments made on account of the Indebtedness or
any portion thereof, whether in due course, as prepayments or otherwise, shall
not reduce the Maximum Secured Amount, unless the aggregate principal amount of
the Indebtedness is less than the Maximum Secured Amount.]/1/
-
Terms and Conditions
--------------------
Mortgagor further represents, warrants, covenants and agrees with
Mortgagee as follows:
1. Payment of Indebtedness. The Mortgagor shall pay the Mortgagor
-----------------------
Indebtedness at the times and places and in the manner specified in the Notes
and the Credit Agreement and shall perform all the Mortgagor Obligations.
2. Other Covenants. At any time and from time to time, upon the
---------------
written request of the Mortgagee, and at the sole expense of the Mortgagor, the
Mortgagor will promptly and
__________________________
/1/ This provision should be added in appropriate jurisdictions.
-
<PAGE>
5
duly execute and deliver such further instruments and documents and take such
further actions as the Mortgagee reasonably may request for the purposes of
obtaining or preserving the full benefits of this Mortgage and of the rights and
powers granted by this Mortgage.
3. Further Assurances. To further assure Mortgagee's rights under
------------------
this Mortgage, Mortgagor agrees upon demand of Mortgagee to do any act or
execute any additional documents (including, but not limited to, security
agreements on any personalty included or to be included in the Mortgaged
Property) as may be reasonably required by Mortgagee to confirm the rights or
benefits conferred on Mortgagee by this Mortgage.
4. Mortgagee's Right to Perform. If the Mortgagor fails to perform
----------------------------
or comply with any of its agreements contained in this Mortgage, the Mortgagee,
at its option, but without any obligation so to do, may perform or comply, or
otherwise cause performance or compliance, with such agreement. The expenses of
the Mortgagee incurred in connection with actions undertaken as provided in this
Section, together with interest thereon at a rate per annum equal to the Overdue
Rate, from the date of payment by the Mortgagee to the date reimbursed by the
Mortgagor, shall be payable by the Mortgagor to the Mortgagee on demand;
provided, however, that the Mortgagor shall not be liable for payment of any
- -------- -------
amount under this Section to the extent the Lessee is responsible for payment of
such amount under the Lease, the Participation Agreement or any other Operative
Agreement.
5. Mortgagor's Existence, etc. Mortgagor shall do all things
---------------------------
necessary to preserve and keep in full force and effect its existence,
franchises, rights and privileges under the laws of the state of [ ]
and its right to own property and transact business in the state of [ ].
This Mortgage constitutes the legal, valid and binding obligation of Mortgagor,
enforceable against Mortgagor in accordance with its terms, except as
enforceability may be limited by principles of equity and applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally.
6. Events of Default. It shall be an event of default under this
-----------------
Mortgage (an "Event of Default") if an Event of Default shall occur under any of
----------------
the Credit Documents.
<PAGE>
6
7. Remedies.
--------
(a) Upon the occurrence of any Event of Default, in addition to any
other rights and remedies Mortgagee may have pursuant to the Credit Documents,
or as provided by law, and without limitation, (a) if such event triggers an
Acceleration under Section 6.1(h) or 6.1(i) of the Credit Agreement,
automatically the Indebtedness and all other amounts owing under the Notes, this
Mortgage and the other Security Documents immediately shall become due and
payable, and (b) if such event is any other Event of Default, by notice to
Mortgagor, Mortgagee may declare the Indebtedness (together with accrued
interest thereon) and all other amounts payable under the Note, this Mortgage
and the other Security Documents to be immediately due and payable. Except as
expressly provided above in this Section, presentment, demand, protest and all
other notices of any kind are hereby expressly waived. In addition, upon the
occurrence of any Event of Default, Mortgagee may immediately take such action,
without notice or demand, as it deems advisable to protect and enforce its
rights against Mortgagor and in and to the Mortgaged Property, including, but
not limited to, the following actions, each of which may be pursued concurrently
or otherwise, at such time and in such manner as Mortgagee may determine, in its
sole discretion, without impairing or otherwise affecting the other rights and
remedies of Mortgagee:
(i) Mortgagee may, to the extent permitted by applicable law, (A)
institute and maintain an action of mortgage foreclosure against all or any
part of the Mortgaged Property, (B) institute and maintain an action on the
Notes, (C) sell all or part of the Mortgaged Property (Mortgagor expressly
granting to Mortgagee the power of sale), or (D) take such other action at
law or in equity for the enforcement of this Mortgage or any of the Credit
Documents as the law may allow. Mortgagee may proceed in any such action
to final judgment and execution thereon for all sums due hereunder,
together with interest thereon at the rate specified in Section 2.8(c) of
the Credit Agreement and all costs of suit, including, without limitation,
reasonable attorneys' fees and disbursements. Interest at the rate
specified in Section 2.8(c) of the Credit Agreement shall be due on any
judgment obtained by Mortgagee from the date of judgment until actual
payment is made of the full amount of the judgment.
(ii) Mortgagee may personally, or by its agents, attorneys and
employees and without regard to the adequacy or inadequacy of the Mortgaged
Property or any other collateral as security for the Indebtedness and
Obligations enter into and upon the Mortgaged Property and each and every
part thereof and exclude Mortgagor and its agents and employees therefrom
without liability for trespass, damage or otherwise (Mortgagor hereby
agreeing to surrender possession of the Mortgaged Property to Mortgagee
upon demand at any such time) and use, operate, manage, maintain and
control the Mortgaged Property and every part thereof. Following such entry
and taking of possession, Mortgagee shall be entitled, without limitation,
(x) to lease all or any part or parts of the Mortgaged Property for such
periods of time and upon such conditions as Mortgagee may, in its
discretion, deem proper, (y) to enforce, cancel or modify any Lease and (z)
generally to execute, do and perform any other act, deed, matter or thing
concerning the Mortgaged Property as Mortgagee shall deem appropriate as
fully as Mortgagor might do.
(b) The holder of this Mortgage, in any action to foreclose it, shall
be entitled to the appointment of a receiver. In case of a foreclosure sale,
the Mortgaged Property may be sold,
<PAGE>
7
at Mortgagee's election, in one parcel or in more than one parcel and Mortgagee
is specifically empowered, (without being required to do so, and in its sole and
absolute discretion) to cause successive sales of portions of the Mortgaged
Property to be held.
(c) In the event of any breach of any of the covenants, agreements,
terms or conditions contained in this Mortgage, and notwithstanding to the
contrary any exculpatory or non-recourse language which may be contained herein,
Mortgagee shall be entitled to enjoin such breach and obtain specific
performance of any covenant, agreement, term or condition and Mortgagee shall
have the right to invoke any equitable right or remedy as though other remedies
were not provided for in this Mortgage.
(d) The Mortgagor hereby waives the benefit of all appraisement,
valuation, stay, extension and redemption laws now or hereafter in force and all
rights of marshalling in the event of any sale of the Mortgaged Property or any
interest therein.
7A. Application of Proceeds. The proceeds available from the
-----------------------
sale of the Mortgaged Property or any part thereof shall be applied as follows:
(_)(a) first, to the payment of the costs and expenses of such sale,
including attorneys' fees, and to the payment of any protective advances
made by the Mortgagee, together with any interest due thereon, in all cases
including all amounts to be paid pursuant to clause First of Section 3.4 of
the Collateral Agent Agreement;
(b) second, an amount up to the amount which, after payments due
under clause (a) above, does not exceed the aggregate outstanding principal
of and accrued interest on the Tranche B Loans shall be paid to the
Collateral Agent to be applied in accordance with the Collateral Agent
Agreement;
(c) third, an amount equal to the proceeds of the sale available
after the payments due pursuant to the clauses (a) and (b) above, reduced
by an amount equal to the aggregate unpaid Lessor Contribution and accrued
Lessor Yield (which amount shall be retained by Mortgagor), shall be paid
to the Collateral Agent to be applied in accordance with the Collateral
Agent Agreement; and
(d) fourth, the balance, if any, shall be paid to whomever shall be
entitled thereto.
8. Successor Mortgagor. In the event ownership of the Mortgaged
-------------------
Property or any portion thereof becomes vested in a person other than the
Mortgagor herein named, Mortgagee may, without notice to the Mortgagor herein
named, whether or not Mortgagee has given written consent to such change in
ownership, deal with such successor or successors in interest with reference to
this Mortgage and the Indebtedness and the Obligations, and in the same manner
as with the Mortgagor herein named, without in any way vitiating or discharging
Mortgagor's liability hereunder or under the Indebtedness and the Obligations.
9. Right of Mortgagee to Credit Sale. Upon the occurrence of any
---------------------------------
sale made under this Mortgage, whether made under the power of sale or by virtue
of judicial proceedings or of a judgment or decree of foreclosure and sale,
Mortgagee may bid for and acquire the Mortgaged Property or any part thereof.
In lieu of paying cash therefor, Mortgagee may make
<PAGE>
8
settlement for the purchase price by crediting upon the Indebtedness or other
sums secured by this Mortgage the net sales price after deducting therefrom the
expenses of sale and the cost of the action and any other sums which Mortgagee
is authorized to deduct under this Mortgage. In such event, this Mortgage, the
Note and documents evidencing expenditures secured hereby may be presented to
the person or persons conducting the sale in order that the amount so used or
applied may be credited upon the Indebtedness as having been paid.
10. Remedies Not Exclusive. The Mortgagee shall be entitled to
----------------------
enforce payment of the Indebtedness and performance of the Obligations and to
exercise all rights and powers under this Mortgage or under any of the other
Credit Documents or other agreement or any laws now or hereafter in force,
notwithstanding some or all of the Obligations may now or hereafter be otherwise
secured, whether by mortgage, security agreement, pledge, lien, assignment or
otherwise. Neither the acceptance of this Mortgage nor its enforcement, shall
prejudice or in any manner affect the Mortgagee's right to realize upon or
enforce any other security now or hereafter held by the Mortgagee, it being
agreed that the Mortgagee shall be entitled to enforce this Mortgage and any
other security now or hereafter held by the Mortgagee in such order and manner
as the Mortgagee may determine in its absolute discretion. No remedy herein
conferred upon or reserved to the Mortgagee is intended to be exclusive of any
other remedy herein or by law provided or permitted, but each shall be
cumulative and shall be in addition to every other remedy given hereunder or now
or hereafter existing at law or in equity or by statute. Every power or remedy
given by any of the Credit Documents to the Mortgagee or to which it may
otherwise be entitled, may be exercised, concurrently or independently, from
time to time and as often as may be deemed expedient by the Mortgagee. In no
event shall the Mortgagee, in the exercise of the remedies provided in this
Mortgage (including in connection with the Assignment of Leases, or the
appointment of a receiver and the entry of such receiver on to all or any part
of the Mortgaged Property), be deemed a "mortgagee in possession," and the
Mortgagee shall not in any way be made liable for any act, either of commission
or omission, in connection with the exercise of such remedies, except for its
gross negligence or willful misconduct.
11. Duty of the Mortgagee. The Mortgagee's sole duty with respect to
---------------------
the custody, safekeeping and physical preservation of any Mortgaged Property in
its possession, under Section 9-207 of the Uniform Commercial Code or otherwise,
shall be to deal with it in the same manner as the Mortgagee deals with similar
property for its own account. Neither the Mortgagee, any Lender nor any of
their respective directors, officers, employees or agents shall be liable for
failure to demand, collect or realize upon any of the Mortgaged Property or for
any delay in doing so or shall be under any obligation to sell or otherwise
dispose of any Mortgaged Property upon the request of the Mortgagor or any other
Person or to take any other action whatsoever with regard to the Mortgaged
Property or any part thereof.
12. Powers Coupled with an Interest. All powers, authorizations and
-------------------------------
agencies contained in this Mortgage are coupled with an interest and are
irrevocable until this Mortgage is terminated and the lien created hereby is
released.
13. Execution of Financing Statements. To the extent permitted by
---------------------------------
applicable law, pursuant to Section 9-402 of the Uniform Commercial Code, the
Mortgagor authorizes the Mortgagee to file financing statements with respect to
the Mortgaged Property without the signature of the Mortgagor in such form and
in such filing offices as the Mortgagee reasonably determines appropriate to
perfect the security interests of the Mortgagee under this Mortgage.
<PAGE>
9
To the extent permitted by applicable law, a carbon, photographic or other
reproduction of this Mortgage shall be sufficient as a financing statement for
filing in any jurisdiction.
14. Appointment of Receiver. If an Event of Default shall have
-----------------------
occurred and be continuing, Mortgagee as a matter of right and without notice to
Mortgagor, unless otherwise required by applicable law, and without regard to
the adequacy or inadequacy of the Mortgaged Property or any other collateral as
security for the Indebtedness and Obligations or the interest of Mortgagor
therein, shall have the right to apply to any court having jurisdiction to
appoint a receiver or receivers or other manager of the Mortgaged Property,
without requiring the posting of a surety bond and without reference to the
adequacy or inadequacy of the value of the Mortgaged Property or the solvency or
insolvency of Mortgagor or any other party obligated for payment of all or any
part of the Indebtedness, and whether or not waste has occurred with respect to
the Mortgaged Property. Mortgagor hereby irrevocably consents to such
appointment and waives notice of any application therefor (except as may be
required by law). Any such receiver or receivers shall have all the usual
powers and duties of receivers in like or similar cases and all the powers and
duties of Mortgagee in case of entry as provided in this Mortgage, including and
to the extent permitted by law, the right to enter into leases of all or any
part of the Mortgaged Property, and shall continue as such and exercise all such
powers until the date of confirmation of sale of the Mortgaged Property unless
such receivership is sooner terminated.
15. Extension, Release, etc. (a) Without affecting the encumbrance
------------------------
or charge of this Mortgage upon any portion of the Mortgaged Property not then
or theretofore released as security for the full amount of the Indebtedness,
Mortgagee may, from time to time and without notice, agree to (i) release any
person liable for the Indebtedness, (ii) extend the maturity or alter any of the
terms of the Indebtedness or any guaranty thereof, (iii) grant other
indulgences, (iv) release or reconvey, or cause to be released or reconveyed at
any time at Mortgagee's option any parcel, portion or all of the Mortgaged
Property, (v) take or release any other or additional security for any
obligation herein mentioned, or (vi) make compositions or other arrangements
with debtors in relation thereto. If at any time this Mortgage shall secure
less than all of the principal amount of the Indebtedness, it is expressly
agreed that any repayments of the principal amount of the Indebtedness shall not
reduce the amount of the encumbrance of this Mortgage until the encumbrance
amount shall equal the principal amount of the Indebtedness outstanding.
(b) No recovery of any judgment by Mortgagee and no levy of an
execution under any judgment upon the Mortgaged Property or upon any other
property of Mortgagor shall affect the encumbrance of this Mortgage or any
liens, rights, powers or remedies of Mortgagee hereunder, and such liens,
rights, powers and remedies shall continue unimpaired.
(c) If Mortgagee shall have the right to foreclose this Mortgage,
Mortgagor authorizes Mortgagee at its option to foreclose the lien of this
Mortgage subject to the rights of any tenants of the Mortgaged Property. The
failure to make any such tenants parties defendant to any such foreclosure
proceeding and to foreclose their rights, or to provide notice to such tenants
as required in any statutory procedure governing a sale of the Mortgaged
Property by Mortgagee, or to terminate such tenant's rights in such sale, will
not be asserted by Mortgagor as a defense to any proceeding instituted by
Mortgagee to collect the Indebtedness or to foreclose this Mortgage.
(d) Unless expressly provided otherwise, in the event that
Mortgagee's interest in this Mortgage and title to the Mortgaged Property or any
estate therein shall become vested in the
<PAGE>
10
same person or entity, this Mortgage shall not merge in such title but shall
continue as a valid charge on the Mortgaged Property for the amount secured
hereby.
16. Security Agreement under Uniform Commercial Code. (a) It is the
------------------------------------------------
intention of the parties hereto that this Mortgage shall constitute a Security
Agreement within the meaning of the Uniform Commercial Code (the "UCC") of the
---
State in which the Mortgaged Property is located. If an Event of Default shall
occur, then in addition to having any other right or remedy available at law or
in equity, the Mortgagee shall have the option of either (i) proceeding under
the UCC and exercising such rights and remedies as may be provided to a secured
party by the Code with respect to all or any portion of the Mortgaged Property
which is personal property (including taking possession of and selling such
property) or (ii) treating such property as real property and proceeding with
respect to both the real and personal property constituting the Mortgaged
Property in accordance with the Mortgagee's rights, powers and remedies with
respect to the real property (in which event the default provisions of the UCC
shall not apply). If the Mortgagee shall elect to proceed under the UCC, then
ten days' notice of sale of the personal property shall be deemed reasonable
notice and the reasonable expenses of retaking, holding, preparing for sale,
selling and the like incurred by the Mortgagee shall include, but not be limited
to, attorneys' fees and legal expenses. At the Mortgagee's request, the
Mortgagor shall assemble the personal property and make it available to the
Mortgagee at a place designated by the Mortgagee which is reasonably convenient
to both parties.
(b) Mortgagor and Mortgagee agree, to the extent permitted by law,
that: (i) all of the goods described within the definition of the word
"Equipment" are or are to become fixtures on the Property; (ii) this Mortgage
upon recording or registration in the real estate records of the proper office
shall constitute a financing statement filed as a "fixture filing" within the
meaning of Sections 9-313 and 9-402 of the UCC; (iii) Mortgagor is the record
owner of the Property; and (iv) the addresses of Mortgagor and Mortgagee are as
set forth in Section 19 of this Mortgage.
(c) The Mortgagor, upon request by the Mortgagee from time to time,
shall execute, acknowledge and deliver to the Mortgagee one or more separate
security agreements, in form reasonably satisfactory to the Mortgagee and
consistent with the Credit Documents, covering all or any part of the Mortgaged
Property and will further execute, acknowledge and deliver, or cause to be
executed, acknowledged and delivered, any financing statement, affidavit,
continuation statement or certificate or other document as the Mortgagee may
request in order to perfect, preserve, maintain, continue or extend the security
interest under and the priority of this Mortgage and such security instrument.
The Mortgagor further agrees to pay to the Mortgagee on demand all reasonable
costs and expenses incurred by the Mortgagee in connection with the preparation,
execution, recording, filing and re-filing of any such document and all
reasonable costs and expenses of any record searches for financing statements
the Mortgagee shall reasonably require; provided, however, that the Mortgagor
-------- -------
shall not be liable for payment of any amount under this Section to the extent
that (i) the Lessee is responsible for payment of such amount under the Lease,
the Participation Agreement or any other Credit Document or (ii) the Lessee has
not paid such amount to the Lessor. If the Mortgagor shall fail to furnish any
financing or continuation statement within ten days after request by the
Mortgagee, then pursuant to the provisions of the UCC, the Mortgagor hereby
authorizes the Mortgagee, without the signature of the Mortgagor, to execute and
file any such financing and continuation statements. The filing of any
financing or continuation statements in the records relating to personal
property or chattels shall not be construed as in any way impairing the right of
the Mortgagee to proceed
<PAGE>
11
against any personal property encumbered by this Mortgage as real property, as
set forth above.
17. Additional Rights. The holder of any subordinate lien or
-----------------
subordinate mortgage on the Mortgaged Property shall have no right to terminate
any lease affecting the Property whether or not such lease is subordinate to
this Mortgage nor shall any holder of any subordinate lien or subordinate deed
of trust join any tenant under any lease in any action to foreclose the lien or
modify, interfere with, disturb or terminate the rights of any tenant under any
lease. By recordation of this Mortgage all subordinate lienholders and the
mortgagees under subordinate mortgages are subject to and notified of this
provision, and any action taken by any such lienholder contrary to this
provision shall be null and void. Upon the occurrence of any Event of Default,
Mortgagee may, in its sole discretion and without regard to the adequacy of its
security under this Mortgage, apply all or any part of any amounts on deposit
with Mortgagee under this Mortgage against all or any part of the Indebtedness.
Any such application shall not be construed to cure or waive any Default or
Event of Default or invalidate any act taken by Mortgagee on account of such
Default or Event of Default.
18. Authority of Mortgagee. The Mortgagor acknowledges that the
----------------------
rights and responsibilities of the Mortgagee under this Mortgage with respect to
any action taken by the Mortgagee or the exercise or non-exercise by the
Mortgagee of any option, voting right, request, judgment or other right or
remedy provided for herein or resulting or arising out of this Mortgage shall,
as between the Mortgagee and the Lenders, be governed by the Credit Agreement
and the Collateral Agent Agreement and by such other agreements with respect
thereto as may exist from time to time among them, but, as between the Mortgagee
and the Mortgagor, the Mortgagee shall be conclusively presumed to be acting as
agent for the Lenders with full and valid authority so to act or refrain from
acting, and the Mortgagor shall be under no obligation, or entitlement, to make
any inquiry respecting such authority.
19. Notices. Unless otherwise specifically provided herein, all
-------
notices, consents, directions, approvals, instructions, requests and other
communications required or permitted by the terms hereof to be given to any
Person shall be given in writing by United States mail, by nationally recognized
courier service or by hand and any such notice shall become effective five
Business Days after being deposited in the mails, certified or registered with
appropriate postage prepaid or one Business Day after delivery to a nationally
recognized courier service specifying overnight delivery or, if delivered by
hand, when received, and shall be directed to the address of such Person as
indicated:
<PAGE>
12
If to the Mortgagor, to it at:
FBTC Leasing Corp.
Two World Trade Center
New York, New York 10048
Attn: Mr. Carl Marc Antonio
If to the Mortgagee, to it at:
The Chase Manhattan Bank
Agent Lender Services
One Chase Manhattan Plaza, 8th Floor
New York, New York 10081
Attn: Janet Belden
with a copy to:
The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017
Attn: Dawn Lee Lum
From time to time any party may designate a new address for purposes of notice
hereunder by notice to each of the other parties hereto.
20. Partial Invalidity. In the event any one or more of the
------------------
provisions contained in this Mortgage shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, but each shall be
construed as if such invalid, illegal or unenforceable provision had never been
included.
21. No Waiver; Cumulative Remedies. (a) No failure to exercise, nor
------------------------------
any delay in exercising, on the part of the Mortgagee or any Lender, any right,
power or privilege hereunder shall operate as a waiver thereof. No single or
partial exercise of any right, power or privilege hereunder shall preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. A waiver by the Mortgagee of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy which the
Mortgagee would otherwise have on any future occasion. Mortgagee may release,
regardless of consideration and without the necessity for any notice to or
consent by the mortgagee of any subordinate mortgage or the holder of any
subordinate lien on the Mortgaged Property, any part of the security held for
the obligations secured by this Mortgage without, as to the remainder of the
security, in anyway impairing or affecting this Mortgage or the priority of this
Mortgage over any subordinate lien or deed of trust.
(b) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
22. No Oral Modification. This Mortgage may not be changed or
--------------------
terminated orally. Any agreement made by Mortgagor and Mortgagee after the date
of this Mortgage
<PAGE>
13
relating to this Mortgage shall be superior to the rights of the holder of any
intervening or subordinate lien, deed of trust or encumbrance.
23. Section Headings. The section headings used in this Mortgage are
----------------
for convenience of reference only and are not to affect the construction hereof
or be taken into consideration in the interpretation hereof.
24. Successors and Assigns. All covenants of Mortgagor contained in
----------------------
this Mortgage are imposed solely and exclusively for the benefit of Mortgagee,
the Lenders and their respective permitted successors and assigns, and no other
person or entity shall have standing to require compliance with such covenants
or be deemed, under any circumstances, to be a beneficiary of such covenants,
any or all of which may be freely waived in whole or in part by Mortgagee at any
time if in the sole discretion of the Mortgagee such waiver is deemed advisable.
All such covenants of Mortgagor shall run with the land and bind Mortgagor, the
permitted successors and assigns of Mortgagor (and each of them) and all
subsequent owners, encumbrances and tenants of the Mortgaged Property, and shall
inure to the benefit of Mortgagee, the Lenders and their respective permitted
successors and assigns. The word "Mortgagor" shall be construed as if it read
"Mortgagors" whenever the sense of this Mortgage so requires and if there shall
be more than one Mortgagor, the obligations of the Mortgagors shall be joint and
several.
25. Mortgagor's Waiver of Rights. Except as otherwise set forth
----------------------------
herein, to the fullest extent permitted by law, the Mortgagor waives the benefit
of all laws now existing or that may subsequently be enacted providing for (i)
any appraisement before sale of any portion of the Mortgaged Property, (ii) any
extension of the time for the enforcement of the collection of the indebtedness
or the creation or extension of a period of redemption from any sale made in
collecting such debt and (iii) exemption of the Mortgaged Property from
attachment, levy or sale under execution or exemption from civil process. Except
as otherwise set forth herein, to the full extent the Mortgagor may do so, the
Mortgagor agrees that the Mortgagor will not at any time insist upon, plead,
claim or take the benefit or advantage of any law now or hereafter in force
providing for any appraisement, valuation, stay, exemption, extension or
redemption, or requiring foreclosure of this Mortgage before exercising any
other remedy granted hereunder and the Mortgagor, for the Mortgagor and its
successors and assigns, and for any and all Persons ever claiming any interest
in the Mortgaged Property, to the extent permitted by law, hereby waives and
releases all rights of redemption, valuation, appraisement, stay of execution,
notice of election to mature or declare due the whole of the secured
indebtedness and marshalling in the event of foreclosure of the liens hereby
created.
26. Multiple Security. If (a) the Mortgaged Property shall consist
-----------------
of one or more parcels, whether or not contiguous and whether or not located in
the same county, or (b) in addition to this Mortgage, the Mortgagee shall now or
hereafter hold one or more additional mortgages, liens, deeds of trust or other
security (directly or indirectly) for the Indebtedness upon other property in
the State in which the Mortgaged Property is located (whether or not such
property is owned by the Mortgagor or by others) or (c) both the circumstances
described in clauses (a) and (b) shall be true, then to the fullest extent
permitted by law, the Mortgagee may, at its election, commence or consolidate in
a single foreclosure action all foreclosure proceedings against all such
collateral securing the Indebtedness (including the Mortgaged Property), which
action may be brought or consolidated in the courts of any county in which any
of such collateral
<PAGE>
14
is located. The Mortgagor acknowledges that the right to maintain a consolidated
foreclosure action is a specific inducement to the Mortgagee to extend the
Indebtedness and the Mortgagor expressly and irrevocably waives any objections
to the commencement or consolidation of the foreclosure proceedings in a single
action and any objections to the laying of venue or based on the grounds of
forum non conveniens which it may now or hereafter have. The Mortgagor further
- ----- --- ----------
agrees that if the Mortgagee shall be prosecuting one or more foreclosure or
other proceedings against a portion of the Mortgaged Property or against any
collateral other than the Mortgaged Property, which collateral directly or
indirectly secures the Indebtedness, or if the Mortgagee shall have obtained a
judgment of foreclosure and sale or similar judgment against such collateral,
then, whether or not such proceedings are being maintained or judgments were
obtained in or outside the State in which the Mortgaged Property is located, the
Mortgagee may commence or continue foreclosure proceedings and exercise its
other remedies granted in this Mortgage against all or any part of the Mortgaged
Property and the Mortgagor waives any objections to the commencement or
continuation of a foreclosure of this Mortgage or exercise of any other remedies
hereunder based on such other proceedings or judgments, and waives any right to
seek to dismiss, stay, remove, transfer or consolidate either any action under
this Mortgage or such other proceedings on such basis. Neither the commencement
nor continuation of proceedings to foreclose this Mortgage nor the exercise of
any other rights hereunder nor the recovery of any judgment by the Mortgagee in
any such proceedings shall prejudice, limit or preclude the Mortgagee's right to
commence or continue one or more foreclosure or other proceedings or obtain a
judgment against any other collateral (either in or outside the State in which
the Mortgaged Property is located) which directly or indirectly secures the
Indebtedness, and the Mortgagor expressly waives any objections to the
commencement of, continuation of, or entry of a judgment in such other
proceedings or exercise of any remedies in such proceedings based upon any
action or judgment connected to this Mortgage, and the Mortgagor also waives any
right to seek to dismiss, stay, remove, transfer or consolidate either such
other proceedings or any action under this Mortgage on such basis. It is
expressly understood and agreed that to the fullest extent permitted by law, the
Mortgagee may, at its election, cause the sale of all collateral which is the
subject of a single foreclosure action at either a single sale or at multiple
sales conducted simultaneously and take such other measures as are appropriate
in order to effect the agreement of the parties to dispose of and administer all
collateral securing the Indebtedness (directly or indirectly) in the most
economical and least time-consuming manner.
27. Governing Law, etc. This Mortgage shall be governed by and
------------------
construed in accordance with the laws of the State of where the Mortgaged
Property is located, except that Mortgagor expressly acknowledges that by its
terms the Notes, the Credit Agreement and the Participation Agreement shall be
governed and construed in accordance with the laws of the State of New York,
without regard to principles of conflict of law, and for purposes of
consistency, Mortgagor agrees that in any in personam proceeding related to this
-- --------
Mortgage the rights of the parties to this Mortgage shall also be governed by
and construed in accordance with the laws of the State of New York governing
contracts made and to be performed in that State, without regard to principles
of conflict of law.
28. Obligations Are Without Recourse. Except as otherwise expressly
--------------------------------
provided in any Credit Document or the Participation Agreement, neither the
Mortgagor nor any of the Mortgagor's successors or assigns (all such Persons
being hereinafter referred to collectively as the "Exculpated Persons"), shall
------------------
be personally liable in any respect for any liability or obligation hereunder or
under any other Credit Document including the payment of the principal of, or
<PAGE>
15
interest on, the Notes, or for monetary damages for the breach of performance of
any of the covenants contained in the Credit Agreement, the Notes, this Mortgage
or any of the other Credit Documents. The Lenders and the Mortgagee agree that,
in the event any of them pursues any remedies available to them under the Credit
Agreement, the Notes, this Mortgage or under any other Credit Document, neither
the Lenders nor the Mortgagee shall have any recourse against the Mortgagor, nor
any other Exculpated Person, for any deficiency, loss or claim for monetary
damages or otherwise resulting therefrom and recourse shall be had solely and
exclusively only against the Mortgaged Property; but nothing contained herein
shall be taken to prevent recourse against or the enforcement of remedies
against the Mortgaged Property or the Guarantee in respect of any and all
liabilities, obligations and undertakings contained in the Credit Agreement, the
Notes or any other Credit Document. The Lenders and the Mortgagee further agree
that the Mortgagor shall not be responsible for the payment of any amounts owing
hereunder (excluding principal and interest (other than Overdue Interest) in
respect of the Loans) (such non-excluded amounts, "Supplemental Amounts") except
--------------------
to the extent that payments of Supplemental Rent applicable to such Supplemental
Amounts have been made by the Lessee for application to such Supplemental
Amounts (it being understood that the failure by the Lessee for any reason to
pay any Supplemental Rent in respect of such Supplemental Amounts shall
nevertheless be deemed to constitute a default by the Mortgagor for the purposes
of Section 6(a)(ii) of the Credit Agreement). Notwithstanding the foregoing
provisions of this Section, nothing in this Mortgage or any other Credit
Document shall (a) constitute a waiver, release or discharge of any obligation
evidenced or secured by this Mortgage or any other Credit Document, (b) limit
the right of any Lenders or the Mortgagee to name the Mortgagor as a party
defendant in any action or suit for judicial foreclosure and sale under any
Security Document, or (c) affect in any way the validity or enforceability of
the Guarantee or any other guaranty (whether of payment and/or performance)
given to the Lenders or the Mortgagee, or of any indemnity agreement given by
the Mortgagor, in connection with the Loans made under the Credit Agreement.
29. WAIVER OF TRIAL BY JURY. MORTGAGOR AND MORTGAGEE EACH HEREBY
-----------------------
IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY ACTION, CLAIM, SUIT
OR PROCEEDING RELATING TO THIS MORTGAGE AND FOR ANY COUNTERCLAIM BROUGHT
THEREIN. MORTGAGOR HEREBY WAIVES ALL RIGHTS TO INTERPOSE ANY COUNTERCLAIM IN
ANY SUIT BROUGHT BY MORTGAGEE HEREUNDER AND ALL RIGHTS TO HAVE ANY SUCH SUIT
CONSOLIDATED WITH ANY SEPARATE SUIT, ACTION OR PROCEEDING.
30. Partial Release; Full Release. The Mortgagee may release, for
-----------------------------
such consideration or none, as it may require, any portion of the Mortgaged
Property without, as to the remainder of the Mortgaged Property, in any way
impairing or affecting the lien, security interest and priority herein provided
for the Mortgagee compared to any other lien holder or secured party. Further,
upon receipt of the Purchase Option Price or the Termination Value and all other
amounts which are due under the Credit Documents with respect to the Property
and payment of all other amounts due on the Notes with respect to the Property
encumbered by this Mortgage, the Mortgagee shall execute and deliver to the
Mortgagor such documents and instruments as may be required to release the lien
and security interest created by this Mortgage.
31. Priority. This Mortgage shall be subject and subordinate to the
--------
Lease and to all presently existing or future Lease Supplements which affect the
Property.
<PAGE>
16
32. Miscellaneous. (a) This Mortgage is one of several mortgages
-------------
and other documents that create liens and security interests that secure payment
and performance of the Indebtedness. The Mortgagee, at its election, may
commence or consolidate in a single action all proceedings to realize upon all
such liens and security interests. The Mortgagor hereby waives (i) any
objections to the commencement or continuation of an action to foreclose this
Mortgage or exercise of any other remedies hereunder based on any action being
prosecuted or any judgment entered with respect to the Indebtedness or any liens
or security interests that secure payment and performance of the Obligations and
(ii) any objections to the commencement of, continuation of, or entry of a
judgment in any such other action based on any action or judgment connected to
this Mortgage. In case of a foreclosure sale, the Mortgaged Property may be
sold, at Mortgagee's election, in one parcel or in more than one parcel, and the
Mortgagee is specifically empowered (without being required to do so, and in its
sole and absolute discretion) to cause successive sales of portions of the
Mortgaged Property to be held.
(b) Except as provided in the Operative Agreements, the Mortgagee,
with the express written consent of the Mortgagor, may at any time or from time
to time renew or extend this Mortgage, or alter or modify the same in any way,
or the Mortgagee may waive any of the terms, covenants or conditions hereof in
whole or in part and may release any portion of the Mortgaged Property or any
other security, and grant such extensions and indulgences in relation to the
Obligations secured hereby as the Mortgagee may determine without the consent of
any other person and without any obligation to give notice of any kind thereto
and without in any manner affecting the priority of the lien hereof on any part
of the Mortgaged Property.
33. Amendments, etc. with respect to the Guaranteed Obligations;
------------------------------------------------------------
Waiver of Rights. This Mortgage shall remain valid and effective and Mortgagor
- ----------------
shall remain obligated hereunder notwithstanding that, without any reservation
of rights against Mortgagor and without notice to or further assent by such
Mortgagor, any demand for payment of any of the Paragon Indebtedness or the
Paragon Obligations made by Mortgagee or Administrative Agent or any Corporate
Lender may be rescinded by such party and any of the Paragon Indebtedness or the
Paragon Obligations continued, and the Paragon Indebtedness or the Paragon
Obligations, or the liability of any other party upon or for any part thereof,
or any collateral security or guarantee therefor or right of offset with respect
thereto, may, from time to time, in whole or in part, be renewed, extended,
amended, modified, accelerated, compromised, waived, surrendered or released by
Mortgagee, the Administrative Agent or any Corporate Lender, and the Corporate
Loan Documents may be amended, modified, supplemented or terminated, in whole or
in part, as the Administrative Agent (or the Required Corporate Lenders, as the
case may be) may deem advisable from time to time, and any collateral security,
guarantee or right of offset at any time held by Mortgagee, Administrative Agent
or any Corporate Lender for the payment of the Paragon Indebtedness or the
Paragon Obligations may be sold, exchanged, waived, surrendered or released.
Neither Mortgagee, Administrative Agent nor any Corporate Lender shall have any
obligation to protect, secure, perfect or insure any Lien at any time held by it
as security for the Paragon Indebtedness or the Paragon Obligations. Any
release of Paragon by Mortgagee, Administrative Agent or any Corporate Lender
shall not relieve Mortgagor, and shall not impair or affect this Mortgage or the
rights and remedies, express or implied, or as a matter of law, of Mortgagee,
Administrative Agent or any Corporate Lender against Mortgagor under this
Mortgage.
34. Mortgage Absolute and Unconditional. Mortgagor waives any and
-----------------------------------
all notice
<PAGE>
17
of the creation, renewal, extension or accrual of any of the Paragon
Indebtedness or the Paragon Obligations and notice of or proof of reliance by
Mortgagee or any Corporate Lender upon this Mortgage or acceptance of this
Mortgage; the Paragon Indebtedness and the Paragon Obligations, and any of them,
shall conclusively be deemed to have been created, contracted or incurred, or
renewed, extended, amended or waived, in reliance upon this Mortgage. Mortgagor
waives diligence, presentment, protest, demand for payment and notice of default
or nonpayment to or upon Paragon with respect to the Paragon Indebtedness and
the Paragon Obligations in order for Mortgagee to exercise its rights under this
Mortgage. Mortgagor understands and agrees that this Mortgage shall be construed
as a continuing, absolute and unconditional mortgage without regard to (a) the
validity, regularity or enforceability of the Corporate Loan Documents, any of
the Paragon Indebtedness or the Paragon Obligations or any other collateral
security therefor or guarantee or right of offset with respect thereto at any
time or from time to time held by the Mortgagee or any Corporate Lender, (b) any
defense, set-off or counterclaim which may at any time be available to or be
asserted by the Paragon against Mortgagee or any Corporate Lender, or (c) any
other circumstance whatsoever which constitutes, or might be construed to
constitute, an equitable or legal discharge of Paragon for the Paragon
Indebtedness or the Paragon Obligations, in bankruptcy or in any other instance.
When pursuing its rights and remedies hereunder against Mortgagor, Mortgagee and
any Corporate Lender may, but shall be under no obligation to, pursue such
rights and remedies as it may have against Paragon or any other Person or
against any collateral security or guarantee for the Paragon Indebtedness or the
Paragon Obligations or any right of offset with respect thereto, and any failure
by Mortgagee or any Corporate Lender to pursue such other rights or remedies or
to collect any payments from Paragon or any such other Person or to realize upon
any such collateral security or guarantee or to exercise any such right of
offset, or any release of Paragon or any such other Person or any such
collateral security, guarantee or right of offset, shall not relieve Mortgagor
of any liability hereunder, and shall not impair or affect the rights and
remedies, whether express, implied or available as a matter of law, of Mortgagee
under this Mortgage. This Mortgage shall remain in full force and effect and be
binding in accordance with and to the extent of its terms upon Mortgagor and the
successors and assigns thereof, and shall inure to the benefit of Mortgagee and
the Corporate Lenders, and their respective successors, indorsees, transferees
and assigns, until all the Obligations shall have been satisfied by payment in
full and the commitments of the Lenders and the Corporate Lenders shall be
terminated, notwithstanding that from time to time during the term of the
Corporate Loan Documents Paragon may be free from any Paragon Indebtedness or
the Paragon Obligations.
35. Reinstatement. This Mortgage shall continue to be effective, or
-------------
be reinstated, as the case may be, if at any time payment, or any part thereof,
of any of the Paragon Indebtedness or the Paragon Obligations is rescinded or
must otherwise be restored or returned by the Mortgagee or any Corporate Lender
or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of Paragon, or upon or as a result of the appointment of a
receiver, intervenor or conservator of, or trustee or similar officer for,
Paragon or any substantial part of its property, or otherwise, all as though
such payments had not been made.
36. Receipt of Copy. Mortgagor acknowledges that it has received a
---------------
true copy of this Mortgage.
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Mortgage to be
duly executed and delivered as of the date first above written.
FBTC LEASING CORP.
By:____________________________
Name:
Title:
<PAGE>
STATE OF ________ )
) ss.:
COUNTY OF ________ )
On the ___ day of,___________, ___, before me personally came
____________________ to me known, who, being by me duly
sworn, did depose and say that he/she resides at------------------------------;
that he/she is the ___________________________of FBTC LEASING CORP., the
corporation described in and which executed the above instrument; and that
he/she signed his/her name thereto by order of the board of directors of said
corporation.
_______________________________
Notary Public
<PAGE>
Exhibit A
---------
Legal Description of the Property
---------------------------------
<PAGE>
JOINDER OF LESSEE
-----------------
LIVING CENTERS HOLDING COMPANY, a Delaware corporation having its
principal office at ______________________________ hereby joins in this Mortgage
in order to, and HEREBY GRANTS TO MORTGAGEE A LIEN UPON AND A SECURITY INTEREST
IN, AND HEREBY MORTGAGES, GRANTS, ASSIGNS, TRANSFERS AND SETS OVER TO MORTGAGEE;
on behalf of the Lenders, all of its right, title and interest in and to the
Property and the other Mortgaged Property (the "Lessee Collateral") for the
-----------------
purpose of securing the Indebtedness. Lessee acknowledges and agrees that, upon
the occurrence of a Credit Agreement Event of Default, the Lenders shall have
the right to exercise any and all of its remedies hereunder as against the
Lessee Collateral.
Lessee agrees that if Lessee has any right, title, estate or interest
in the Lessee Collateral, the Lessee is to that extent a guarantor or surety for
the benefit of the Agent and the Lenders. In such event, Lessee expressly
agrees that the rights of the Agent and the Lenders shall in no way be affected
or impaired by reason of the occurrence of any of the following events: (i) the
waiver by the Agent or the Lenders of the performance or observance by the
Mortgagor, Lessee or any other party of any terms of the Operative Agreements;
(ii) the extension, in whole or in part, of the time for payment by Mortgagor of
any sums owing or payable under the Operative Agreements; (iii) any failure,
delay or inability of the Agent or the Lenders in enforcing any remedies or any
other provisions under the Operative Agreements; (iv) the occurrence of any
event described in Section 6.1(i) of the Credit Agreement; or (v) the inability
of Mortgagor to perform (or the release of Mortgagor's performance) under the
Operative Agreements due to any Legal Requirement.
This Joinder shall be considered part of the Mortgage to which it is
attached, and all references in the Operative Agreements to the Mortgage shall
mean the Mortgage together with this Joinder.
All capitalized terms used herein and not otherwise defined herein
shall have the meaning ascribed to such terms in the Mortgage.
<PAGE>
This Joinder has been duly executed by Lessee on the date first above
written.
LIVING CENTERS HOLDING COMPANY
By: _______________________
Name:
Title:
<PAGE>
EXHIBIT A-2 TO THE
PARTICIPATION AGREEMENT
-----------------------
================================================================================
FORM OF
DEED OF TRUST AND SECURITY AGREEMENT/1/
-
from
FBTC LEASING CORP., Grantor
to
________________________, Trustee
for the use and benefit of
THE CHASE MANHATTAN BANK, as Agent
Dated as of _______ __, ____
When recorded return to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Erin L. Rothfuss, Esq.
_______________________
/1/ The form of Deed of Trust in each jurisdiction shall be modified to conform
-
to documentary conventions and recording statutes and customs of the particular
jurisdiction.
<PAGE>
1
DEED OF TRUST AND SECURITY AGREEMENT
------------------------------------
DEED OF TRUST AND SECURITY AGREEMENT, dated as of _______ __, ____
(this "Deed of Trust"), made by FBTC LEASING CORP., a New York corporation (the
-------------
"Grantor"), to ___________________ (the "Trustee"), for the use and benefit of
------- -------
THE CHASE MANHATTAN BANK, a New York banking corporation, as collateral agent
(in such capacity, the "Beneficiary" or the "Agent") under the Collateral Agent
----------- -----
Agreement, dated as of November 4, 1997 (as amended, supplemented, or otherwise
modified from time to time, the "Collateral Agent Agreement"), among the
--------------------------
Grantor, the Beneficiary and the financial institutions from time to time
parties thereto.
Preliminary Statement
---------------------
A. Grantor has entered into that certain Amended and Restated Credit
Agreement dated as of November 4, 1997 (as the same may be further amended,
supplemented or otherwise modified from time to time, the "Credit Agreement")
----------------
with the several lenders from time to time parties thereto (the "Lenders") and
-------
Beneficiary.
B. Grantor is the owner of the parcel(s) of real property described
on Schedule A attached (such real property, together with all of the buildings,
improvements, structures and fixtures now or subsequently located thereon (the
"Improvements"), being collectively referred to as the "Real Estate").
------------ -----------
C. Pursuant to the terms and conditions of the Credit Agreement, the
Beneficiary has agreed to make loans to the Grantor, in an aggregate principal
amount not to exceed $97,000,000 (the "Loans"). Pursuant to the terms and
-----
conditions of that certain Amended and Restated Guarantee dated as of the date
hereof, Paragon Health Network, Inc. ("Paragon"), as the successor-in-interest
-------
to Living Centers of America, Inc. and certain of Paragon's subsidiaries, have
agreed to amend and restate its obligations under that certain Guarantee dated
as of October 10, 1996 and guarantee the obligations of Grantor under the Credit
Agreement.
D. Paragon has entered into that certain Credit Agreement dated as of
November 4, 1997 (as the same may be amended, supplemented or otherwise modified
from time to time, the "Corporate Credit Agreement") with the several lenders
--------------------------
from time to time parties thereto (the "Corporate Lenders") and The Chase
-----------------
Manhattan Bank, as Administrative Agent (in such capacity, "Administrative
--------------
Agent").
- -----
E. Pursuant to the terms and conditions of the Corporate Credit
Agreement, the Corporate Lenders have agreed to make loans to Paragon in an
aggregate principal amount not to exceed $890,000,000 (the "Corporate Loans").
---------------
F. The obligations of (i) the Lenders to make the Loans are
conditioned upon, among other things, that the obligations of Grantor under the
Credit Agreement be secured by a mortgage lien upon the Trust Property and (ii)
the Corporate Lenders to make the Corporate Loans are conditioned upon, among
other things, that the obligations of Paragon under the
<PAGE>
2
Corporate Credit Agreement be secured by a mortgage lien upon the Trust
Property.
G. In order to induce (i) the Lenders to make the Loans and (ii) the
Corporate Lenders to make the Corporate Loans, Grantor desires to grant
Beneficiary a lien upon the Trust Property upon the terms and conditions
hereinafter set forth.
H. Capitalized terms used but not otherwise defined in this Mortgage
shall have the meanings assigned to them in Annex A attached to the Amended and
Restated Participation Agreement dated as of November 4, 1997 among Living
Centers Holding Company, Grantor, Agent, certain co-agents and the Lenders. The
rules of usage and documentary conventions set forth in such Annex are also
applicable hereto.
Granting Clauses
----------------
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Grantor agrees that to secure:
(a) (i) the repayment by Grantor of all obligations, liabilities and
indebtedness of Grantor, whether direct or indirect, absolute or
contingent, due or to become due, or now existing or hereafter incurred,
under, arising out of or in connection with the Credit Agreement, the Notes
or the other Operative Agreements, together with all interest and fees
payable thereon (collectively, the "Grantor Indebtedness") and (ii) the
--------------------
payment of all obligations, liabilities and indebtedness of Paragon,
whether direct or indirect, absolute or contingent, due or to become due,
or now existing or hereafter incurred, under, arising out of or in
connection with the Corporate Credit Agreement and the other Loan
Documents, together with all interest and fees payable thereon
(collectively, the "Paragon Indebtedness"; together with the Grantor
--------------------
Indebtedness, the "Indebtedness"); and
------------
(b) (i) the performance and observance of all covenants, agreements,
obligations and liabilities of Grantor (the "Grantor Obligations") under or
-------------------
pursuant to the provisions of the Operative Agreements and any amendments,
supplements, extensions, renewals, restatements, replacements or
modifications of any of the foregoing and (ii) the performance and
observance of all covenants, agreements, obligations and liabilities of
Paragon under the Loan Documents and any amendments, supplements,
extensions, renewals, restatements, replacements or modifications of any of
the foregoing (the "Paragon Obligations"; together with the Grantor
-------------------
Obligations, the "Obligations") (the Operative Agreements and the Loan
-----------
Documents and all other documents and instruments from time to time
evidencing, securing or guaranteeing the payment of the Indebtedness or the
performance of the Obligations, as any of the same may be amended,
supplemented, extended, renewed, restated, replaced or modified from time
to time, are collectively referred to as the "Credit Documents");
----------------
GRANTOR HEREBY IRREVOCABLY GRANTS, TRANSFERS AND ASSIGNS TO TRUSTEE, IN TRUST,
WITH POWER OF SALE, AND RIGHT OF ENTRY AND INSPECTION, THE FOLLOWING:
(A) all right, title and interest of Grantor, whether now owned or
hereafter
<PAGE>
3
acquired, in and to the parcels of real property described on Schedule A
(together with the Land, the Improvements, the Appurtenant Rights and the
Fixtures relating thereto being collectively referred to herein as the
"Property")
--------
(B) all the estate, right, title, claim or demand whatsoever of the
Grantor, in possession or expectancy, in and to the Property or any part
thereof;
(C) all right, title and interest of Grantor, whether now owned or
hereafter acquired, in and to the Equipment;
(D) all right, title and interest of Grantor, whether now owned or
hereafter acquired, in and to all substitutes and replacements of, and all
additions and improvements to, the Property and the Equipment, subsequently
acquired by or released to Grantor or constructed, assembled or placed by
Grantor on the Property, immediately upon such acquisition, release,
construction, assembling or placement, including, without limitation, any
and all building materials whether stored at the Property or offsite, and,
in each such case, without any further mortgage, conveyance, assignment or
other act by Grantor;
(E) all right, title and interest of Grantor, whether now owned or
hereafter acquired, in, to and under all leases, subleases, underlettings,
concession agreements, management agreements, licenses and other agreements
relating to the use or occupancy of the Property or the Equipment or any
part thereof, now existing or subsequently entered into by Grantor and
whether written or oral and all guarantees of any of the foregoing
(collectively, as any of the foregoing may be amended, restated, extended,
renewed or modified from time to time, the "Leases"), and all rights of
------
Grantor in respect of cash and securities deposited thereunder and the
right to receive and collect the revenues, income, rents, issues and
profits thereof, together with all other rents, royalties, issues, profits,
revenue, income and other benefits arising from the use and enjoyment of
the Trust Property (as defined below) (collectively, the "Rents");
-----
(F) all right, title and interest of Grantor in and to all unearned
premiums under insurance policies now or subsequently obtained by Grantor
relating to the Property or Equipment and Grantor's interest in and to all
proceeds of any such insurance policies (including title insurance
policies) including the right to collect and receive such proceeds; and all
awards and other compensation, including the interest payable thereon and
the right to collect and receive the same, made to the present or any
subsequent owner of the Property or Equipment for the taking by eminent
domain, condemnation or otherwise, of all or any part of the Property or
any easement or other right therein;
(G) all right, title and interest of Grantor in and to (i) all
contracts from time to time executed by Grantor or any manager or agent on
its behalf relating to the ownership, construction, maintenance, repair,
operation, occupancy, sale or financing of the Property or Equipment or any
part thereof and all agreements relating to the purchase or lease of any
portion of the Property or any property which is adjacent or peripheral to
the Property, together with the right to exercise such options and all
leases of Equipment, (ii) all consents, licenses, building permits,
certificates of occupancy and other governmental approvals relating to
construction, completion, occupancy, use or operation of the Property or
any part thereof and (iii) all drawings, plans, specifications and similar
or
<PAGE>
4
related items relating to the Property;
(H) all right, title and interest of Grantor in and to any and all
monies now or subsequently on deposit for the payment of real estate taxes
or special assessments against the Property or for the payment of premiums
on insurance policies covering the foregoing property or otherwise on
deposit with or held by Beneficiary as provided in this Deed of Trust; all
capital, operating, reserve or similar accounts held by or on behalf of
Grantor and related to the operation of the Trust Property, whether now
existing or hereafter arising and all monies held in any of the foregoing
accounts and any certificates or instruments related to or evidencing such
accounts; and
(I) all amendments, modifications, substitutions, replacements and
additions of any of the foregoing, and all proceeds, both cash and noncash,
of any of the foregoing;
(All of the foregoing property and rights and interests now owned or
held or subsequently acquired by Grantor and described in the foregoing clauses
(A) through (I) are collectively referred to as the "Trust Property"); PROVIDED
--------------
THAT EXCLUDED from the Trust Property at all times and in all respects shall be
all Excepted Rights and the Trust Property shall be subject at all times and in
all respects to all Shared Rights.
TO HAVE AND TO HOLD the Trust Property and the rights and privileges
hereby granted unto Trustee, its successors and assigns for the uses and
purposes set forth, until the Indebtedness is fully paid and the Obligations
fully performed, subject however to the matters listed on Schedule B hereto (the
"Permitted Encumbrances and Liens").
[PROVIDED, HOWEVER, that this Deed of Trust secures a principal amount
of the Obligations not to exceed $______________ (the "Maximum Secured Amount");
----------------------
and
PROVIDED FURTHER, that payments made on account of the Indebtedness or
any portion thereof, whether in due course, as prepayments or otherwise, shall
not reduce the Maximum Secured Amount, unless the aggregate principal amount of
the Indebtedness is less than the Maximum Secured Amount.]/2/
-
Terms and Conditions
--------------------
Grantor further represents, warrants, covenants and agrees with
Trustee and Beneficiary as follows:
1. Payment of Indebtedness. Grantor shall pay the Indebtedness at
-----------------------
the times and places and in the manner specified in the Notes and the Credit
Agreement and shall perform all the Obligations.
2. Other Covenants. At any time and from time to time, upon the
---------------
written request of the Beneficiary, and at the sole expense of the Grantor, the
Grantor will promptly and duly
___________________
/2/ This provision should be added in appropriate jurisdictions.
-
<PAGE>
5
execute and deliver such further instruments and documents and take such further
actions as the Beneficiary reasonably may request for the purposes of obtaining
or preserving the full benefits of this Deed of Trust and of the rights and
powers granted by this Deed of Trust.
3. Further Assurances. To further assure Beneficiary's and Trustee's
------------------
rights under this Deed of Trust, Grantor agrees upon demand of Beneficiary or
Trustee to do any act or execute any additional documents (including, but not
limited to, security agreements on any personalty included or to be included in
the Trust Property) as may be reasonably required by Beneficiary or Trustee to
confirm the rights or benefits conferred on Beneficiary or Trustee by this Deed
of Trust.
4. Beneficiary's Right to Perform. If the Grantor fails to perform
------------------------------
or comply with any of its agreements contained in this Deed of Trust, the
Beneficiary, at its option, but without any obligation so to do, may perform or
comply, or otherwise cause performance or compliance, with such agreement. The
expenses of the Beneficiary incurred in connection with actions undertaken as
provided in this Section, together with interest thereon at a rate per annum
equal to the Overdue Rate, from the date of payment by the Beneficiary to the
date reimbursed by the Grantor, shall be payable by the Grantor to the
Beneficiary on demand; provided, however, that the Grantor shall not be liable
-------- -------
for payment of any amount under this Section to the extent the Lessee is
responsible for payment of such amount under the Lease, the Participation
Agreement or any other Operative Agreement.
5. Grantor's Existence, etc. Grantor shall do all things necessary
-------------------------
to preserve and keep in full force and effect its existence, franchises, rights
and privileges under the laws of the state of [ ] and its right to own
property and transact business in the state of [ ]. This Deed of
Trust constitutes the legal, valid and binding obligation of Grantor,
enforceable against Grantor in accordance with its terms, except as
enforceability may be limited by principles of equity and applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally.
6. Events of Default. It shall be an event of default under this
-----------------
Deed of Trust (an "Event of Default") if an Event of Default shall occur under
----------------
any of the Credit Documents.
7. Remedies./3/ Upon the occurrence of any Event of Default, in
-------- -
addition to any other rights and remedies Beneficiary may have pursuant to the
Credit Documents, or as provided by law, and without limitation, (a) if such
event triggers an Acceleration under Section 6.1(h) or 6.1(i) of the Credit
Agreement, automatically the Indebtedness and all other amounts owing under the
Notes, this Deed of Trust and the other Security Documents immediately shall
become due and payable, and (b) if such event is any other Event of Default, by
notice to Grantor, Beneficiary may declare the Indebtedness (together with
accrued interest thereon) and all other amounts payable under the Note, this
Deed of Trust and the other Security Documents to be immediately due and
payable. Except as expressly provided in the Credit Documents presentment,
demand,
_____________________
/3/ Deed of Trust remedies are a matter of state law and vary from jurisdiction
-
to jurisdiction. Local counsel will be consulted to be sure that the Deed
of Trust covers all remedies available under local law, and that any
waivers or other provisions required by state statutes to ensure
enforceability of particular remedies are included in the Deed of Trust.
<PAGE>
6
protest and all other notices of any kind are hereby expressly waived. In
addition, upon the occurrence of any Event of Default, Beneficiary may
immediately take such action, without notice or demand, as it deems advisable to
protect and enforce its rights against Grantor and in and to the Trust Property,
including the following actions, each of which may be pursued concurrently or
otherwise, at such time and in such manner as Beneficiary may determine, in its
sole discretion, without impairing or otherwise affecting the other rights and
remedies of Beneficiary:
(a) Either in person or by agent, with or without bringing any
action or proceeding, or by a receiver appointed by a court and without regard
to the adequacy of its security, enter upon and take possession of the Trust
Property or any part thereof, with or without legal action, and do any acts
which it deems necessary or desirable to preserve the value, marketability or
rentability of the Trust Property, or any part thereof or the value of this Deed
of Trust (including entering into new leases of all or any part of the Trust
Property) and, with or without taking possession of the Trust Property, sue for
or otherwise collect the rents, issues and profits thereof, including those past
due and unpaid, and apply the same, less costs and expenses of operation and
collection including reasonable attorneys' fees, upon the Indebtedness, all in
such order as Beneficiary may determine. The entering upon and taking
possession of the Trust Property, the collection of such rents, issues and
profits and the application thereof as aforesaid, shall not cure or waive any
default or notice of default hereunder or invalidate any act done in response to
such default or pursuant to such notice of default and, notwithstanding the
continuance in possession of the Trust Property or the collection, receipt and
application of rents, issues or profits, Beneficiary shall be entitled to
exercise every right provided for in any of the Credit Documents or by law.
(b) Bring an action in any court of competent jurisdiction to
foreclose this Deed of Trust, to appoint a receiver or to enforce any of the
covenants, terms or conditions hereof and Beneficiary shall have the right to
specific performance, injunction and any other equitable right or remedy as
though other remedies were not provided in this Deed of Trust.
(c) Elect to cause the Trust Property or any part thereof to be sold
as follows, Grantor hereby expressly waiving any right which it may have to
direct the order in which any of the Trust Property may be sold:
(i) Beneficiary may proceed as if all of the Trust Property were real
property, in accordance with subparagraph (c) below, or Beneficiary may
elect to treat any of the Trust Property which consists of personal
property, in accordance with the Section of this Deed of Trust entitled
"Security Agreement under Uniform Commercial Code", separate and apart from
the sale of real property, the remainder of the Trust Property being
treated as real property;
(ii) Beneficiary may cause any such sale or other disposition to be
conducted immediately following the expiration of any grace period, if any,
herein provided or Beneficiary may delay any such sale or other disposition
for such period of time as Beneficiary deems to be in its best interest.
Should Beneficiary desire that more than one such sale or other disposition
be conducted, Beneficiary may, at its option, cause the same to be
conducted simultaneously, or successively on the same day, or at such
different days or times and in such order as Beneficiary may deem to be in
its best interest;
<PAGE>
7
(iii) Should Beneficiary elect to sell the Trust Property and
Beneficiary elects to proceed under the laws governing foreclosure of or
sales pursuant to deeds of trust, Beneficiary or Trustee shall give such
notice of default and election to sell as may then be required by law.
Thereafter, upon the expiration of such time and the giving of such notice
of sale as may then be required by law, Trustee, at the time and place
specified by the notice of sale, shall sell such Trust Property, or any
portion thereof specified by Beneficiary, at public auction to the highest
bidder for cash in lawful money of the United States, subject, however, to
the provisions of the Section of this Deed of Trust entitled "Right of
Beneficiary to Credit Sale". Trustee may, and upon request of Beneficiary
shall, from time to time, postpone the sale by public announcement thereof
at the time and place noticed therefor. If the Trust Property consists of
several lots or parcels, Beneficiary may elect to sell the Trust Property
either as a whole or in separate lots or parcels. If Beneficiary elects to
sell in separate lots or parcels, Beneficiary may designate the order in
which such lots or parcels shall be offered for sale or sold. Any person,
including Grantor, Trustee or Beneficiary, may purchase at the sale. Upon
any sale, Trustee shall execute and deliver to the purchaser or purchasers
a deed or deeds conveying the property so sold, but without any covenant or
warranty whatsoever, express or implied, whereupon such purchaser or
purchasers shall be let into immediate possession;
(iv) In the event of a sale or other disposition of any such
property, or any part thereof, and the execution of a deed or other
conveyance pursuant thereto, the recitals therein of facts, such as an
Event of Default, the giving of notice of default and notice of sale,
demand that such sale should be made, postponement of sale, terms of sale,
sale, purchase, payments of purchase money, and any other fact affecting
the regularity or validity of such sale or disposition shall be conclusive
proof of the truth of such facts; and any such deed or conveyance shall be
conclusive against all persons as to such facts recited therein;
(v) Beneficiary and/or Trustee shall apply the proceeds of any sale
or disposition hereunder in the order as provided in the Section of this
Deed of Trust entitled "Sale of the Properties; Application of Proceeds";
and
(d) Exercise all other rights and remedies provided herein, in
the other Credit Documents or otherwise available at law of equity.
7A. Application of Proceeds. The proceeds available from the
-----------------------
sale of the Trust Property or any part thereof shall be applied as follows:
(_)(a) first, to the payment of the costs and expenses of such sale,
including attorneys' fees, and to the payment of any protective advances
made by the Beneficiary, together with any interest due thereon, in all
cases including all amounts to be paid pursuant to clause First of Section
3.4 of the Collateral Agent Agreement;
(b) second, an amount up to the amount which, after payments due
under clause (a) above, does not exceed the aggregate outstanding principal
of and accrued interest on the Tranche B Loans shall be paid to the
Collateral Agent to be applied in accordance with the Collateral Agent
Agreement;
<PAGE>
8
(c) third, an amount equal to the proceeds of the sale available
after the payments due pursuant to the clauses (a) and (b) above, reduced
by an amount equal to the aggregate unpaid Lessor Contribution and accrued
Lessor Yield (which amount shall be retained by Grantor), shall be paid to
the Collateral Agent to be applied in accordance with the Collateral Agent
Agreement; and
(d) fourth, the balance, if any, shall be paid to whomever shall be
entitled thereto.
8. Sale of the Properties; Application of Proceeds. Subject to the
-----------------------------------------------
requirements of applicable law, the proceeds or avails of any foreclosure sale
and all moneys received by Beneficiary pursuant to any right given or action
taken under the provisions of this Deed of Trust shall be applied in accordance
with Section 8.2 of the Credit Agreement.
9. Successor Grantor. In the event ownership of the Trust Property
-----------------
or any portion thereof becomes vested in a person other than the Grantor herein
named, Beneficiary may, without notice to the Grantor herein named, whether or
not Beneficiary has given written consent to such change in ownership, deal with
such successor or successors in interest with reference to this Deed of Trust
and the Indebtedness and the Obligations, and in the same manner as with the
Grantor herein named, without in any way vitiating or discharging Grantor's
liability hereunder or under the Indebtedness and the Obligations.
10. Right of Beneficiary to Credit Sale. Upon the occurrence of any
-----------------------------------
sale made under this Deed of Trust, whether made under the power of sale or by
virtue of judicial proceedings or of a judgment or decree of foreclosure and
sale, Beneficiary may bid for and acquire the Trust Property or any part
thereof. In lieu of paying cash therefor, Beneficiary may make settlement for
the purchase price by crediting upon the Indebtedness or other sums secured by
this Deed of Trust the net sales price after deducting therefrom the expenses of
sale and the cost of the action and any other sums which Beneficiary is
authorized to deduct under this Deed of Trust. In such event, this Deed of
Trust, the Notes and documents evidencing expenditures secured hereby may be
presented to the person or persons conducting the sale in order that the amount
so used or applied may be credited upon the Indebtedness as having been paid.
11. Remedies Not Exclusive. Beneficiary and Trustee shall be
----------------------
entitled to enforce payment of the Indebtedness and performance of the
Obligations and to exercise all rights and powers under this Deed of Trust or
under any of the other Credit Documents or other agreement or any laws now or
hereafter in force, notwithstanding some or all of the Indebtedness and
Obligations may now or hereafter be otherwise secured, whether by deed of trust,
mortgage, security agreement, pledge, lien, assignment or otherwise. Neither
the acceptance of this Deed of Trust nor its enforcement, shall prejudice or in
any manner affect Beneficiary's or Trustee's right to realize upon or enforce
any other security now or hereafter held by Beneficiary or Trustee, it being
agreed that Beneficiary and Trustee shall be entitled to enforce this Deed of
Trust and any other security now or hereafter held by Beneficiary or Trustee in
such order and manner as Beneficiary may determine in its absolute discretion.
No remedy herein conferred upon or reserved to Trustee or Beneficiary is
intended to be exclusive of any other remedy herein or by law provided or
permitted, but each shall be cumulative and shall be in addition to every other
remedy given hereunder or now or hereafter existing at law or in equity or by
statute. Every power or remedy given by any of the Credit Documents to
Beneficiary or Trustee or to which either may otherwise be entitled, may be
exercised, concurrently or independently, from time to
<PAGE>
9
time and as often as may be deemed expedient by Beneficiary or Trustee, as the
case may be. In no event shall Beneficiary or Trustee, in the exercise of the
remedies provided in this Deed of Trust (including in connection with the
Assignment of Leases, or the appointment of a receiver and the entry of such
receiver on to all or any part of the Trust Property), be deemed a "mortgagee in
possession," and neither Beneficiary nor Trustee shall in any way be made liable
for any act, either of commission or omission, in connection with the exercise
of such remedies except for its gross negligence or willful misconduct.
12. Duty of the Beneficiary. The Beneficiary's sole duty with
-----------------------
respect to the custody, safekeeping and physical preservation of any Trust
Property in its possession, under Section 9-207 of the Uniform Commercial Code
or otherwise, shall be to deal with it in the same manner as the Beneficiary
deals with similar property for its own account. Neither the Beneficiary, any
Lender nor any of their respective directors, officers, employees or agents
shall be liable for failure to demand, collect or realize upon any of the Trust
Property or for any delay in doing so or shall be under any obligation to sell
or otherwise dispose of any Trust Property upon the request of the Grantor or
any other Person or to take any other action whatsoever with regard to the Trust
Property or any part thereof.
13. Powers Coupled with an Interest. All powers, authorizations and
-------------------------------
agencies contained in this Deed of Trust are coupled with an interest and are
irrevocable until this Deed of Trust is terminated and the lien created hereby
is released.
14. Execution of Financing Statements. To the extent permitted by
---------------------------------
applicable law, pursuant to Section 9-402 of the Uniform Commercial Code, the
Grantor authorizes the Beneficiary to file financing statements with respect to
the Trust Property without the signature of the Grantor in such form and in such
filing offices as the Beneficiary reasonably determines appropriate to perfect
the security interests of the Beneficiary under this Deed of Trust. To the
extent permitted by applicable law, a carbon, photographic or other reproduction
of this Deed of Trust shall be sufficient as a financing statement for filing in
any jurisdiction.
15. Trustee's Powers and Liabilities.
--------------------------------
(a) Powers of Trustee. At any time or from time to time, without
-----------------
liability therefor and without notice, upon the written request of Beneficiary
and presentation of the Notes and this Deed of Trust for endorsement, without
affecting the personal liability of any person for the payment of the
indebtedness secured hereby, and without affecting the lien of this Deed of
Trust upon the Trust Property for the full amount of all amounts secured hereby,
Trustee may (i) reconvey all or any part of the Trust Property, (ii) consent to
the making of any map or plat thereof, (iii) join in granting any easement
thereon or in creating any covenants or conditions restricting use or occupancy
thereof, or (iv) join in any extension agreement or in any agreement
subordinating the lien or charge hereof.
(b) Reconveyance. Upon written request of Beneficiary stating that
------------
all sums secured hereby have been paid, and upon surrender of this Deed of Trust
and the Notes to Trustee for cancellation and retention, and upon payment of its
fees, Trustee shall reconvey, without warranty, the property then held
hereunder. The recitals in any such reconveyance of any matters or facts shall
be conclusive proof of the truth thereof. The grantee in such reconveyance may
be described as "the person or persons legally entitled thereto."
<PAGE>
10
(c) Trustee Notice. Trustee is not obligated to notify any party
--------------
hereto of any pending sale under any other deed of trust or of any action or
proceeding in which Grantor, Beneficiary or Trustee shall be a party, unless
brought by Trustee.
(d) Compensation and Indemnification of Trustee. Trustee shall be
-------------------------------------------
entitled to reasonable compensation for all services rendered or expenses
incurred in the administration or execution of the trusts hereby created and
Grantor hereby agrees to pay the same. Except to the extent caused by Trustee's
gross negligence or willful misconduct, Trustee shall be indemnified, held
harmless and reimbursed by Grantor for any liability, damage or expense,
including reasonable attorneys' fees and amounts paid in settlement, which
Trustee may incur or sustain in connection with this Deed of Trust or in the
doing of any act which Trustee is required or permitted to do by the terms
hereof or by law.
(e) Substitute Trustees. Beneficiary may from time to time
-------------------
substitute the Trustee hereunder in any manner now or hereafter provided by law,
or in lieu thereof, Beneficiary may from time to time, by an instrument in
writing, substitute a successor or successors to any Trustee named herein or
acting hereunder, which instrument, executed and acknowledged by Beneficiary and
recorded in the office of the recorder of the county or counties where the Trust
Property is situated, shall be conclusive proof of proper substitution of such
successor Trustee or Trustees, who shall thereupon, and without conveyance from
the predecessor Trustee, succeed to all its title, estate, rights, powers and
duties.
(f) Acceptance by Trustee. The acceptance by Trustee of this trust
---------------------
shall be evidenced when this Deed of Trust, duly executed and acknowledged, is
made a public record as provided by law.
(g) Trust Irrevocable; No Offset. The trust created hereby is
----------------------------
irrevocable by Grantor. No offset or claim that Grantor now or may in the
future have against Beneficiary shall relieve Grantor from paying the
Indebtedness or performing the Obligations.
(h) Corrections. Grantor will, upon request of Beneficiary or
-----------
Trustee, promptly correct any defect, error or omission which may be discovered
in the contents of this Deed of Trust or in the execution or acknowledgement
hereof, and will execute, acknowledge and deliver such further instruments and
do such further acts as may be necessary or as may be reasonably requested by
Beneficiary or Trustee to carry out more effectively the purposes of this Deed
of Trust, to subject to the lien and security interests hereby created any of
Grantor's properties, rights or interest covered or intended to be covered
hereby, and to perfect and maintain such lien and security interest.
16. Appointment of Receiver. If an Event of Default shall have
-----------------------
occurred and be continuing, Beneficiary as a matter of right and without notice
to Grantor, unless otherwise required by applicable law, and without regard to
the adequacy or inadequacy of the Trust Property or any other collateral as
security for the Indebtedness and Obligations or the interest of Grantor
therein, shall have the right to apply to any court having jurisdiction to
appoint a receiver or receivers or other manager of the Trust Property, without
requiring the posting of a surety bond and without reference to the adequacy or
inadequacy of the value of the Trust Property or the solvency or insolvency of
Grantor or any other party obligated for payment of all or any part
<PAGE>
11
of the Indebtedness, and whether or not waste has occurred with respect to the
Trust Property. Grantor hereby irrevocably consents to such appointment and
waives notice of any application therefor (except as may be required by law).
Any such receiver or receivers shall have all the usual powers and duties of
receivers in like or similar cases and all the powers and duties of Beneficiary
in case of entry as provided in this Deed of Trust, including, without
limitation and to the extent permitted by law, the right to enter into leases of
all or any part of the Trust Property, and shall continue as such and exercise
all such powers until the date of confirmation of sale of the Trust Property
unless such receivership is sooner terminated.
17. Extension, Release, etc. (a) Without affecting the encumbrance
------------------------
or charge of this Deed of Trust upon any portion of the Trust Property not then
or theretofore released as security for the full amount of the Indebtedness,
Beneficiary may, from time to time and without notice, agree to (i) release any
person liable for the Indebtedness, (ii) extend the maturity or alter any of the
terms of the Indebtedness or any guaranty thereof, (iii) grant other
indulgences, (iv) release or reconvey, or cause to be released or reconveyed at
any time at Beneficiary's option any parcel, portion or all of the Trust
Property, (v) take or release any other or additional security for any
obligation herein mentioned, or (vi) make compositions or other arrangements
with debtors in relation thereto. If at any time this Deed of Trust shall
secure less than all of the principal amount of the Indebtedness, it is
expressly agreed that any repayments of the principal amount of the Indebtedness
shall not reduce the amount of the encumbrance of this Deed of Trust until the
encumbrance amount shall equal the principal amount of the Indebtedness
outstanding.
(b) No recovery of any judgment by Beneficiary and no levy of an
execution under any judgment upon the Trust Property or upon any other property
of Grantor shall affect the encumbrance of this Deed of Trust or any liens,
rights, powers or remedies of Beneficiary or Trustee hereunder, and such liens,
rights, powers and remedies shall continue unimpaired.
(c) If Beneficiary shall have the right to foreclose this Deed of
Trust or to direct the Trustee to exercise its power of sale, Grantor authorizes
Beneficiary at its option to foreclose the lien of this Deed of Trust (or direct
the Trustee to sell the Trust Property, as the case may be) subject to the
rights of any tenants of the Trust Property. The failure to make any such
tenants parties defendant to any such foreclosure proceeding and to foreclose
their rights, or to provide notice to such tenants as required in any statutory
procedure governing a sale of the Trust Property by Trustee, or to terminate
such tenant's rights in such sale, will not be asserted by Grantor as a defense
to any proceeding instituted by Beneficiary to collect the Indebtedness or to
foreclose this Deed of Trust.
(d) Unless expressly provided otherwise, in the event that
Beneficiary's interest in this Deed of Trust and title to the Trust Property or
any estate therein shall become vested in the same person or entity, this Deed
of Trust shall not merge in such title but shall continue as a valid charge on
the Trust Property for the amount secured hereby.
18. Security Agreement under Uniform Commercial Code. (a) It is the
------------------------------------------------
intention of the parties hereto that this Deed of Trust shall constitute a
Security A greement within the meaning of the Uniform Commercial Code (the
"UCC") of the State in which the Trust Property is located. If an Event of
Default shall occur under this Deed of Trust, then in addition to having any
other right or remedy available at law or in equity, Beneficiary shall have the
option of either (i) proceeding under the UCC and exercising such rights and
remedies as may be provided to a
<PAGE>
12
secured party by the UCC with respect to all or any portion of the Trust
Property which is personal property (including, without limitation, taking
possession of and selling such property) or (ii) treating such property as real
property and proceeding with respect to both the real and personal property
constituting the Trust Property in accordance with Beneficiary's rights, powers
and remedies with respect to the real property (in which event the default
provisions of the UCC shall not apply). If Beneficiary shall elect to proceed
under the UCC, then ten Business Days' notice of sale of the personal property
shall be deemed reasonable notice and the reasonable expenses of retaking,
holding, preparing for sale, selling and the like incurred by Beneficiary shall
include, but not be limited to, attorneys' fees and legal expenses. At
Beneficiary's request, Grantor shall assemble the personal property and make it
available to Beneficiary at a place designated by Beneficiary which is
reasonably convenient to both parties.
(b) Grantor and Beneficiary agree, to the extent permitted by law,
that: (i) all of the goods described within the definition of the word
"Equipment" are or are to become fixtures on the Property; (ii) this Deed of
Trust upon recording or registration in the real estate records of the proper
office shall constitute a financing statement filed as a "fixture filing" within
the meaning of Sections 9-313 and 9-402 of the UCC; (iii) Grantor is the record
owner of the Property; and (iv) the addresses of Grantor and Beneficiary are as
set forth in Section 17 of this Deed of Trust.
(c) Grantor, upon request by Beneficiary from time to time, shall
execute, acknowledge and deliver to Beneficiary one or more separate security
agreements, in form reasonably satisfactory to Beneficiary and consistent with
the Credit Documents, covering all or any part of the Trust Property and will
further execute, acknowledge and deliver, or cause to be executed, acknowledged
and delivered, any financing statement, affidavit, continuation statement or
certificate or other document as Beneficiary may reasonably request in order to
perfect, preserve, maintain, continue or extend the security interest under and
the priority of this Deed of Trust and such security instrument. Grantor
further agrees to pay to Beneficiary on demand all reasonable costs and expenses
incurred by Beneficiary in connection with the preparation, execution,
recording, filing and re-filing of any such document and all reasonable costs
and expenses of any record searches for financing statements Beneficiary shall
reasonably require; provided, however, that the Grantor shall not be liable for
-------- -------
payment of any amount under this Section to the extent that (i) the Lessee is
responsible for payment of such amount under the Lease, the Participation
Agreement or any other Credit Document or (ii) the Lessee has not paid such
amount to Lessor. If Grantor shall fail to furnish any financing or
continuation statement within ten days after request by Beneficiary, then
pursuant to the provisions of the UCC, Grantor hereby authorizes Beneficiary,
without the signature of Grantor, to execute and file any such financing and
continuation statements. The filing of any financing or continuation statements
in the records relating to personal property or chattels shall not be construed
as in any way impairing the right of Beneficiary to proceed against any personal
property encumbered by this Deed of Trust as real property, as set forth above.
19. Additional Rights. The holder of any subordinate lien or
-----------------
subordinate deed of trust on the Trust Property shall have no right to terminate
any lease affecting the Property whether or not such lease is subordinate to
this Deed of Trust nor shall any holder of any subordinate lien or subordinate
deed of trust join any tenant under any lease in any trustee's sale or action to
foreclose the lien or modify, interfere with, disturb or terminate the rights of
any tenant under any lease. By recordation of this Deed of Trust all subordinate
lienholders and the trustees and beneficiaries under subordinate deeds of trust
are subject to and notified of this
<PAGE>
13
provision, and any action taken by any such lienholder or trustee or beneficiary
contrary to this provision shall be null and void. Upon the occurrence of any
Event of Default, Beneficiary may, in its sole discretion and without regard to
the adequacy of its security under this Deed of Trust, apply all or any part of
any amounts on deposit with Beneficiary under this Deed of Trust against all or
any part of the Indebtedness. Any such application shall not be construed to
cure or waive any Default or Event of Default or invalidate any act taken by
Beneficiary on account of such Default or Event of Default.
20. Authority of Beneficiary. The Grantor acknowledges that the
------------------------
rights and responsibilities of the Beneficiary under this Deed of Trust with
respect to any action taken by the Beneficiary or the exercise or non-exercise
by the Beneficiary of any option, voting right, request, judgment or other right
or remedy provided for herein or resulting or arising out of this Deed of Trust
shall, as between the Beneficiary and the Lenders, be governed by the Credit
Agreement and the Collateral Agent Agreement and by such other agreements with
respect thereto as may exist from time to time among them, but, as between the
Beneficiary and the Grantor, the Beneficiary shall be conclusively presumed to
be acting as agent for the Lenders with full and valid authority so to act or
refrain from acting, and the Grantor shall be under no obligation, or
entitlement, to make any inquiry respecting such authority.
21. Notices. Unless otherwise specifically provided herein, all
-------
notices, consents, directions, approvals, instructions, requests and other
communications required or permitted by the terms hereof to be given to any
Person shall be given in writing by United States mail, by nationally recognized
courier service or by hand and any such notice shall become effective five
Business Days after being deposited in the mails, certified or registered with
appropriate postage prepaid or one Business Day after delivery to a nationally
recognized courier service specifying overnight delivery or, if delivered by
hand, when received, and shall be directed to the address of such Person as
indicated:
<PAGE>
14
If to the Grantor, to it at:
FBTC Leasing Corp.
Two World Trade Center
New York, New York 10048
Attn: Mr. Carl Marcantonio
If to the Beneficiary, to it at:
The Chase Manhattan Bank
Agent Lender Services
One Chase Manhattan Plaza, 8th Floor
New York, New York 10081
Attn: Janet Belden
with a copy to:
The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017
Attn: Dawn Lee Lum
If to the Trustee, to it at:
[ ]
_________________________
_________________________
Attn: ________________
From time to time any party may designate a new address for purposes of notice
hereunder by notice to each of the other parties hereto.
22. Partial Invalidity. In the event any one or more of the
------------------
provisions contained in this Deed of Trust shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, but each shall be
construed as if such invalid, illegal or unenforceable provision had never been
included.
23. No Waiver; Cumulative Remedies. (a) No failure to exercise, nor
------------------------------
any delay in exercising, on the part of the Beneficiary or any Lender, any
right, power or privilege hereunder shall operate as a waiver thereof. No
single or partial exercise of any right, power or privilege hereunder shall
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by the Beneficiary of any right or remedy
hereunder on any one occasion shall not be construed as a bar to any right or
remedy which the Beneficiary would otherwise have on any future occasion.
Beneficiary may release, regardless of consideration and without the necessity
for any notice to or consent by
the beneficiary of any subordinate deed of trust or the holder of any
subordinate lien on the Trust Property, any part of the security held for the
obligations secured by this Deed of Trust without, as to the remainder of the
security, in
<PAGE>
15
anyway impairing or affecting this Deed of Trust or the priority of this Deed of
Trust over any subordinate lien or deed of trust.
(b) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
24. No Oral Modification. This Deed of Trust may not be changed or
--------------------
terminated orally. Any agreement made by Grantor and Beneficiary after the date
of this Deed of Trust relating to this Deed of Trust shall be superior to the
rights of the holder of any intervening or subordinate deed of trust, lien or
encumbrance. Trustee's execution of any written agreement between Grantor and
Beneficiary shall not be required for the effectiveness thereof as between
Grantor and Beneficiary.
25. Section Headings. The section headings used in this Deed of
----------------
Trust are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
26. Successors and Assigns. All covenants of Grantor contained in
----------------------
this Deed of Trust are imposed solely and exclusively for the benefit of
Beneficiary, the Lenders and Trustee and their respective permitted successors
and assigns, and no other person or entity shall have standing to require
compliance with such covenants or be deemed, under any circumstances, to be a
beneficiary of such covenants, any or all of which may be freely waived in whole
or in part by Beneficiary or Trustee at any time if in the sole discretion of
either of them such waiver is deemed advisable. All such covenants of Grantor
shall run with the land and bind Grantor, the permitted successors and assigns
of Grantor (and each of them) and all subsequent owners, encumbrances and
tenants of the Trust Property, and shall inure to the benefit of Beneficiary,
Trustee and their respective permitted successors and assigns. Without limiting
the generality of the foregoing, any successor to Trustee appointed by
Beneficiary shall succeed to all rights of Trustee as if such successor had been
originally named as Trustee hereunder. The word "Grantor" shall be construed as
if it read "Grantors" whenever the sense of this Deed of Trust so requires and
if there shall be more than one Grantor, the obligations of the Grantors shall
be joint and several.
27. Grantor's Waiver of Rights. Except as otherwise set forth
--------------------------
herein, to the fullest extent permitted by law, Grantor waives the benefit of
all laws now existing or that may subsequently be enacted providing for (i) any
appraisement before sale of any portion of the Trust Property, (ii) any
extension of the time for the enforcement of the collection of the indebtedness
or the creation or extension of a period of redemption from any sale made in
collecting such debt and (iii) exemption of the Trust Property from attachment,
levy or sale under execution or exemption from civil process. Except as
otherwise set forth herein, to the full extent Grantor may do so, Grantor agrees
that Grantor will not at any time insist upon, plead, claim or take the benefit
or advantage of any law now or hereafter in force providing for any
appraisement, valuation, stay, exemption, extension or redemption, or requiring
foreclosure of this Deed of Trust before exercising any other remedy granted
hereunder and Grantor, for Grantor and its successors and assigns, and for any
and all Persons ever claiming any interest in the Trust Property, to the extent
permitted by law, hereby waives and releases all rights of redemption,
valuation, appraisement, stay of execution, notice of election to mature or
declare due the whole of the secured indebtedness and marshalling in the event
of exercise by Trustee or Beneficiary of the power of sale or other rights
hereby created.
<PAGE>
16
28. Multiple Security. If (a) the Land shall consist of one or more
-----------------
parcels, whether or not contiguous and whether or not located in the same
county, or (b) in addition to this Deed of Trust, Beneficiary shall now or
hereafter hold or be the beneficiary of one or more additional deeds of trust,
mortgages, liens or other security (directly or indirectly) for the Indebtedness
upon other property in the State in which the Land is located (whether or not
such property is owned by Grantor or by others) or (c) both the circumstances
described in clauses (a) and (b) shall be true, then to the fullest extent
permitted by law, Beneficiary may, at its election, commence or consolidate in a
single trustee's sale or foreclosure action all trustee's sale or foreclosure
proceedings against all such collateral securing the Indebtedness (including the
Trust Property), which action may be brought or consolidated in the courts of,
or sale conducted in, any county in which any of such collateral is located.
Grantor acknowledges that the right to maintain a consolidated trustee's sale or
foreclosure action is a specific inducement to Beneficiary to extend the
Indebtedness, and Grantor expressly and irrevocably waives any objections to the
commencement or consolidation of the foreclosure proceedings in a single action
and any objections to the laying of venue or based on the grounds of forum non
----- ---
conveniens which it may now or hereafter have. Grantor further agrees that if
- ----------
Trustee or Beneficiary shall be prosecuting one or more foreclosure or other
proceedings against a portion of the Trust Property or against any collateral
other than the Trust Property, which collateral directly or indirectly secures
the Indebtedness, or if Beneficiary shall have obtained a judgment of
foreclosure and sale or similar judgment against such collateral (or, in the
case of a trustee's sale, shall have met the statutory requirements therefor
with respect to such collateral), then, whether or not such proceedings are
being maintained or judgments were obtained in or outside the State in which the
Land is located, Beneficiary may commence or continue any trustee's sale or
foreclosure proceedings and exercise its other remedies granted in this Deed of
Trust against all or any part of the Trust Property and Grantor waives any
objections to the commencement or continuation of a foreclosure of this Deed of
Trust or exercise of any other remedies hereunder based on such other
proceedings or judgments, and waives any right to seek to dismiss, stay, remove,
transfer or consolidate either any action under this Deed of Trust or such other
proceedings on such basis. The commencement or continuation of proceedings to
sell the Trust Property in a trustee's sale, to foreclose this Deed of Trust or
the exercise of any other rights hereunder or the recovery of any judgment by
Beneficiary or the occurrence of any sale by the Trustee in any such proceedings
shall not prejudice, limit or preclude Beneficiary's right to commence or
continue one or more trustee's sales, foreclosure or other proceedings or obtain
a judgment against (or, in the case of a trustee's sale, to meet the statutory
requirements for, any such sale of) any other collateral (either in or outside
the State in which the Land is located) which directly or indirectly secures the
Indebtedness, and Grantor expressly waives any objections to the commencement
of, continuation of, or entry of a judgment in such other sales or proceedings
or exercise of any remedies in such sales or proceedings based upon any action
or judgment connected to this Deed of Trust, and Grantor also waives any right
to seek to dismiss, stay, remove, transfer or consolidate either such other
sales or proceedings or any sale or action under this Deed of Trust on such
basis. It is expressly understood and agreed that to the fullest extent
permitted by law, Beneficiary may, at its election, cause the sale of all
collateral which is the subject of a single trustee's sale or foreclosure action
at either a single sale or at multiple sales conducted simultaneously and take
such other measures as are appropriate in order to effect the agreement of the
parties to dispose of and administer all collateral securing the Indebtedness
(directly or indirectly) in the most economical and least time-consuming manner.
<PAGE>
17
29. Governing Law, etc. This Deed of Trust shall be governed
------------------
by and construed in accordance with the laws of the State where the Trust
Property is located, except that Grantor expressly acknowledges that by its
terms the Notes, the Credit Agreement and the Participation Agreement shall be
governed and construed in accordance with the laws of the State of New York,
without regard to principles of conflict of law, and for purposes of
consistency, Grantor agrees that in any in personam proceeding related to this
-- --------
Deed of Trust the rights of the parties to this Deed of Trust shall also be
governed by and construed in accordance with the laws of the State of New York
governing contracts made and to be performed in that State, without regard to
principles of conflict of law.
30. Obligations Are Without Recourse. Except as otherwise expressly
--------------------------------
provided in any Credit Document or the Participation Agreement, neither the
Grantor nor any of the Grantor's successors or assigns (all such Persons being
hereinafter referred to collectively as the "Exculpated Persons"), shall be
------------------
personally liable in any respect for any liability or obligation hereunder or
under any other Credit Document including the payment of the principal of, or
interest on, the Notes, or for monetary damages for the breach of performance of
any of the covenants contained in the Credit Agreement, the Notes, this Deed of
Trust or any of the other Credit Documents. The Lenders, the Trustee and the
Beneficiary agree that, in the event any of them pursues any remedies available
to them under the Credit Agreement, the Notes, this Deed of Trust or under any
other Credit Document, neither the Lenders, the Trustee nor the Beneficiary
shall have any recourse against the Grantor, nor any other Exculpated Person,
for any deficiency, loss or claim for monetary damages or otherwise resulting
therefrom and recourse shall be had solely and exclusively only against the
Trust Property; but nothing contained herein shall be taken to prevent recourse
against or the enforcement of remedies against the Trust Property or the
Guarantee in respect of any and all liabilities, obligations and undertakings
contained in the Credit Agreement, the Notes or any other Credit Document. The
Lenders, the Trustee and the Beneficiary further agree that the Grantor shall
not be responsible for the payment of any amounts owing hereunder (excluding
principal and interest (other than Overdue Interest) in respect of the Loans)
(such non-excluded amounts, "Supplemental Amounts") except to the extent that
--------------------
payments of Supplemental Rent applicable to such Supplemental Amounts have been
made by the Lessee for application to such Supplemental Amounts (it being
understood that the failure by the Lessee for any reason to pay any Supplemental
Rent in respect of such Supplemental Amounts shall nevertheless be deemed to
constitute a default by the Grantor for the purposes of Section 6(a)(ii) of the
Credit Agreement). Notwithstanding the foregoing provisions of this Section,
nothing in this Deed of Trust or any other Credit Document shall (a) constitute
a waiver, release or discharge of any obligation evidenced or secured by this
Deed of Trust or any other Credit Document, (b) limit the right of any Lenders,
the Trustee or the Beneficiary to name the Grantor as a party defendant in any
action or suit for judicial foreclosure and sale under any Security Document, or
(c) affect in any way the validity or enforceability of the Guarantee or any
other guaranty (whether of payment and/or performance) given to the Lenders, the
Trustee or the Beneficiary, or of any indemnity agreement given by the Grantor,
in connection with the Loans made under the Credit Agreement.
31. WAIVER OF TRIAL BY JURY. GRANTOR, TRUSTEE AND BENEFICIARY EACH
-----------------------
HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY ACTION, CLAIM,
SUIT OR PROCEEDING RELATING TO THIS DEED OF TRUST AND FOR ANY COUNTERCLAIM
BROUGHT THEREIN.
<PAGE>
18
GRANTOR HEREBY WAIVES ALL RIGHTS TO INTERPOSE ANY COUNTERCLAIM IN ANY SUIT
BROUGHT BY BENEFICIARY OR TRUSTEE HEREUNDER AND ALL RIGHTS TO HAVE ANY SUCH SUIT
CONSOLIDATED WITH ANY SEPARATE SUIT, ACTION OR PROCEEDING.
32. Partial Release; Full Release. The Beneficiary may release, for
-----------------------------
such consideration or none, as it may require, any portion of the Trust Property
without, as to the remainder of the Trust Property, in any way impairing or
affecting the lien, security interest and priority herein provided for the
Beneficiary compared to any other lien holder or secured party. Further, upon
receipt of the Purchase Option Price or the Termination Value and all other
amounts which are due under the Credit Documents with respect to the Property
and payment of all other amounts due on the Notes with respect to the Property
encumbered by this Deed of Trust, the Beneficiary shall execute and deliver to
the Grantor such documents and instruments as may be required to release the
lien and security interest created by this Deed of Trust.
33. Priority. This Deed of Trust shall be subject and subordinate to
--------
the Lease and to all presently existing or future Lease Supplements which affect
the Property.
34. Miscellaneous. (a) This Deed of Trust is one of several deeds
-------------
of trust and other documents that create liens and security interests that
secure payment and performance of the Indebtedness. The Beneficiary, at its
election, may commence or consolidate in a single action all proceedings to
realize upon all such liens and security interests. The Grantor hereby waives
(i) any objections to the commencement or continuation of an action to foreclose
this Deed of Trust or exercise of any other remedies hereunder based on any
action being prosecuted or any judgment entered with respect to the Indebtedness
or any liens or security interests that secure payment and performance of the
Obligations and (ii) any objections to the commencement of, continuation of, or
entry of a judgment in any such other action based on any action or judgment
connected to this Deed of Trust. In case of a foreclosure sale, the Trust
Property may be sold, at Beneficiary's election, in one parcel or in more than
one parcel, and the Beneficiary is specifically empowered (without being
required to do so, and in its sole and absolute discretion) to cause successive
sales of portions of the Trust Property to be held.
(b) Except as provided in the Credit Documents, the Beneficiary, with
the express written consent of the Grantor, may at any time or from time to time
renew or extend this Deed of Trust, or alter or modify the same in any way, or
the Beneficiary may waive any of the terms, covenants or conditions hereof in
whole or in part and may release any portion of the Trust Property or any other
security, and grant such extensions and indulgences in relation to the
Obligations secured hereby as the Beneficiary may determine without the consent
of any other person and without any obligation to give notice of any kind
thereto and without in any manner affecting the priority of the lien hereof on
any part of the Trust Property.
35. Amendments, etc. with respect to the Guaranteed Obligations;
------------------------------------------------------------
Waiver of Rights. This Deed of Trust shall remain valid and effective and
- ----------------
Grantor shall remain obligated hereunder notwithstanding that, without any
reservation of rights against Grantor and without notice to or further assent by
such Grantor, any demand for payment of any of the Paragon Indebtedness or the
Paragon Obligations made by Beneficiary or Administrative Agent or any Corporate
Lender may be rescinded by such party and any of the Paragon Indebtedness or the
Paragon Obligations continued, and the Paragon Indebtedness or the Paragon
Obligations, or the
<PAGE>
19
liability of any other party upon or for any part thereof, or any collateral
security or guarantee therefor or right of offset with respect thereto, may,
from time to time, in whole or in part, be renewed, extended, amended, modified,
accelerated, compromised, waived, surrendered or released by Beneficiary, the
Administrative Agent or any Corporate Lender, and the Corporate Loan Documents
may be amended, modified, supplemented or terminated, in whole or in part, as
the Administrative Agent (or the Required Corporate Lenders, as the case may be)
may deem advisable from time to time, and any collateral security, guarantee or
right of offset at any time held by Beneficiary, Administrative Agent or any
Corporate Lender for the payment of the Paragon Indebtedness or the Paragon
Obligations may be sold, exchanged, waived, surrendered or released. Neither
Beneficiary, Administrative Agent nor any Corporate Lender shall have any
obligation to protect, secure, perfect or insure any Lien at any time held by it
as security for the Paragon Indebtedness or the Paragon Obligations. Any release
of Paragon by Beneficiary, Administrative Agent or any Corporate Lender shall
not relieve Grantor, and shall not impair or affect this Deed of Trust or the
rights and remedies, express or implied, or as a matter of law, of Beneficiary,
Administrative Agent or any Corporate Lender against Grantor under this Deed of
Trust.
36. Deed of Trust Absolute and Unconditional. Grantor waives any and
----------------------------------------
all notice of the creation, renewal, extension or accrual of any of the Paragon
Indebtedness or the Paragon Obligations and notice of or proof of reliance by
Beneficiary or any Corporate Lender upon this Deed of Trust or acceptance of
this Deed of Trust; the Paragon Indebtedness and the Paragon Obligations, and
any of them, shall conclusively be deemed to have been created, contracted or
incurred, or renewed, extended, amended or waived, in reliance upon this Deed of
Trust. Grantor waives diligence, presentment, protest, demand for payment and
notice of default or nonpayment to or upon Paragon with respect to the Paragon
Indebtedness and the Paragon Obligations in order for Beneficiary to exercise
its rights under this Deed of Trust. Grantor understands and agrees that this
Deed of Trust shall be construed as a continuing, absolute and unconditional
mortgage without regard to (a) the validity, regularity or enforceability of the
Corporate Loan Documents, any of the Paragon Indebtedness or the Paragon
Obligations or any other collateral security therefor or guarantee or right of
offset with respect thereto at any time or from time to time held by the
Beneficiary or any Corporate Lender, (b) any defense, set-off or counterclaim
which may at any time be available to or be asserted by the Paragon against
Beneficiary or any Corporate Lender, or (c) any other circumstance whatsoever
which constitutes, or might be construed to constitute, an equitable or legal
discharge of Paragon for the Paragon Indebtedness or the Paragon Obligations, in
bankruptcy or in any other instance. When pursuing its rights and remedies
hereunder against Grantor, Beneficiary and any Corporate Lender may, but shall
be under no obligation to, pursue such rights and remedies as it may have
against Paragon or any other Person or against any collateral security or
guarantee for the Paragon Indebtedness or the Paragon Obligations or any right
of offset with respect thereto, and any failure by Beneficiary or any Corporate
Lender to pursue such other rights or remedies or to collect any payments from
Paragon or any such other Person or to realize upon any such collateral security
or guarantee or to exercise any such right of offset, or any release of Paragon
or any such other Person or any such collateral security, guarantee or right of
offset, shall not relieve Grantor of any liability hereunder, and shall not
impair or affect the rights and remedies, whether express, implied or available
as a matter of law, of Beneficiary under this Deed of Trust. This Deed of Trust
shall remain in full force and effect and be binding in accordance with and to
the extent of its terms upon Grantor and the successors and assigns thereof, and
shall inure to the benefit of Beneficiary and the Corporate Lenders, and their
respective successors, indorsees, transferees and assigns,
<PAGE>
20
until all the Obligations shall have been satisfied by payment in full and the
commitments of the Lenders and the Corporate Lenders shall be terminated,
notwithstanding that from time to time during the term of the Corporate Loan
Documents Paragon may be free from any Paragon Indebtedness or the Paragon
Obligations.
37. Reinstatement. This Deed of Trust shall continue to be
-------------
effective, or be reinstated, as the case may be, if at any time payment, or any
part thereof, of any of the Paragon Indebtedness or the Paragon Obligations is
rescinded or must otherwise be restored or returned by the Beneficiary or any
Corporate Lender or any Lender upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of Paragon, or upon or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or similar
officer for, Paragon or any substantial part of its property, or otherwise, all
as though such payments had not been made.
38. Receipt of Copy. Grantor acknowledges that it has received a
---------------
true copy of this Deed of Trust.
<PAGE>
21
This Deed of Trust has been duly executed by Grantor on the date first
above written.
FBTC LEASING CORP., a New York corporation
By: _____________________________
Name:
Title:
<PAGE>
STATE OF ________)
) ss.:
COUNTY OF ________ )
On the ____ day of ____________, 199__, before me personally came
____________________________________________ to me known, who, being by me duly
sworn, did depose and say that he/she resides at______________________________;
that he/she is the ___________________________of FBTC LEASING CORP., the
corporation described in and which executed the above instrument; and that
he/she signed his/her name thereto by order of the board of directors of said
corporation.
_______________________________
Notary Public
<PAGE>
Schedule A
----------
Description of the Land
<PAGE>
JOINDER OF LESSEE
-----------------
LIVING CENTERS HOLDING COMPANY, a Delaware corporation having its
principal office at ________________________ hereby joins in this Deed of Trust
in order to, and hereby irrevocably, GRANTS, TRANSFERS AND ASSIGNS TO TRUSTEE,
IN TRUST, WITH POWER OF SALE AND RIGHT OF ENTRY AND INSPECTION, all of its
right, title and interest in and to the Property and the other Trust Property
(the "Lessee Collateral") for the purpose of securing the Obligations. Lessee
-----------------
acknowledges and agrees that, upon the occurrence of a Credit Agreement Event of
Default, the Trustee and the Beneficiary shall have the right to exercise any
and all of their remedies hereunder as against the Lessee Collateral.
Lessee agrees that if Lessee has any right, title, estate or interest
in the Lessee Collateral, the Lessee is to that extent a guarantor or surety for
the benefit of the Agent and the Lenders. In such event, Lessee expressly
agrees that the rights of the Agent and the Lenders shall in no way be affected
or impaired by reason of the occurrence of any of the following events: (i) the
waiver by the Agent or the Lenders of the performance or observance by the
Grantor, Lessee or any other party of any terms of the Operative Agreements;
(ii) the extension, in whole or in part, of the time for payment by Grantor of
any sums owing or payable under the Operative Agreements; (iii) any failure,
delay or inability of the Trustee, the Agent or the Lenders in enforcing any
remedies or any other provisions under the Operative Agreements; (iv) the
occurrence of any event described in Section 6.1(i) of the Credit Agreement; or
(v) the inability of Grantor to perform (or the release of Grantor's
performance) under the Operative Agreements due to any Legal Requirement.
This Joinder shall be considered part of the Deed of Trust to which it
is attached, and all references in the Operative Agreements to the Deed of Trust
shall mean the Deed of Trust together with this Joinder.
All capitalized terms used herein and not otherwise defined herein
shall have the meaning ascribed to such terms in the Deed of Trust.
<PAGE>
2
This Joinder has been duly executed by Lessee on the date first above
written.
LIVING CENTERS HOLDING COMPANY
By: ________________________________
Name:
Title:
<PAGE>
3
Add notary page for particular jurisdiction
<PAGE>
EXHIBIT 10.51
AMENDED AND RESTATED GUARANTEE
AMENDED AND RESTATED GUARANTEE dated as of November 4, 1997 made by
PARAGON HEALTH NETWORK, INC., a Delaware corporation ("Paragon") and the other
-------
guarantors which are signatories hereto (Paragon and each such other guarantor,
individually, a "Guarantor"; collectively, the "Guarantors"), in favor of THE
--------- ----------
CHASE MANHATTAN BANK, as administrative agent (in such capacity, the "Agent")
-----
for the lenders (the "Lenders") parties to the Amended and Restated Credit
-------
Agreement, dated as of the date hereof (as further amended, supplemented,
extended or otherwise modified from time to time, the "Credit Agreement"), among
----------------
FBTC LEASING CORP. (the "Borrower"), the Lenders and the Agent.
--------
Preliminary Statement
---------------------
Pursuant to that certain Guarantee dated as of October 10, 1996 made
by Living Centers of America, Inc. ("LCA") and certain of its subsidiaries in
---
favor of the Agent (the "Original Guarantee"), LCA agreed to guarantee the
------------------
prompt and complete performance of the Guaranteed Obligations (as defined in the
Original Guarantee).
Upon the consummation of the transactions contemplated in the
Agreement and Plan of Merger dated as of May 7, 1997 among Apollo Management,
L.P., Apollo LCA Acquisition Corporation and LCA and the Agreement and Plan of
Merger dated as of May 7 1997 among LCA, GranCare, Inc. and Apollo Management,
L.P. (collectively, the "Recapitalization Agreement"), Paragon Health Network,
--------------------------
Inc. will succeed to all of the assets and rights, and will assume all of the
obligations and liabilities of, LCA.
The parties hereto have agreed to amend and restate the Original
Guarantee to confirm that the rights and obligations of LCA under the Original
Guarantee have been assumed by Paragon and certain of its subsidiaries and to
make other modifications to the terms of the Original Guarantee.
To evidence the foregoing agreements, the Guarantors and the Agent are
amending and restating the terms and conditions of the Original Guarantee upon
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained and to induce the Lenders to continue to make their respective Loans
to the Borrower under the Credit Agreement, and other good and valuable
consideration, receipt of which is hereby acknowledged, each Guarantor hereby
agrees with the Agent, for the ratable benefit of the Lenders, that the terms of
the Original Guarantee are hereby amended and restated in their entirety as
follows:
1. Defined Terms; Calculations and Computations. Capitalized terms
--------------------------------------------
not
<PAGE>
otherwise defined herein shall have the meanings set forth on Annex A to the
Amended and Restated Participation Agreement dated as of the date hereof among
the Lessee, the Lessor, the Agent and the Lenders. The documentary conventions
and rules of usage contained in such Annex A shall also be applicable to this
Guarantee.
2. Guarantee (a) Subject to the provisions of Section 2(b) and
---------
without duplication, the Guarantors hereby jointly and severally unconditionally
and irrevocably guarantee to the Agent, for the ratable benefit of the Lenders
and their respective successors, indorsees, transferees and assigns, (i) the
prompt and complete payment and performance by the Borrower when due (whether at
the stated maturity, by acceleration or otherwise) of each of the following:
the unpaid principal of and interest on the Notes and all other obligations and
liabilities of the Borrower to the Agent or the Lenders (including interest
accruing at the then applicable rate provided in the Credit Agreement after the
maturity of the Loans and interest accruing at the then applicable rate provided
in the Credit Agreement after the filing of any petition in bankruptcy, or the
commencement of any insolvency, reorganization or like proceeding, relating to
the Borrower, whether or not a claim for post-filing or post-petition interest
is allowed in such proceeding), whether direct or indirect, absolute or
contingent, due or to become due, now existing or hereafter incurred, which may
arise under, out of, or in connection with, the Credit Agreement, the Notes, the
other Operative Agreements or any other document made, delivered or given in
connection therewith, whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses or otherwise (including all
reasonable fees and disbursements of counsel to the Agent or to the Lenders that
are required to be paid by the Borrower pursuant to the terms of the Credit
Agreement or any other Operative Agreement) and (ii) the prompt and complete
payment by the Lessee and the Construction Agent when due (whether at stated
maturity, by acceleration or otherwise) of all amounts payable by the Lessee and
the Construction Agent under any of the Operative Agreements (including
indemnities and Facility Fees) to the Agent and/or the Lenders and the Lessor
(each and all of the above obligations described in clauses (i) and (ii) above,
collectively, the "Guaranteed Obligations").
----------------------
(b) Anything herein or in any other Operative Agreement to the
contrary notwithstanding, no Guarantor shall at any time be required to make any
payment hereunder in respect of the principal of any Tranche B Loans or of the
Lessor Contribution unless at such time a Lease Event of Default has occurred
and is continuing.
The maximum liability of each Guarantor hereunder shall in no event exceed the
amount which can be guaranteed by each Guarantor under applicable federal and
state laws relating to the insolvency of debtors.
(c) Each Guarantor further agrees to pay any and all expenses
(including all reasonable fees and disbursements of counsel) which may be paid
or incurred by the Agent or any Lender in enforcing, or obtaining advice of
counsel in respect of, any rights with respect to, or collecting, any or all of
the Guaranteed Obligations and/or enforcing any rights with respect to, or
collecting against, such Guarantor under this Guarantee. This Guarantee shall
remain in full force and effect until the Guaranteed Obligations and all amounts
owing hereunder are paid in full and the Commitments are terminated,
notwithstanding that from time to time prior thereto the Borrower or the Lessee
may be free from any Guaranteed Obligations.
(d) No payment or payments made by the Borrower, any Guarantor or any
other Person or received or collected by the Agent or any Lender from the
Borrower, any Guarantor or
<PAGE>
any other Person by virtue of any action or proceeding or any set-off or
appropriation or application at any time or from time to time in reduction of or
in payment of the Guaranteed Obligations shall be deemed to modify, reduce,
release or otherwise affect the liability of any Guarantor hereunder which
shall, notwithstanding any such payment or payments remain liable for the
Guaranteed Obligations until the Guaranteed Obligations and all amounts owing
hereunder are paid in full and the Commitments are terminated.
(e) Each Guarantor agrees that whenever, at any time, or from time to
time, it shall make any payment to the Agent or any Lender on account of its
liability hereunder, it will notify the Agent in writing that such payment is
made under this Guarantee for such purpose.
3. Right of Set-off. In addition to any rights now or hereafter
----------------
granted under applicable law or otherwise, and not by way of limitation of any
such rights, upon the occurrence and during the continuance of an Event of
Default, the Agent and each Lender is hereby authorized at any time or from time
to time, without presentment, demand, protest or other notice of any kind to the
Borrower, any Guarantor or to any other Person, any such notice being hereby
expressly waived, to set off and to appropriate and apply any and all deposits
(general or special) and any other Debt at any time held or owing by the Agent
or such Lender (including by branches and agencies of the Agent or such Lender
wherever located) to or for the credit or the account of any Guarantor against
and on account of the obligations and liabilities of any Guarantor hereunder or
under any of the other Operative Agreements, and all other claims of any nature
or description arising out of or connected with this Guarantee or any other
Operative Agreement, irrespective of whether the Agent or such Lender shall have
made any demand hereunder.
4. No Subrogation. Notwithstanding any payment or payments made by
--------------
any Guarantor hereunder or any set-off or application of funds of such Guarantor
by any Lender, no Guarantor shall be entitled to exercise or enforce any
subrogation rights of the Agent or any Lender against the Borrower or any other
Guarantor or any collateral security or guarantee or right of offset held by the
Agent or any Lender for the payment of the Guaranteed Obligations, nor shall any
Guarantor seek or be entitled to seek any contribution or reimbursement from the
Borrower or any other Guarantor in respect of payments made by any Guarantor
hereunder, until all amounts owing to the Agent and the Lenders by the Borrower
on account of the Guaranteed Obligations and all amounts owing hereunder are
paid in full and the Commitments are terminated. If any amount shall be paid to
any Guarantor on account of such subrogation rights at any time when all of the
Guaranteed Obligations and all amounts owing hereunder shall not have been paid
in full or the Commitments shall not have been terminated, such amount shall be
held by such Guarantor in trust for the Agent and the Lenders, segregated from
other funds of such Guarantor, and shall, forthwith upon receipt by such
Guarantor, be turned over to the Agent in the exact form received by such
Guarantor (duly indorsed by such Guarantor to the Agent, if required), to be
applied against the Guaranteed Obligations, whether matured or unmatured, in
such order as the Agent may determine.
5. Amendments, etc. with respect to the Guaranteed Obligations;
------------------------------------------------------------
Waiver of Rights. Each Guarantor shall remain obligated hereunder
- ----------------
notwithstanding that, without any reservation of rights against such Guarantor
and without notice to or further assent by such Guarantor, any demand for
payment of any of the Guaranteed Obligations made by the Agent or any Lender may
be rescinded by such party and any of the Guaranteed Obligations continued, and
the Guaranteed Obligations, or the liability of any other party upon or for any
part thereof, or any collateral security or guarantee therefor or right of
offset with respect thereto, may, from time to
<PAGE>
time, in whole or in part, be renewed, extended, amended, modified, accelerated,
compromised, waived, surrendered or released by the Agent or any Lender, and the
Credit Agreement, the Participation Agreement and the other Operative Agreements
may be amended, modified, supplemented or terminated, in whole or in part, as
the Agent (or the Required Lenders, as the case may be) may deem advisable from
time to time, and any collateral security, guarantee or right of offset at any
time held by the Agent or any Lender for the payment of the Guaranteed
Obligations may be sold, exchanged, waived, surrendered or released. Neither the
Agent nor any Lender shall have any obligation to protect, secure, perfect or
insure any Lien at any time held by it as security for the Guaranteed
Obligations or for this Guarantee or any property subject thereto. When making
any demand hereunder against any Guarantor, the Agent or any Lender may, but
shall be under no obligation to, make a similar demand on the Borrower or any
other Guarantor, and any failure by the Agent or any Lender to make any such
demand or to collect any payments from the Borrower or any other Guarantor or
any release of the Borrower or any such other Guarantor shall not relieve any
Guarantor, and shall not impair or affect the rights and remedies, express or
implied, or as a matter of law, of the Agent or any Lender against such
Guarantor. For the purposes hereof "demand" shall include the commencement and
continuance of any legal proceedings.
6. Guarantee Absolute and Unconditional. Each Guarantor waives any
------------------------------------
and all notice of the creation, renewal, extension or accrual of any of the
Guaranteed Obligations and notice of or proof of reliance by the Agent or any
Lender upon this Guarantee or acceptance of this Guarantee; the Guaranteed
Obligations, and any of them, shall conclusively be deemed to have been created,
contracted or incurred, or renewed, extended, amended or waived, in reliance
upon this Guarantee; and all dealings between the Borrower and each Guarantor,
on the one hand, and the Agent and the Lenders, on the other hand, with respect
to the Guaranteed Obligations, likewise shall be conclusively presumed to have
been had or consummated in reliance upon this Guarantee. Each Guarantor waives
diligence, presentment, protest, demand for payment and notice of default or
nonpayment to or upon the Borrower or such Guarantor with respect to the
Guaranteed Obligations. Each Guarantor understands and agrees that this
Guarantee shall be construed as a continuing, absolute and unconditional
guarantee of payment without regard to (a) the validity, regularity or
enforceability of the Credit Agreement or any other Operative Agreement, any of
the Guaranteed Obligations or any other collateral security therefor or
guarantee or right of offset with respect thereto at any time or from time to
time held by the Agent or any Lender, (b) any defense, set-off or counterclaim
(other than a defense of payment or performance) which may at any time be
available to or be asserted by the Borrower or any Guarantor against the Agent
or any Lender, (c) any non-recourse provision contained in any Operative
Agreement, or (d) any other circumstance whatsoever (with or without notice to
or knowledge of the Borrower or such Guarantor) which constitutes, or might be
construed to constitute, an equitable or legal discharge of the Borrower for the
Guaranteed Obligations, or of any Guarantor under this Guarantee, in bankruptcy
or in any other instance. When pursuing its rights and remedies hereunder
against any Guarantor, the Agent and any Lender may, but shall be under no
obligation to, pursue such rights and remedies as it may have against the
Borrower or any other Person or against any collateral security or guarantee for
the Guaranteed Obligations or any right of offset with respect thereto, and any
failure by the Agent or any Lender to pursue such other rights or remedies or to
collect any payments from the Borrower or any such other Person or to realize
upon any such collateral security or guarantee or to exercise any such right of
offset, or any release of the Borrower or any such other Person or any such
collateral security, guarantee or right of offset, shall not relieve any
Guarantor of any liability hereunder, and shall not impair or affect the rights
and remedies, whether express, implied or available as a matter of law, of the
<PAGE>
Agent and the Lenders against such Guarantor. This Guarantee shall remain in
full force and effect and be binding in accordance with and to the extent of its
terms upon each Guarantor and the successors and assigns thereof, and shall
inure to the benefit of the Agent and the Lenders, and their respective
successors, indorsees, transferees and assigns, until all the Guaranteed
Obligations and the obligations of each Guarantor under this Guarantee shall
have been satisfied by payment in full and the Commitments shall be terminated,
notwithstanding that from time to time during the term of the Credit Agreement
the Borrower may be free from any Guaranteed Obligations.
7. Reinstatement. This Guarantee shall continue to be effective, or
-------------
be reinstated, as the case may be, if at any time payment, or any part thereof,
of any of the Guaranteed Obligations is rescinded or must otherwise be restored
or returned by the Agent or any Lender upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Borrower or any Guarantor, or
upon or as a result of the appointment of a receiver, intervenor or conservator
of, or trustee or similar officer for, the Borrower or any Guarantor or any
substantial part of its property, or otherwise, all as though such payments had
not been made.
8. Payments. Each Guarantor hereby guarantees that payments
--------
hereunder will be paid to the Agent without set-off or counterclaim in U.S.
Dollars at the office of the Agent located at 270 Park Avenue, New York, New
York 10017.
9. Representations, Warranties. In order to induce the Lenders to
---------------------------
enter into the Credit Agreement and to make the Loans, each Guarantor hereby
represents and warrants to the Agent and each Lender hereto as of the
Reorganization Closing Date and as of each Funding Date as follows:
Section 9.1. Financial Condition. (a) The unaudited pro forma
------------------- --- -----
consolidated balance sheet of Paragon and its consolidated Subsidiaries as
at June 30, 1997 (including the notes thereto) (the "Pro Forma Balance
-----------------
Sheet"), a copy of which has heretofore been furnished to each Lender, has
-----
been prepared giving effect (as if such events had occurred on such date)
to (i) the consummation of the Recapitalization, (ii) this Guarantee being
delivered and the Senior Subordinated Notes to be issued on the
Reorganization Closing Date and the use of proceeds thereof and (iii) the
payment of fees and expenses in connection with the foregoing. The Pro
Forma Balance Sheet complies with Regulation S-X of the Securities Act of
1933, as amended, based on the best information available to Paragon as of
the date of delivery thereof and consistent in all material respects with
the sources and uses of funds for the Recapitalization as previously
disclosed to the Lenders and the forecasts and projections previously
provided to the Lenders, and presents fairly on a pro forma basis the
--- -----
estimated financial position of Paragon and its consolidated Subsidiaries
as at June 30, 1997, assuming that the events specified in the preceding
sentence had actually occurred at such date.
(b) The audited consolidated balance sheets of (i) Old GranCare as at
December 31, 1996, December 31, 1995 and December 31, 1994 and the related
consolidated statements of income and of cash flows for the fiscal years
ended on such dates, reported on by and accompanied by an unqualified
report from Ernst & Young LLP and (ii) LCA as at September 30, 1996,
September 30, 1995 and September 30, 1994 and the related consolidated
statements of income and of cash flows for the fiscal years ended on such
dates, reported on by and accompanied by an unqualified report from Ernst &
Young
<PAGE>
LLP, in each case present fairly the consolidated financial condition of
Old GranCare or LCA, as the case may be, as at such dates, and the
consolidated results of their operations and their consolidated cash flows
for the respective fiscal years then ended. The unaudited consolidated
balance sheet of GranCare as at June 30, 1997, and the related unaudited
consolidated statements of income and cash flows for the six-month period
ended on such date, present fairly the consolidated financial condition of
GranCare as at such date, and the consolidated results of its operations
and its consolidated cash flows for the six-month period then ended
(subject to normal year-end audit adjustments). The unaudited consolidated
balance sheet of LCA as at June 30, 1997, and the related unaudited
consolidated statements of income and cash flows for the nine-month period
ended on such date, present fairly the consolidated financial condition of
LCA as at such date, and the consolidated results of its operations and its
consolidated cash flows for the nine-month period then ended (subject to
normal year-end audit adjustments). All such financial statements,
including the related schedules and notes thereto, have been prepared in
accordance with GAAP applied consistently throughout the periods involved
(except as approved by the aforementioned firm of accountants and disclosed
therein). No Guarantor has any material Guarantee Obligations, contingent
liabilities and liabilities for taxes, or any long-term leases or unusual
forward or long-term commitments, including, without limitation, any
interest rate or foreign currency swap or exchange transaction or other
obligation in respect of derivatives, which are not reflected in the most
recent financial statements of GranCare or LCA, as the case may be,
referred to in this paragraph (b). Except as disclosed in Schedule 9.1,
during the period from September 30, 1996 to and including the
Reorganization Closing Date there has been no Disposition by LCA of any
material part of its business or any of its Corporate Properties and during
the period from December 31, 1996 to and including the Reorganization
Closing Date there has been no Disposition by Old GranCare prior to
February 13, 1997, or by GranCare from and after February 13, 1997, of any
material part of its business or Corporate Property.
9.2 No Change. (a) From September 30, 1996 to and including the date
---------
hereof there has been no development or event which has had or could
reasonably be expected to have a material adverse effect on the business,
assets, property, condition (financial or otherwise) or prospects of LCA
and its Subsidiaries taken as a whole; (b) from December 31, 1996 to and
including the date hereof there has been no development or event which has
had or could reasonably be expected to have a material adverse effect on
the business, assets, property, condition (financial or otherwise) or
prospects of Grancare and its Subsidiaries taken as a whole (other than the
spin-off by Old GranCare of its interests in TeamCare to Vitalink Pharmacy
Services, Inc.); (c) since the date hereof, there has been no development
or event which has had or could reasonably be expected to have a material
adverse effect on the business, assets, property, condition (financial or
otherwise) or prospects of Paragon and its Subsidiaries taken as a whole;
and (d) since the date hereof, there has been no development or event which
has had or could reasonably be expected to have a material adverse effect
on the validity or enforceability of the Corporate Credit Agreement, any
Operative Agreement or any of the documents thereunder or the rights or
remedies of the Agent or the Lenders hereunder or thereunder.
9.3 Corporate Existence; Compliance with Law. Each Guarantor (a) is
----------------------------------------
duly organized, validly existing (except to the extent the failure to do so
results from a transaction permitted by Section 11.4) and in good standing
under the laws of the jurisdiction of its organization, (b) has the
corporate power and authority, and the legal
<PAGE>
right, to own and operate its Corporate Property, to lease the Corporate
Property it operates as lessee and to conduct the businesses in which it is
currently engaged, (c) is duly qualified as a foreign corporation and in
good standing under the laws of each jurisdiction where its ownership,
lease or operation of Corporate Property or the conduct of its business
requires such qualification except where failure to so be qualified could
not, in the aggregate, reasonably be expected to have a Material Adverse
Effect and (d) is in compliance with all Requirements of Law except to the
extent that the failure to comply therewith could not, in the aggregate,
reasonably be expected to have a Material Adverse Effect.
9.4 Corporate Power; Authorization; Enforceable Obligations. Each
-------------------------------------------------------
Guarantor has the corporate power and authority, and the legal right, to
make, deliver and perform this Guarantee. Each Guarantor has taken all
necessary corporate action to authorize the execution, delivery and
performance of this Guarantee. Each consent or authorization of, filing
with, notice to or other act by or in respect of, any Governmental
Authority or any other Person required in connection with the
Recapitalization or with the execution, delivery, performance, validity or
enforceability of this Guarantee or any of the other Operative Agreements,
has been obtained or made and is in full force and effect except as set
forth on Schedule 9.4. This Guarantee has been duly executed and delivered
on behalf of each Guarantor party hereto. This Guarantee constitutes a
legal, valid and binding obligation of each Guarantor party hereto,
enforceable against each such Guarantor in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general equitable
principles (whether enforcement is sought by proceedings in equity or at
law).
9.5 No Legal Bar. The execution, delivery and performance of this
------------
Guarantee will not violate any Requirement of Law or, except with respect
to those leases referred to on Schedule 9.4, any Contractual Obligation of
Paragon or any of its Subsidiaries and will not result in, or require, the
creation or imposition of any Lien on any of their respective properties or
revenues pursuant to any Requirement of Law or any such Contractual
Obligation (other than the Liens created by the Security Documents). No
Requirement of Law or Contractual Obligation applicable to Paragon or any
of its Subsidiaries could reasonably be expected to have a Material Adverse
Effect.
9.6 No Material Litigation. Except as described on Schedule 9.6, no
----------------------
litigation, investigation or proceeding of or before any arbitrator or
Governmental Authority is pending or, to the best knowledge of Paragon, LCA
or Old GranCare, threatened by or against any Guarantor or against any of
their respective properties or revenues (a) with respect to any of the
Operative Agreements or any of the transactions contemplated hereby or
thereby, or (b) which could reasonably be expected to have a Material
Adverse Effect.
9.7 No Default. No Guarantor is in default under or with respect to
----------
any of its Contractual Obligations in any respect which could reasonably be
expected to have a Material Adverse Effect. No Default or Event of Default
has occurred and is continuing.
9.8 Ownership of Corporate Property; Liens. Each Guarantor has title
--------------------------------------
in fee simple to, or a valid leasehold interest in, all its real property,
and good title to, or a valid
<PAGE>
leasehold interest in, all its other Corporate Property, and none of such
Corporate Property is subject to any Lien except as permitted by Section
11.3.
9.9 Intellectual Property. Except as described on Schedule 9.9: (a)
---------------------
each Guarantor owns, or is licensed to use, all Intellectual Property
necessary for the conduct of its business as currently conducted; (b) to
the best knowledge of Paragon, no material claim has been asserted and is
pending by any Person challenging or questioning the use of any
Intellectual Property or the validity or effectiveness of any Intellectual
Property, nor does Paragon know of any valid basis for any such claim; and
(c) to the best knowledge of Paragon, the use of Intellectual Property by
Paragon and its Subsidiaries does not infringe on the rights of any Person
in any material respect.
9.10 Taxes. Each Guarantor has filed or caused to be filed all
-----
Federal, state and other material tax returns which are required to be
filed and has paid all taxes shown to be due and payable on said returns or
on any assessments made against it or any of its Corporate Property and all
other material taxes, fees or other charges imposed on it or any of its
Corporate Property by any Governmental Authority (other than any such
taxes, fees or charges the amount or validity of which is currently being
contested in good faith by appropriate proceedings and with respect to
which reserves in conformity with GAAP have been provided on the books of
Paragon or its Subsidiaries, as the case may be); no tax Lien has been
filed, and, to the knowledge of Paragon, no claim is being asserted, with
respect to any such material tax, fee or other charge.
9.11 Federal Regulations. No part of the proceeds of any Loans will
-------------------
be used for "purchasing" or "carrying" any "margin stock" within the
respective meanings of each of the quoted terms under Regulation G or
Regulation U of the Board as now and from time to time hereafter in effect
or for any purpose which violates the provisions of the Regulations of the
Board. If requested by any Lender or the Agent, Paragon will furnish to
the Agent and each Lender a statement to the foregoing effect in conformity
with the requirements of FR Form G-3 or FR Form U-1 referred to in said
Regulation G or Regulation U, as the case may be.
9.12 Labor Matters. There are no strikes or other labor disputes
-------------
against Paragon or any of its Subsidiaries pending or, to the knowledge of
Paragon, threatened that (individually or in the aggregate) could
reasonably be expected to have a Material Adverse Effect. Hours worked by
and payment made to employees of Paragon and its Subsidiaries have not been
in violation of the Fair Labor Standards Act or any other applicable
Requirement of Law dealing with such matters that (individually or in the
aggregate) could reasonably be expected to have a Material Adverse Effect.
All payments due from Paragon or any of its Subsidiaries on account of
employee health and welfare insurance that (individually or in the
aggregate) could reasonably be expected to have a Material Adverse Effect
if not paid have been paid or accrued as a liability on the books of
Paragon or the relevant Subsidiary.
9.13 ERISA. Neither a Reportable Event nor an "accumulated funding
-----
deficiency" (within the meaning of Section 412 of the Code or Section 302
of ERISA) has occurred during the five-year period prior to the date on
which this representation is made or deemed made with respect to any Plan,
and each Plan has complied in all material respects with the applicable
provisions of ERISA and the Code. No termination of a
<PAGE>
Single Employer Plan (other than the American Medical Services Employees'
Pension Plan (the "American Plan")) has occurred, and no Lien in favor of
-------------
the PBGC or a Plan has arisen, during such five-year period. The present
value of all accrued benefits under each Single Employer Plan (based on
those assumptions used to fund such Plans) did not, as of the last annual
valuation date prior to the date on which this representation is made or
deemed made, exceed the value of the assets of such Plan allocable to such
accrued benefits by a material amount. Neither Paragon nor any Commonly
Controlled Entity has had a complete or partial withdrawal from any
Multiemployer Plan which has resulted or could reasonably be expected to
result in a material liability under ERISA, and neither Paragon nor any
Commonly Controlled Entity would become subject to any material liability
under ERISA if Paragon or any such Commonly Controlled Entity were to
withdraw completely from all Multiemployer Plans as of the valuation date
most closely preceding the date on which this representation is made or
deemed made. No such Multiemployer Plan is in Reorganization or Insolvent.
Neither Paragon nor any Commonly Controlled Entity has incurred any
liability which remains outstanding to the PBGC by reason of the
termination of the American Plan.
9.14 Investment Company Act; Other Regulations. No Guarantor is an
-----------------------------------------
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended. No
Guarantor is subject to regulation under any Requirement of Law (other than
Regulation X of the Board) which limits its ability to incur Indebtedness
of the type incurred or to be incurred under this Guarantee, any other
Operative Agreement or any Loan Document.
9.15 Subsidiaries. The Subsidiaries listed on Schedule 9.15(a)
------------
constitute all the Subsidiaries of Paragon at the Reorganization Closing
Date.
9.16 Environmental Matters. Except as described on Schedule 9.16 and
---------------------
such other matters as, individually or in the aggregate, could not
reasonably be expected to result in the payment of a Material Environmental
Amount:
(a) To the knowledge of Paragon and its Subsidiaries, the facilities
and properties owned, leased or operated by Paragon or any of its
Subsidiaries (each, a "Corporate Property"; collectively, the "Corporate
------------------ ---------
Properties") do not contain, and have not previously contained, any
----------
Materials of Environmental Concern in amounts or concentrations or under
circumstances which (i) constitute or constituted a violation of, or (ii)
could give rise to liability under, any Environmental Law.
(b) (i) All operations of Paragon and its Subsidiaries at the
Corporate Properties are in compliance and have in the last five years been
in compliance with all applicable Environmental Laws, and (ii) to the
knowledge of Paragon and its Subsidiaries, there is no contamination at,
under or about the Corporate Properties or violation of any Environmental
Law with respect to the Corporate Properties or the business operated by
Paragon or any of its Subsidiaries (the "Business") which could interfere
--------
with the continued operation of the Corporate Properties or impair the fair
saleable value thereof.
(c) No Guarantor has received or knows of any notice of violation,
alleged violation, non-compliance, liability or potential liability
regarding environmental matters or compliance with Environmental Laws with
regard to any of the Corporate Properties or
<PAGE>
the Business, nor does Paragon have knowledge or reason to believe that any
such notice will be received or is being threatened.
(d) To the knowledge of Paragon or any of its Subsidiaries, Materials
of Environmental Concern have not been transported or disposed of in
violation of, or in a manner or to a location which could give rise to
liability of Paragon or any of its Subsidiaries under, any Environmental
Law, nor have any Materials of Environmental Concern been generated,
treated, stored or disposed of at, on or under any location in violation
of, or in a manner that could reasonably be anticipated to give rise to
liability of Paragon or any of its Subsidiaries under, any applicable
Environmental Law.
(e) No judicial proceeding or governmental or administrative action
is pending or, to the knowledge of Paragon, threatened, under any
Environmental Law to which Paragon or any Subsidiary is or will be named as
a party, nor are there any consent decrees or other decrees, consent
orders, administrative orders or other orders, or other administrative or
judicial requirements applicable to Paragon or any of its Subsidiaries
outstanding under any Environmental Law.
(f) To the knowledge of Paragon and its Subsidiaries, there has been
no release or threat of release of Materials of Environmental Concern at or
from the Corporate Properties, or arising from or related to the operations
of Paragon or any Subsidiary in connection with the Corporate Properties or
otherwise in connection with the Business, in violation of or that could
reasonably be expected to give rise to liability under Environmental Laws.
9.17 Accuracy of Information, etc. No statement or information
----------------------------
contained in this Guarantee, any other Operative Agreement, any Loan
Document or any other document, certificate or statement furnished to the
Agent or the Lenders or any of them, by or on behalf of any Guarantor for
use in connection with the transactions contemplated by the Operative
Agreements, contained as of the date such statement, information, document
or certificate was so furnished, any untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
contained herein or therein not misleading. The projections and pro forma
--- -----
financial information contained in the materials referenced above are based
upon good faith estimates and assumptions believed by management of Paragon
to be reasonable at the time made, it being recognized by the Lenders that
such financial information as it relates to future events is not to be
viewed as fact and that actual results during the period or periods covered
by such financial information may differ from the projected results set
forth therein by a material amount. As of the Reorganization Closing Date,
the representations and warranties contained in the Recapitalization
Agreement are true and correct in all material respects. There is no fact
known to any Guarantor that could reasonably be expected to have a Material
Adverse Effect that has not been expressly disclosed herein or in the other
Operative Agreements or in any other documents, certificates and statements
furnished to the Agent and the Lenders for use in connection with the
transactions contemplated in the Operative Agreements.
9.18 Solvency. Each Guarantor is, and after giving effect to the
--------
Recapitalization and the incurrence of the obligations being incurred in
connection herewith will be and will continue to be, Solvent.
<PAGE>
9.19 Senior Indebtedness. The Guaranteed Obligations constitute
-------------------
senior indebtedness of each Guarantor, prior to, or pari passu with, all
----------
other Indebtedness of the Guarantors.
9.20 Health Care Permits. Except as disclosed on Schedule 9.20:
------------------- -------------
(a) Except as, in the aggregate, could not reasonably be
expected to have a Material Adverse Effect: (i) each Guarantor now has
(after giving effect to the Recapitalization), and has no reason to believe
it will not be able to maintain in effect, all Health Care Permits
necessary for the lawful conduct of its business or operations wherever now
conducted and as planned to be conducted, including, without limitation,
the ownership and operation of its Health Care Facilities pursuant to all
Requirements of Law, (ii) all such Health Care Permits are in full force
and effect and have not been amended or otherwise modified, rescinded,
revoked or assigned, (iii) each Guarantor is substantially complying with
the requirements of each such Health Care Permit, and no event has
occurred, and no condition exists, which, with the giving of notice, the
passage of time, or both, would constitute a violation thereof, (iv) no
Guarantor has received any written notice of any violation of any
Requirement of Law, (v) to the knowledge of Paragon, no condition exists or
event has occurred which in itself or with the giving of notice or the
lapse of time, or both, would result in the suspension, revocation,
impairment, forfeiture or non-renewal of any such Health Care Permit, (vi)
there is no claim filed with any Governmental Authority of which any
Guarantor has been notified in writing challenging the validity of any such
Health Care Permit and (vii) the continuation, validity and effectiveness
of all such Health Care Permits will not be adversely affected by the
Recapitalization or the execution and performance of any of the Loan
Documents or Operative Agreements.
(b) All Health Care Facilities owned, leased, managed or
operated by Paragon or any of its Subsidiaries are entitled to participate
in, and receive payment under, the appropriate Medicare, Medicaid and
related reimbursement programs, and any similar state or local government-
sponsored program, to the extent that Paragon or any of its Subsidiaries
has decided to participate in any such program, and to receive
reimbursement from private and commercial payers and health maintenance
organizations to the extent applicable thereto. There are no proceedings
pending or, to the knowledge of Paragon, any proceedings threatened or
investigations pending or threatened, by any Governmental Authority with
respect to Paragon's or any of its Subsidiaries' participation in the
Medicare, Medicaid or related reimbursement programs and which could
reasonably be expected to have a Material Adverse Effect.
9.21 Operative Agreements Control. Notwithstanding the
----------------------------
foregoing, to the extent a representation or warranty contained in this
Guarantee relating in any respect to the Properties is inconsistent with
the representations and warranties contained in the Participation Agreement
or other Operative Agreement (other than this Guarantee), the
representations contained in the Participation Agreement or other Operative
Agreement (other than this Guarantee) shall govern.
10. Affirmative Covenants of the Guarantor. Paragon hereby covenants
--------------------------------------
and agrees that so long as this Guarantee is in effect and until the Commitments
have terminated and
<PAGE>
the Guaranteed Obligations and all amounts owing hereunder are paid in full,
Paragon shall and shall cause each of its Subsidiaries to:
10.1 Financial Statements. Furnish to the Agent (with
--------------------
sufficient copies for each Lender):
(a) as soon as available, but in any event within 90 days after the
end of each fiscal year of Paragon, a copy of the audited consolidated
balance sheet of Paragon and its consolidated Subsidiaries as at the end of
such year and the related audited consolidated statements of income and of
cash flows for such year, setting forth in each case in comparative form
(for fiscal years 1998 and thereafter) the figures for the previous year,
reported on without a "going concern" or like qualification or exception,
or qualification arising out of the scope of the audit, by Ernst & Young
LLP or other independent certified public accountants of nationally
recognized standing; and
(b) as soon as available, but in any event not later than 45 days
after the end of each of the first three quarterly periods of each fiscal
year of Paragon, the unaudited consolidated balance sheet of Paragon and
its consolidated Subsidiaries as at the end of such quarter and the related
unaudited consolidated statements of income and of cash flows for such
quarter and the portion of the fiscal year through the end of such quarter,
setting forth in each case in comparative form the figures for the previous
year, certified by a Responsible Officer as being fairly stated in all
material respects (subject to normal year-end audit adjustments);
all such financial statements shall be complete and correct in all material
respects and shall be prepared in reasonable detail and in accordance with
GAAP applied consistently throughout the periods reflected therein and with
prior periods (except as approved by such accountants or officer, as the
case may be, and disclosed therein).
10.2 Certificates; Other Information. Furnish to each of the
-------------------------------
Lenders:
(a) concurrently with the delivery of the financial statements
referred to in Section 10.1(a), a certificate of the independent certified
public accountants reporting on such financial statements stating that in
making the examination necessary therefor no knowledge was obtained of any
Default or Event of Default, except as specified in such certificate;
(b) concurrently with the delivery of any financial statements
pursuant to Section 10.1, (i) a certificate of a Responsible Officer
stating that, to the best of each such Responsible Officer's knowledge,
each Guarantor during such period has observed or performed all of its
covenants and other material agreements, and satisfied every material
condition, contained in this Guarantee and the other Operative Agreements
to be observed, performed or satisfied by any Guarantor or Lessee, and that
such Responsible Officer has obtained no knowledge of any Default or Event
of Default except as specified in such certificate and (ii) in the case of
quarterly or annual financial statements, (x) a Compliance Certificate
containing all information necessary for determining compliance by Paragon
and its Subsidiaries with the provisions of Section 11.1 referred to
therein as of the last day of the fiscal quarter or fiscal year of Paragon,
as the case may be, and (y) to the extent not previously disclosed to the
Agent, a listing of any county or state within the
<PAGE>
United States where any Guarantor keeps inventory (excluding immaterial
pharmaceutical inventory located in a country where neither Paragon nor any
of its Subsidiaries maintains a distribution center) or equipment and of
any Intellectual Property acquired by any Guarantor since the date of the
most recent list delivered pursuant to this clause (y) (or, in the case of
the first such list to be delivered, since the Reorganization Closing
Date);
(c) as soon as available, and in any event no later than 45 days
after the end of each fiscal year of Paragon, a detailed consolidated
budget for the following fiscal year (including a projected consolidated
balance sheet of Paragon and its Subsidiaries as of the end of the
following fiscal year, and the related consolidated statements of projected
cash flow, projected changes in financial position and projected income),
and, as soon as available, significant revisions, if any, of such budget
and projections with respect to such fiscal year (collectively, the
"Projections"), which Projections shall in each case be accompanied by a
summary of assumptions and a certificate of a Responsible Officer stating
that such Projections are based on reasonable estimates, information and
assumptions and that such Responsible Officer has no reason to believe that
such Projections are incorrect or misleading in any material respect;
(d) promptly following the circulation thereof for execution, but
prior to the effectiveness thereof, copies of substantially final drafts of
any proposed amendment, supplement, waiver or other modification with
respect to the Senior Subordinated Note Indenture, the Senior Subordinated
Notes or the Recapitalization Agreement;
(e) within five days after the same are sent, copies of all financial
statements and reports which Paragon sends to the holders of any class of
its debt securities or public equity securities and within five days after
the same are filed, copies of all financial statements and reports which
Paragon may make to, or file with, the Securities and Exchange Commission
or any successor or analogous Governmental Authority; and
(f) promptly, such additional financial and other information as any
Lender may from time to time reasonably request (through the Agent).
10.3 Payment of Obligations. Pay, discharge or otherwise satisfy at
----------------------
or before maturity or before they become delinquent, as the case may be,
all its material obligations of whatever nature, except where the amount or
validity thereof is currently being contested in good faith by appropriate
proceedings and reserves in conformity with GAAP with respect thereto have
been provided on the books of Paragon or its Subsidiaries, as the case may
be.
<PAGE>
10.4 Conduct of Business and Maintenance of Existence, etc. (a)
------------------------------------------------------
(i) Continue to engage in the business of owning, operating, managing
and/or financing Health Care Facilities and providing other services or
amenities customarily provided by, or other activities customarily
undertaken by, Persons owning, operating, managing and/or financing Health
Care Facilities, (ii) preserve, renew and keep in full force and effect its
corporate existence (except as otherwise permitted by Section 11.4) and
(iii) take all reasonable action to maintain all rights, privileges and
franchises necessary or desirable in the normal conduct of its business,
except, in each case, as otherwise permitted by Section 11.4 and except, in
the case of clause (iii) above, to the extent that failure to do so could
not reasonably be expected to have a Material Adverse Effect; and (b)
comply with all Contractual Obligations and Requirements of Law except to
the extent that failure to comply therewith could not, in the aggregate,
reasonably be expected to have a Material Adverse Effect.
10.5 Maintenance of Corporate Property; Insurance. (a) Keep all
---------------------------------------------
Corporate Property useful and necessary in its business in good working
order and condition, ordinary wear and tear excepted and (b) maintain with
financially sound and reputable insurance companies insurance on all its
Corporate Property in at least such amounts and against at least such risks
(but including in any event public liability, product liability and
business interruption) as are usually insured against by companies engaged
in the same or a similar business in the same geographic areas.
10.6 Health Care Permits and Approvals. Take all action reasonably
----------------------------------
necessary to (a) maintain in full force and effect all Health Care Permits
reasonably necessary for the lawful conduct of its business or operations
where now conducted and as planned to be conducted, including the ownership
and operation of its Health Care Facilities, pursuant to all Requirements
of Law and (b) to ensure that all Health Care Facilities owned, leased,
managed or operated by Paragon or any of its Subsidiaries are entitled to
participate in, and receive payment under, the appropriate Medicare,
Medicaid and related reimbursement programs, and any similar state or local
government-sponsored program, to the extent Paragon or any of its
Subsidiaries has decided to participate in any such program, and to receive
reimbursement from private and commercial payers and health maintenance
organizations to the extent applicable thereto, except, in each case, where
a failure to do so could not reasonably be expected to have a Material
Adverse Effect.
10.7 Inspection of Corporate Property; Books and Records;
----------------------------------------------------
Discussions. (a) Keep proper books of records and account in which full,
true and correct entries in conformity with GAAP and all Requirements of
Law shall be made of all dealings and transactions in relation to its
business and activities and (b) permit representatives of any Lender to
visit and inspect any of its properties and examine and make abstracts from
any of its books and records at any reasonable time and as often as may
reasonably be desired and to discuss the business, operations, properties
and financial and other condition of Paragon and its Subsidiaries with
officers and employees of Paragon and its Subsidiaries and with its
independent certified public accountants; provided, that the Agent shall
--------
use reasonable efforts to coordinate any such visits prior to the
occurrence and during the continuance of an Event of Default.
10.8 Notices. Promptly give notice to the Agent and each Lender of:
-------
<PAGE>
15
(a) the occurrence of any Default or Event of Default, provided, that
in the case of Defaults or Events of Default referred to in Section 8(d) of
the Corporate Credit Agreement, Paragon has knowledge thereof;
(b) any (i) default or event of default under any Contractual
Obligation of Paragon or any of its Subsidiaries or (ii) litigation,
investigation or proceeding which may exist at any time between Paragon or
any of its Subsidiaries and any Governmental Authority, which in either
case could reasonably be expected to have a Material Adverse Effect;
(c) any litigation or proceeding affecting Paragon or any of its
Subsidiaries in which the amount involved is $10,000,000 or more and not
covered by insurance or in which injunctive or similar relief is sought;
(d) the following events, as soon as possible and in any event within
30 days after Paragon knows or has reason to know thereof: (i) the
occurrence of any Reportable Event with respect to any Plan, a failure to
make any required contribution to a Plan, the creation of any Lien in favor
of the PBGC or a Plan or any withdrawal from, or the termination,
Reorganization or Insolvency of, any Multiemployer Plan or (ii) the
institution of proceedings or the taking of any other action by the PBGC or
Paragon or any Commonly Controlled Entity or any Multiemployer Plan with
respect to the withdrawal from, or the termination, Reorganization or
Insolvency of, any Plan;
(e) the following events, as soon as possible and in any event within
five Business Days (i) after obtaining knowledge thereof, the occurrence of
any event that would (with the giving of notice, the passage of time, or
both) be a violation of any Health Care Permit necessary for the lawful
conduct of the business or operations of Paragon or any of its Subsidiaries
(other than those Health Care Permits the violation of which could not
reasonably be expected to have a Material Adverse Effect), including,
without limitation, the ownership and operation of its Health Care
Facilities, (ii) after receipt thereof, any notice of any violation of any
Requirements of Law which would (with the giving of notice, the passage of
time, or both) cause any of the Health Care Permits referred to in clause
(i) to be modified, rescinded or revoked and which Paragon does not
reasonably expect to be able to cure within a reasonable period of time,
(iii) after receipt thereof, any notice, summons, citation or other
proceeding seeking to adversely modify in any material respect, revoke, or
suspend any Medicare provider agreement, Medicaid provider agreement,
Medicare certification or Medicaid certification applicable to any of the
Health Care Facilities of Paragon or any of its Subsidiaries in any manner
which could reasonably be expected to have a Material Adverse Effect, or
(iv) after obtaining knowledge thereof, any revocation or involuntary
termination of any Medicare provider agreement, Medicaid provider
agreement, Medicare certification or Medicaid certification applicable to
any of the Health Care Facilities of Paragon or any of its Subsidiaries
that could reasonably be expected to have a Material Adverse Effect;
(f) as soon as possible and in any event within 10 days of obtaining
knowledge thereof, the default, notice of default, event of default or
breach by Paragon or any of its Subsidiaries under any Material Lease;
(g) any development or event which has had or could reasonably be
expected to have a Material Adverse Effect; and
<PAGE>
16
(h) as soon as possible and in any event within 10 days of obtaining
knowledge thereof, any development, event or condition that, individually
or in the aggregate with other developments, events or conditions, could
reasonably be expected to result in the payment by Paragon and its
Subsidiaries, in the aggregate, of a Material Environmental Amount.
Each notice pursuant to this Section 10.8 shall be accompanied by a
statement of a Responsible Officer setting forth details of the occurrence
referred to therein and stating what action Paragon or the relevant
Subsidiary proposes to take with respect thereto.
10.9 Environmental Laws. (a) Comply in all material respects with,
------------------
and use commercially reasonable efforts to ensure compliance in all
material respects by all tenants and subtenants, if any, with, all
applicable Environmental Laws, and obtain and comply in all material
respects with and maintain, and use commercially reasonable efforts to
ensure that all tenants and subtenants obtain and comply in all material
respects with and maintain, any and all licenses, approvals, notifications,
registrations or permits required by applicable Environmental Laws.
(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply with all orders and directives of
all Governmental Authorities regarding Environmental Laws, unless such
requirement, order or directive is being timely challenged in appropriate
proceedings and the pendency of such proceedings could not reasonably be
expected to result in payment of a Material Environmental Amount.
(c) With respect to any development, event or condition that is (or
should have been) the subject of a notice provided pursuant to subsection
10.8(h) of this Guarantee, provide such information to the Agent as may be
necessary to give the Agent reasonable assurance that such development,
event or condition could not reasonably be expected to result in a Material
Adverse Effect.
10.10 Additional Guarantors. With respect to any new Subsidiary
---------------------
created or acquired after the Reorganization Closing Date by Paragon
(which, for the purposes of this paragraph, shall include any existing
Subsidiary that ceases to be either an Excluded Foreign Subsidiary or an
Excluded Domestic Subsidiary), Paragon or any of its Subsidiaries shall
promptly cause such new Subsidiary to become a party to this Guarantee and
to provide such evidence of corporate authority to enter into such
Guarantee as the Agent may reasonably request.
10.11 Permitted Acquisitions. (a) Deliver to the Lenders, not less
----------------------
than 10 Business Days prior to the closing of any proposed Acquisition
involving a Purchase Price greater than or equal to $10,000,000 (which
Purchase Price shall be increased to $25,000,000 if the Consolidated
Leverage Ratio as of the last day of the most recently completed fiscal
quarter is less than 4.5 to 1.0), each of the following: (i) a description
of the property, assets and/or equity interest being purchased, in
reasonable detail; (ii) a term sheet or other description setting forth the
essential terms and the basic structure of the proposed Acquisition
(including, Purchase Price and method and structure of payment; in this
regard, if the Purchase Price includes a note or other right to payment
Paragon shall
<PAGE>
17
detail the economic terms thereof and state in writing the balance sheet
amount that will be required to be recorded in connection with such
consideration; if the proposed Acquisition is approved, the amount of such
consideration for purposes of the restrictions set forth in Section 11.8(h)
shall be such balance sheet amount); (iii) projected statements of income
for the entity that is being acquired (or the assets, if an asset
Acquisition) for at least a two-year period following such Acquisition
(including a summary of assumptions or pro forma adjustments for such
projections); (iv) to the extent made available to Paragon, historical
financial statements for the entity that is being acquired (or the assets,
if an asset Acquisition) (including balance sheets and statements of
income, retained earnings and cash flows for at least a two-year period
prior to such Acquisition); and (v) confirmation, supported by detailed
calculations, that Paragon and its Subsidiaries (A) would have been in
compliance with all the covenants in Section 11.1 for the fiscal quarter
ending immediately prior to the consummation of such Permitted Acquisition,
with such compliance determined on a pro forma basis as if such Permitted
Acquisition had been consummated on the first day of the Reference Period
ending on the last day of such fiscal quarter, and (B) will have been in
compliance with all the covenants of Section 11.1 for the Reference Period
beginning on the first day of the fiscal quarter during which the
consummation of such Permitted Acquisition occurs, with such compliance
determined on a pro forma basis as if such Permitted Acquisition had been
consummated on the first day of such Reference Period. With respect to any
proposed Acquisition involving a Purchase Price of $25,000,000 or more,
Paragon agrees that in reviewing such compliance and the historical
financial statements of the Person or Persons being acquired, the Agent may
require a review, at the cost of Paragon, by an independent certified
public accountant.
(b) Deliver to the Lenders, not later than 45 days after the end of
each fiscal quarter of Paragon, the information required pursuant to clause
(i) of paragraph (a) above for each Permitted Acquisition which was closed
during such fiscal quarter and involves a Purchase Price of at least
$3,000,000.
10.12 Operative Agreements Control. Notwithstanding the foregoing,
----------------------------
to the extent an affirmative covenant contained in this Guarantee relating
in any respect to the Properties is inconsistent with an affirmative
covenant contained in the Participation Agreement or other Operative
Agreement (other than this Guarantee), the covenants contained in the
Participation Agreement or other Operative Agreement (other than this
Guarantee) shall govern.
11. Negative Covenants. Paragon hereby agrees that so long as
------------------
this Guarantee is in effect and until the Commitments have terminated and the
Guaranteed Obligations and all amounts owing hereunder are paid in full, Paragon
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly:
11.1 Financial Condition Covenants.
-----------------------------
(a) Consolidated Leverage Ratio. Permit the Consolidated Leverage
---------------------------
Ratio as at the last day of any Reference Period ending during any period
set forth below to exceed the ratio set forth below opposite such period:
<PAGE>
18
<TABLE>
<CAPTION>
Consolidated
Period Leverage Ratio
------ --------------
<S> <C>
December 31, 1997 through September 30, 1998 6.75 to 1.0
December 31, 1998 through June 30, 1999 6.50 to 1.0
September 30, 1999 through June 30, 2000 6.00 to 1.0
September 30, 2000 through June 30, 2001 5.50 to 1.0
September 30, 2001 through June 30, 2002 5.00 to 1.0
September 30, 2002 through June 30, 2003 4.75 to 1.0
September 30, 2003 (or, if earlier, the Consolidated
Leverage Ratio Stepdown Date)and thereafter 4.50 to 1.0
</TABLE>
(b) Consolidated Interest Coverage Ratio. Permit the Consolidated
------------------------------------
Interest Coverage Ratio for any Reference Period ending during any period
set forth below to be less than the ratio set forth below opposite such
period:
<TABLE>
<CAPTION>
Consolidated
Period Leverage Ratio
------ --------------
<S> <C>
December 31, 1997 through September 30, 1998 1.60 to 1.0
December 31, 1998 through September 30, 1999 1.75 to 1.0
December 31, 1999 through September 30, 2000 2.00 to 1.0
December 31, 2000 through September 30, 2001 2.25 to 1.0
December 31, 2001 through September 30, 2002 2.50 to 1.0
December 31, 2002 and thereafter 2.75 to 1.0
</TABLE>
;provided, that for purposes of determining the ratio described above for
--------
the fiscal quarters of Paragon ending December 31, 1997, March 31, 1998 and
June 30, 1998, Consolidated Interest Expense for the relevant Reference
Period shall be deemed to equal Consolidated Interest Expense for such
fiscal quarter (and, in the case of the latter two determinations, each
previous fiscal quarter commencing after September 30, 1997) multiplied by
4, 2 and 4/3, respectively.
(c) Consolidated Fixed Charge Coverage Ratio. Permit the
----------------------------------------
Consolidated Fixed Charge Coverage Ratio for any Reference Period ending
during any period set forth below to be less than the ratio set forth below
opposite such period:
<TABLE>
<CAPTION>
Consolidated
Period Leverage Ratio
------ --------------
<S> <C>
December 31, 1997 through September 30, 1998 1.10 to 1.0
December 31, 1998 through September 30, 1999 1.15 to 1.0
December 31, 1999 through September 30, 2001 1.20 to 1.0
December 31, 2001 and thereafter 1.25 to 1.0
</TABLE>
;provided, that for purposes of determining the ratio described above for
--------
the fiscal quarters of Paragon ending December 31, 1997, March 31, 1998 and
June 30, 1998, Consolidated Interest Expense and Capital Expenditures
(Maintenance) for the relevant
<PAGE>
19
Reference Period shall be deemed to equal Consolidated Interest Expense or
Capital Expenditures (Maintenance), as the case may be, for such fiscal
quarter (and, in the case of the latter two determinations, each previous
fiscal quarter commencing after September 30, 1997) multiplied by 4, 2 and
4/3, respectively.
(d) Maintenance of Consolidated Net Worth. Permit Consolidated Net
-------------------------------------
Worth at the last day of any fiscal quarter of Paragon ending after
December 31, 1997 to be less than the sum of (x) all items which were
included on the consolidated balance sheet under shareholders' equity at
December 31, 1997 less $50,000,000, (y) 50% of Consolidated Net Income (if
positive) for the period from January 1, 1998 to such date and (z) without
duplication, 100% of the Net Cash Proceeds of any issuance of Capital Stock
by, or capital contribution made to, Paragon or any of its Subsidiaries
after the Closing Date.
11.2 Limitation on Indebtedness. Create, incur, assume or suffer to
--------------------------
exist (in each case, to "Incur") any Indebtedness, except:
-----
(a) Indebtedness of any Guarantor pursuant to the Corporate Credit
Agreement, any Operative Agreement or any document relating thereto;
(b) Indebtedness of Paragon to any Subsidiary and of any Wholly Owned
Subsidiary Guarantor and, if incurred in the ordinary course of business,
any other Wholly Owned Subsidiary, to Paragon or any other Subsidiary;
(c) Indebtedness referred to in Section 11.3(g), Capital Lease
Obligations and Attributable Debt in an aggregate principal amount for all
Indebtedness referred to in this paragraph (c) not to exceed $50,000,000 at
any one time outstanding, provided, that in no event shall the aggregate
--------
principal amount of Attributable Debt exceed $10,000,000 at any one time
outstanding;
(d) Indebtedness outstanding on the Reorganization Closing Date and
listed on Schedule 11.2(d) and any refinancings, refundings, renewals or
extensions thereof (without any increase in the principal amount thereof,
except to the extent (i) interest, premium and other amounts owing in
respect of the Indebtedness being refinanced, refunded, renewed or extended
and (ii) customary transaction costs incurred in connection with such
refinancings, refundings, renewals or extensions, in each case, are
capitalized in connection therewith);
(e) (i) guarantees made in the ordinary course of business by Paragon
or any of its Subsidiaries of obligations of any Wholly Owned Subsidiary;
(ii) guarantees made by Paragon of any Assumed Debt of any Wholly Owned
Subsidiary Guarantor; (iii) guarantees by any New PHCMI Subsidiary of
PHCMI's obligations to Omega in connection with granting Omega a Lien on
any Substitute Omega Property; and (iv) guarantees made by Paragon,
GranCare, AMS Properties, Inc. and GCI Health Care Centers, Inc. under the
HRPT Transaction Documents as described on Schedule 11.4(e).
(f) Indebtedness of Paragon in respect of the Senior Subordinated
Notes; provided, that the aggregate gross proceeds thereof do not exceed
--------
$500,000,000;
(g) additional Indebtedness of Paragon in an aggregate principal
amount not to
<PAGE>
20
exceed $25,000,000 at any one time outstanding;
(h) Assumed Debt Incurred pursuant to an Acquisition consummated in
accordance with Section 11.8(h);
(i) additional Indebtedness of any of Paragon's Subsidiaries in an
aggregate principal amount (for all Subsidiaries) not to exceed $25,000,000
at any one time outstanding;
(j) Indebtedness in respect of Interest Rate Protection Agreements
with any Lender or any affiliate of any Lender for hedging and not for
speculative purposes; and
(k) obligations to acquire Capital Stock pursuant to Section 11.6(b).
11.3 Limitation on Liens. Create, incur, assume or suffer to exist
-------------------
any Lien upon any of its Corporate Property or revenues, whether now owned
or hereafter acquired, except for:
(a) Liens for taxes not yet due or which are being contested in good
faith by appropriate proceedings, provided that adequate reserves with
--------
respect thereto are maintained on the books of Paragon or its Subsidiaries,
as the case may be, in conformity with GAAP;
(b) carriers', warehousemen's, mechanics', materialmen's, repairmen's
or other like Liens arising in the ordinary course of business which are
not overdue for a period of more than 30 days or which are being contested
in good faith by appropriate proceedings;
(c) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation;
(d) deposits to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business;
(e) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which do not in
any case materially detract from the value of the Corporate Property
subject thereto or materially interfere with the ordinary conduct of the
business of Paragon or any of its Subsidiaries;
(f) Liens in existence on the Reorganization Closing Date listed on
Schedule 11.3(f), securing Indebtedness permitted by Section 11.2(d),
provided that no such Lien is spread to cover any additional Corporate
--------
Property after the Closing Date and that the amount of Indebtedness secured
thereby is not increased (it being understood that if such Indebtedness is
refinanced, refunded, renewed or extended in accordance with Section
11.2(d), Liens with respect to the relevant Corporate Property may continue
to apply to such Indebtedness as so refinanced, refunded, renewed or
extended);
(g) Liens securing Indebtedness of Paragon or any other Subsidiary
Incurred
<PAGE>
21
pursuant to Section 11.2(c) to finance the acquisition of fixed or capital
assets, provided that (i) such Liens shall be created substantially
--------
simultaneously with the acquisition of such fixed or capital assets, (ii)
such Liens do not at any time encumber any Corporate Property other than
the Corporate Property financed by such Indebtedness and (iii) the amount
of Indebtedness secured thereby is not increased;
(h) Liens created pursuant to the Security Documents;
(i) Liens resulting from judgments not constituting an Event of
Default so long as no remedies in respect of such Liens have been
exercised;
(j) any interest or title of a lessor under any lease entered into by
Paragon or any other Subsidiary in the ordinary course of its business and
covering only the assets so leased;
(k) Liens securing Assumed Debt so long as such Liens (i) were not
incurred in contemplation of the Acquisition consummated in conjunction
with the assumption of such Assumed Debt and (ii) such Liens do not
encumber any Corporate Property other than the Corporate Property acquired
pursuant to such Acquisition;
(l) Liens securing Indebtedness Incurred pursuant to Section 11.2(i)
so long as (i) such Indebtedness was Incurred to finance the acquisition of
Corporate Property, (ii) recourse for repayment of such Indebtedness is
expressly limited to the Corporate Property so acquired and (iii) such
Liens do not encumber any Corporate Property other than the Corporate
Property so acquired;
(m) the creation of Liens by PHCMI and any New PHCMI Subsidiary in
favor of Omega with respect to any Substitute Omega Property;
(n) the creation of Liens by Paragon, GranCare, AMS Properties, Inc.
and GCI Health Care Centers, Inc. in favor of HRPT in connection with the
transactions described in Schedule 11.3(n) hereto;
(o) Liens not otherwise permitted by this Section 11.3 so long as
neither (i) the aggregate outstanding principal amount of the obligations
secured thereby nor (ii) the aggregate fair market value (determined as of
the date such Lien is incurred) of the assets subject thereto exceeds (as
to Paragon and all Subsidiaries) $5,000,000 at any one time; and
(p) Permitted Exceptions (as such term is defined in the Corporate
Mortgages) in effect on the Reorganization Closing Date.
11.4 Limitation on Fundamental Changes. Enter into any merger,
---------------------------------
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or Dispose of, all or substantially
all of its Corporate Property or business, or make any material change in
its present method of conducting business, except:
(a) any Subsidiary of Paragon may be merged or consolidated with or
into Paragon (provided that Paragon shall be the continuing or surviving
--------
corporation) or with
<PAGE>
or into any Wholly Owned Subsidiary Guarantor (provided that the Wholly
--------
Owned Subsidiary Guarantor shall be the continuing or surviving
corporation);
(b) any Subsidiary of Paragon may Dispose of any or all of its assets
(upon voluntary liquidation or otherwise) to Paragon or any Wholly Owned
Subsidiary Guarantor;
(c) any Subsidiary of Paragon may Dispose of one or more Substitute
Omega Properties to PHCMI or any of the New PHCMI Subsidiaries in
connection with providing substitute collateral to Omega in exchange for
the surrender by Omega of the Omega Letter of Credit;
(d) any acquisition expressly permitted by Section 11.8 may be
structured as a merger with or into Paragon (provided that Paragon shall be
the continuing or surviving corporation) or with or into any Wholly-Owned
Subsidiary Guarantor (provided that the Wholly Owned Subsidiary Guarantor
shall be the continuing or surviving corporation)
(e) the Dispositions described in Schedule 11.4(e) hereto and the
transactions permitted pursuant to Sections 11.5(e) and 11.5(f).
11.5 Limitation on Sale of Assets. Dispose of any of its Corporate
----------------------------
Property or business (including, without limitation, receivables and
leasehold interests), whether now owned or hereafter acquired, or, in the
case of any Subsidiary, issue or sell any shares of such Subsidiary's
Capital Stock to any Person, except:
(a) the Disposition of obsolete or worn out property in the ordinary
course of business;
(b) the sale of inventory in the ordinary course of business;
(c) Dispositions permitted by Section 11.4(b), 11.4(c) or 11.4(e);
(d) the sale or issuance of any Subsidiary's Capital Stock to Paragon
or any Wholly Owned Subsidiary Guarantor;
(e) the exchange by Paragon or any of its Subsidiaries of any of its
Health Care Facilities for any Health Care Facility of any third Person
other than any exchange described in Schedule 11.4(e) hereto (any such
exchange, an "Asset Swap"); provided, that (i) the aggregate amount of
---------- --------
Asset Swaps that may be consummated during the term of this Guarantee shall
not exceed $50,000,000, valued at the fair market value thereof, (ii) prior
to consummating any Asset Swap Paragon shall have provided evidence
reasonably satisfactory to the Agent demonstrating pro forma compliance by
Paragon with Section 11.1 both before and after giving effect to such Asset
Swap, (iii) the fair market value of the property being received by Paragon
or any of its Subsidiaries in connection with any such Asset Swap shall be
substantially equivalent to the fair market value of the property being
exchanged by Paragon or any of its Subsidiaries, (iv) prior to consummating
any Asset Swap Paragon shall have provided evidence reasonably satisfactory
to the Agent demonstrating that the net effect of any such Asset Swap on
Consolidated EBITDA on a pro forma basis would be substantially equivalent
to or
<PAGE>
greater than the Consolidated EBITDA for such Reference Period and
(v) Paragon or the relevant Subsidiary shall take all steps requested by
the Agent to provide the Agent on behalf of the Lenders with a fully
perfected Lien on or security interest in the property being received by
Paragon or any of its Subsidiaries in connection with any such Asset Swap
to the same extent as the Lien or security interest which the Agent had in
the property being exchanged by Paragon or any of its Subsidiaries; and
(f) the sale of other assets having a fair market value not to exceed
$50,000,000 in the aggregate for any fiscal year of Paragon; provided, that
--------
no such individual sale or series of sales in an aggregate amount in excess
of $10,000,000 may be consummated unless Paragon provides a certificate to
the Agent demonstrating pro forma compliance with Section 7.1 both before
and after consummating such sale or sales; and provided, further, that
-------- -------
regardless of the aggregate amount of such individual sale or series of
sales, Paragon shall be in pro forma compliance with Section 11.1 both
before and after any such sale or series of sales.
11.6 Limitation on Dividends. Declare or pay any dividend (other
-----------------------
than dividends payable solely in common stock of the Person making such
dividend) on, or make any payment on account of, or set apart assets for a
sinking or other analogous fund for, the purchase, redemption, defeasance,
retirement or other acquisition of, any shares of any class of Capital
Stock of Paragon or any Subsidiary or any warrants or options to purchase
any such Capital Stock, whether now or hereafter outstanding, or make any
other distribution in respect thereof, either directly or indirectly,
whether in cash or property or in obligations of Paragon or any Subsidiary
(collectively, "Restricted Payments"), except that:
(a) any Subsidiary may make Restricted Payments to Paragon or any
Wholly Owned Subsidiary Guarantor; and
(b) so long as no Default or Event of Default shall have occurred and
be continuing, Paragon may purchase its common stock or common stock
options (i) from present or former officers or employees of Paragon or any
Subsidiary upon the death, disability or termination of employment of such
officer or employee or (ii) to the extent deemed necessary by Paragon in
connection with employee compensation programs, provided, that after giving
--------
effect to any payment under this paragraph (b), the aggregate amount of all
payments made pursuant to this paragraph (b) during the term of this
Guarantee, when added to the Employee Loan Outstanding Amount then in
effect, shall not exceed $10,000,000.
11.7 Limitation on Capital Expenditures. Make or commit to make (by
----------------------------------
way of the acquisition of securities of a Person or otherwise) any Capital
Expenditures (Discretionary), except (a) Capital Expenditures
(Discretionary) of Paragon and its Subsidiaries in any fiscal year which,
when combined with the aggregate amount of Permitted Acquisitions made
pursuant to Section 11.8(h) during such fiscal year (excluding the
aggregate amount of the Purchase Prices thereof which is made in the form
of the consideration referred to in clause (b) of the definition of
Purchase Price), shall not exceed $125,000,000; provided that (i) no
--------
Default or Event of Default has occurred and is continuing (unless a
binding commitment to make such Capital Expenditures was entered into prior
to the occurrence of such Default or Event of Default), or would occur
after
<PAGE>
giving effect to any such Capital Expenditures (Discretionary); (ii)
any amounts permitted herein for Capital Expenditures (Discretionary)
during any fiscal year and not so expended in the fiscal year for which it
is permitted may be carried over for expenditure only in the next following
fiscal year; (iii) Capital Expenditures (Discretionary) made pursuant to
this clause (a) during any fiscal year shall be deemed made, first, in
respect of amounts permitted for the then-current fiscal year as provided
above and, second, in respect of amounts carried over from the prior fiscal
year pursuant to subclause (ii) above and (iv) if the Consolidated Leverage
Ratio as of the last day of the most recently completed fiscal quarter is
less than 4.5 to 1.0 then the amount referred to above shall be increased
to $200,000,000 (and if availability under this clause (iv) is utilized the
Consolidated Leverage Stepdown Ratio Date shall occur) and (b) Capital
Expenditures made with the proceeds of any Reinvestment Deferred Amount.
11.8 Limitation on Investments, Loans and Advances. On or after the
---------------------------------------------
Reorganization Closing Date, make any advance, loan, extension of credit
(by way of guarantee or otherwise) or capital contribution to, or purchase
any stock, bonds, notes, debentures or other securities of, or make any
Acquisition from, or make any other investment in, any Person, except:
(a) extensions of trade credit in the ordinary course of business;
(b) investments in Cash Equivalents;
(c) Guarantee Obligations permitted by Section 11.2;
(d) loans and advances ("Employee Loans") to employees of Paragon or
--------------
its Subsidiaries in the ordinary course of business (including, without
limitation, for travel, entertainment and relocation expenses), so long as,
after giving effect to the making of any Employee Loan, the aggregate
amount of Employee Loans made since the Reorganization Closing Date
(determined net of amounts actually repaid in cash in respect thereof) (the
"Employee Loan Outstanding Amount"), when added to the aggregate amount of
--------------------------------
Restricted Payments made since the Reorganization Closing Date pursuant to
Section 11.6(b), shall not exceed $10,000,000;
(e) the Recapitalization;
(f) investments made by Paragon or any of its Subsidiaries with the
proceeds of any Reinvestment Deferred Amount;
(g) capital contributions or other similar investments by Paragon or
any of its Subsidiaries in Paragon or any Person that, prior to any such
investment, is a Wholly Owned Subsidiary Guarantor or, if made in the
ordinary course of business, any other Wholly Owned Subsidiary;
(h) any Acquisition of any Person or business, either through the
purchase of the assets (including the goodwill) of such Person or business
or the purchase of 100% of the Capital Stock of such Person, if each of the
following conditions is satisfied: (i) the requirements of Section 10.11
have been satisfied with respect to such Acquisition and Paragon shall be
in pro forma compliance with Section 11.1 both before and after giving
<PAGE>
effect to such Acquisition; (ii) no Default or Event of Default has
occurred and is continuing, or would occur after giving effect to such
Acquisition; (iii) the aggregate Purchase Prices (not including clause (b)
of the definition thereof) of all such Acquisitions in any fiscal year of
Paragon, when combined with the aggregate amount of Capital Expenditures
(Discretionary) made during such fiscal year, shall not exceed
$125,000,000; (iv) the Purchase Price (or any portion thereof) which is
paid in the form of the consideration referred to in clause (b) of the
definition of Purchase Price for all such Acquisitions in any fiscal year
of Paragon shall not exceed $200,000,000; and (v) any such Acquisition
shall have been approved by the Board of Directors or such comparable
governing body of the Person or business being acquired; provided, that if
--------
the Consolidated Leverage Ratio as of the last day of the most recently
completed fiscal quarter for which the relevant financial information is
available both before and after giving pro forma effect for such
Acquisition as if such Acquisition were consummated on the first day of the
Reference Period ending on the last day of the most recently completed
fiscal quarter is less than 4.5 to 1.0, then the amounts referred to in
clauses (iii) and (iv) above shall be increased to $200,000,000 (and if
availability under this proviso is utilized the Consolidated Leverage Ratio
Stepdown Date shall occur); and provided, further, that if the Consolidated
-----------------
Leverage Ratio as of the last day of the most recently completed fiscal
quarter for which the relevant financial information is available after
giving pro forma effect for such Acquisition as if such Acquisition were
consummated on the first day of the Reference Period ending on the last day
of the most recently completed fiscal quarter is less than 4.5 to 1.0, then
the amount referred to in clause (iv) shall be increased to $300,000,000
(all such Acquisitions, the "Permitted Acquisitions");
----------------------
(i) investments by Paragon or any of its Subsidiaries in patient
trust accounts;
(j) investments representing non-cash consideration in the form of
senior notes of the purchasing party pledged by Paragon or the relevant
Subsidiary in favor of the Agent for the benefit of the Lenders received by
Paragon or any of its Subsidiaries in connection with any Asset Sale;
provided that the aggregate amount of any such investments shall not exceed
--------
$50,000,000 during the term of this Guarantee;
(k) in addition to investments otherwise expressly permitted by this
Section 11.8, investments by Paragon or any of its Subsidiaries in an
aggregate amount (valued at cost) not to exceed $20,000,000 in the
aggregate during the term of this Guarantee.
11.9 Limitation on Optional Payments and Modifications of Debt
---------------------------------------------------------
Instruments, etc. (a) Make or offer to make any payment, prepayment,
-----------------
repurchase or redemption of or otherwise defease or segregate funds with
respect to the Senior Subordinated Notes (other than scheduled interest
payments required to be made in cash), (b) amend, modify, waive or
otherwise change, or consent or agree to any amendment, modification,
waiver or other change to, any of the terms of the Senior Subordinated
Indenture or the Senior Subordinated Notes (other than any such amendment,
modification, waiver or other change which (i) would extend the maturity or
reduce the amount of any payment of principal thereof or which would reduce
the rate or extend the date for payment of interest thereon or (ii) is not
adverse to the interests of the Lenders in any respect) or (c) designate
any Indebtedness as "Designated Senior Indebtedness" for the purposes of
the Senior Subordinated Note Indenture.
<PAGE>
11.10 Limitation on Transactions with Affiliates. Enter into any
------------------------------------------
transaction, including, without limitation, any purchase, sale, lease or
exchange of Corporate Property, the rendering of any service or the payment
of any management, advisory or similar fees, with any Affiliate (other than
Paragon or any Wholly Owned Subsidiary) unless such transaction is (a)
otherwise permitted under this Guarantee, (b) in the ordinary course of
business of Paragon or such Subsidiary, as the case may be, and (c) upon
fair and reasonable terms no less favorable to Paragon or such Subsidiary,
as the case may be, than it would obtain in a comparable arm's length
transaction with a Person which is not an Affiliate.
11.11 Limitation on Sales and Leasebacks. Enter into any arrangement
----------------------------------
with any Person providing for the leasing by Paragon or any Subsidiary of
real or personal property which has been or is to be sold or transferred by
Paragon or such Subsidiary to such Person or to any other Person to whom
funds have been or are to be advanced by such Person on the security of
such property or rental obligations of Paragon or such Subsidiary (any such
transaction, a "Sale/Leaseback Transaction"), except (a) to the extent
--------------------------
expressly permitted by Section 11.2(c), (b) Sale/Leaseback Transactions
identified on Schedule 11.2(d) and (c) the Sale/Leaseback Transaction
described on Schedule 11.4(e).
11.12 Health Care Permits and Approvals. Engage in any activity that
---------------------------------
(a) constitutes or, with the giving of notice, the passage of time, or
both, would result in a material violation of any Health Care Permit
necessary for the lawful conduct of its business or operations or (b)
constitutes or, with the giving of notice, the passage of time, or both,
would result in the loss by any Health Care Facility owned, leased, managed
or operated by Paragon or any of its Subsidiaries of the right to
participate in, and receive payment under, the appropriate Medicare,
Medicaid and related reimbursement programs, and any similar state or local
government-sponsored program, to the extent that such Guarantor has decided
to participate in any such program, and to receive reimbursement from
private and commercial payers and health maintenance organizations to the
extent applicable thereto, in each case, except where the loss of such
Health Care Permit or rights to participate in or receive payments under
such programs could not reasonably be expected to have a Material Adverse
Effect.
11.13 Limitation on Changes in Fiscal Periods. Permit the fiscal
---------------------------------------
year of Paragon to end on a day other than September 30 or change Paragon's
method of determining fiscal quarters.
11.14 Limitation on Negative Pledge Clauses. Except as set forth on
-------------------------------------
Schedule 11.14, enter into or suffer to exist or become effective any
agreement which prohibits or limits the ability of Paragon or any of its
Subsidiaries to create, incur, assume or suffer to exist any Lien upon any
of its Corporate Property or revenues, whether now owned or hereafter
acquired, other than (a) a Loan Document or Operative Agreement and (b) any
agreements governing any purchase money Liens or Capital Lease Obligations
otherwise permitted hereby (in which case, any prohibition or limitation
shall only be effective against the assets financed thereby).
11.15 Limitation on Restrictions on Subsidiary Distributions. Except
------------------------------------------------------
as set forth on Schedule 11.15, enter into or suffer to exist or become
effective any consensual encumbrance or restriction on the ability of any
Subsidiary of Paragon to (a) pay dividends
<PAGE>
or make any other distributions in respect of any Capital Stock of such
Subsidiary held by, or pay any Indebtedness owed to, Paragon or any other
Subsidiary of Paragon, (b) make loans or advances to Paragon or any other
Subsidiary of Paragon or (c) transfer any of its assets to Paragon or any
other Subsidiary of Paragon, except for such encumbrances or restrictions
existing under or by reason of (i) any restrictions existing under the Loan
Documents or Operative Agreements and (ii) any restrictions with respect to
a Subsidiary imposed pursuant to an agreement which has been entered into
in connection with the Disposition of all or substantially all of the
Capital Stock or assets of such Subsidiary.
11.16 Limitation on Lines of Business. Enter into any business,
-------------------------------
either directly or through any Subsidiary, except for those businesses in
which Paragon and its Subsidiaries are engaged on the Reorganization
Closing Date or which are reasonably related thereto.
11.17 Limitation on Amendments to Recapitalization Documents, etc..
------------------------------------------------------------
Amend, supplement or otherwise modify the terms and conditions of the
Recapitalization Agreement or any other document delivered by the parties
thereto (other than Paragon) or any of their Affiliates in connection
therewith except to the extent that any such amendment, supplement or
modification could not reasonably be expected to have a Material Adverse
Effect.
11.18 Operative Agreements Control. Notwithstanding the foregoing,
----------------------------
to the extent a negative covenant contained in this Guarantee relating in
any respect to the Properties is inconsistent with a negative covenant
contained in the Participation Agreement or other Operative Agreement
(other than this Guarantee), the covenants contained in the Participation
Agreement or other Operative Agreement (other than this Guarantee) shall
govern.
12. Authority of Agent. Each Guarantor acknowledges that the rights
------------------
and responsibilities of the Agent under this Guarantee with respect to any
action taken by the Agent or the exercise or non-exercise by the Agent of any
option, right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Guarantee shall, as between the Agent and the
Lenders, be governed by the Credit Agreement and by such other agreements with
respect thereto as may exist from time to time among them, but, as between the
Agent and each Guarantor, the Agent shall be conclusively presumed to be acting
as agent for the Lenders with full and valid authority so to act or refrain from
acting, and no Guarantor shall be under any obligation, or entitlement, to make
any inquiry respecting such authority.
13. Notices. All notices, requests and demands to or upon the Agent,
-------
any Lender or any Guarantor to be effective shall be in writing (including by
telecopy or telex), and, unless otherwise expressly provided herein, shall be
deemed to have been duly given or made when delivered by hand, or three Business
Days after being deposited in the mail, postage prepaid, or, in the case of
telecopy notice, confirmation of receipt received, or, in the case of telex
notice, when sent, answerback received, addressed as follows:
(a) if to the Agent or any Lender, at its address or transmission
number for notices provided in Section 9.2 of the Credit Agreement; and
(b) if to any Guarantor, at its address or transmission number for
notices set forth below.
<PAGE>
The Agent, each Lender and each Guarantor may change its address and
transmission numbers for notices by notice in the manner provided in this
Section 9.2 of the Credit Agreement.
14. Severability. Any provision of this Guarantee which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
15. Integration. This Guarantee represents the agreement of each
-----------
Guarantor with respect to the subject matter hereof and there are no promises or
representations by the Agent or any Lender relative to the subject matter hereof
not reflected herein.
16. Amendments in Writing; No Waiver; Cumulative Remedies (a) None
-----------------------------------------------------
of the terms or provisions of this Guarantee may be waived, amended,
supplemented or otherwise modified except as provided in Section 9.1 of the
Credit Agreement.
(b) Neither the Agent nor any Lender shall by any act (except by a
written instrument pursuant to Section 16(a) hereof), delay, indulgence,
omission or otherwise be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or Event of Default or in any breach of any of
the terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Agent or any Lender, any right, power or
privilege hereunder shall operate as a waiver thereof. No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
A waiver by the Agent or any Lender of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy which the Agent
or such Lender would otherwise have on any future occasion.
(c) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
17. Section Headings. The section headings used in this Guarantee
----------------
are for convenience of reference only and are not to affect the construction
hereof or be taken into consideration in the interpretation hereof.
18. Successors and Assigns. This Guarantee shall be binding upon the
----------------------
successors and assigns of each Guarantor and shall inure to the benefit of the
Agent and the Lenders and their successors and assigns.
19. SUBMISSION TO JURISDICTION; WAIVERS. (a) EACH GUARANTOR HEREBY
-----------------------------------
IRREVOCABLY AND UNCONDITIONALLY:
(i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ALL LEGAL ACTIONS OR
PROCEEDINGS RELATING TO THIS GUARANTEE OR ANY OTHER OPERATIVE AGREEMENT TO
WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN
RESPECT THEREOF TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE
<PAGE>
SUPREME COURT OF THE STATE OF NEW YORK, AND THE APPELLATE COURTS THEREOF
AND WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION OR PROCEEDING TO ANY FEDERAL
COURT;
(ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE
BROUGHT IN SUCH COURT, WAIVES ANY OBJECTION THAT IT MAY HAVE NOW OR
HEREAFTER TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT
AND WAIVES ANY OBJECTION THAT SUCH ACTION OR PROCEEDING IN ANY SUCH COURT
WAS BROUGHT IN AN INCONVENIENT FORUM AND AGREES NOT TO PLEAD, CLAIM OR
ASSERT THE SAME;
(iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING IN ANY SUCH COURT MAY BE EFFECTED BY MAILING A COPY THEREOF BY
REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL),
POSTAGE PREPAID TO, OR BY PERSONAL SERVICE AT, ITS ADDRESS SET FORTH HEREIN
OR SUCH OTHER ADDRESS OF WHICH THE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT
HERETO, WHETHER OR NOT SUCH ADDRESS BE WITHIN THE JURISDICTION OF ANY SUCH
COURT;
(iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO
EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL
LIMIT THE RIGHT OF THE AGENT (AND NOT OF GUARANTORS) TO SUE IN ANY OTHER
JURISDICTION; AND
(v) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY
RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING
REFERRED TO IN THIS SECTION 19 ANY SPECIAL, EXEMPLARY, OR PUNITIVE DAMAGES.
(b) EACH GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES
TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTEE OR
ANY OTHER OPERATIVE AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.
(c) TO THE EXTENT ANY PROPERTY IS LOCATED IN THE STATE OF CALIFORNIA,
EACH GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES THE RIGHT TO
ASSERT, ARGUE OR RAISE, IN ANY ACTION BROUGHT BY THE AGENT AGAINST ANY GUARANTOR
UNDER THIS GUARANTEE, THAT THE AGENT OR THE LENDERS STRUCTURED THE TRANSACTION
CONTEMPLATED BY THE OPERATIVE AGREEMENTS IN SUCH A MANNER PRIMARILY TO
CIRCUMVENT THE CALIFORNIA ONE-FORM-OF-ACTION AND ANTI-DEFICIENCY LAWS, INCLUDING
CALIFORNIA CODE OF CIVIL PROCEDURE (S)(S) 580a, 580b, 580d AND 726.
(d) To the extent any Property is located in the State of California,
each Guarantor hereby waives all of such Guarantor's rights of subrogation and
reimbursement and any other rights and defenses available to such Guarantor by
reason of California Civil Code Sections
<PAGE>
2787 to 2855, inclusive, including (a) any defenses such Guarantor may have to
the obligations undertaken by such Guarantor in this Guarantee by reason of an
election of remedies by Lender, and (b) any rights or defenses such Guarantor
may have by reason of protection afforded to Borrower with respect to the
obligations guaranteed hereby pursuant to the antideficiency or other laws of
the State of California limiting or discharging Borrower's indebtedness,
including California Code of Civil Procedure Section 580a, 580b, 580d or 726.
Each Guarantor's waiver of defenses under clause (a) above is made even though
an election of remedies by Lender, such as a nonjudicial foreclosure with
respect to security for a guaranteed obligation, destroys such Guarantor's
rights of subrogation and reimbursement against Borrower by the operation of
California Code of Civil Procedure Section 580d or otherwise. The foregoing
waivers shall not be deemed a waiver of the defense that the Obligations have
been paid or the Commitments reduced.
20. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND
-------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK,
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be
duly executed and delivered by its duly authorized officer as of the day and
year first above written.
PARAGON HEALTH NETWORK, INC.
By: /s/ Charles B. Caeden
-------------------------------
Title: Vice President
<PAGE>
AMERICAN-CAL MEDICAL SERVICES, INC.
AMS GREEN TREE, INC.
AMS PROPERTIES, INC.
CONNERWOOD HEALTHCARE, INC.
COORDINATED HOME HEALTH SERVICES, INC.
CORNERSTONE HEALTH MANAGEMENT COMPANY
EH ACQUISITION CORP.
EH ACQUISITION CORP. II
EH ACQUISITION CORP. III
EVERGREEN HEALTHCARE, INC.
EVERGREEN HEALTHCARE LTD., L.P.
GC SERVICES, INC.
GCI BELLA VITA, INC.
GCI CAMELLIA CARE CENTER, INC.
GCI COLTER VILLAGE, INC.
GCI EAST VALLEY MEDICAL & REHABILITATION CENTER, INC.
GCI FAITH NURSING HOME, INC.
GCI HEALTH CARE CENTERS, INC.
GCI JOLLEY ACRES, INC.
GCI PALM COURT, INC.
GCI PRINCE GEORGE, INC.
GCI REALTY, INC.
GCI REHAB, INC.
GCI SPRINGDALE VILLAGE, INC.
GCI THERAPIES, INC.
GCI VALLEY MANOR HEALTH CARE CENTER, INC.
GCI VILLAGE GREEN, INC.
GCI-CAL HEALTH CARE CENTERS, INC.
GCI-CAL THERAPIES COMPANY
GCI-WISCONSIN PROPERTIES, INC.
GRANCARE GPO SERVICES, INC.
GRANCARE HOME HEALTH SERVICES, INC.
GRANCARE, INC.
GRANCARE NURSING SERVICES AND HOSPICE, INC.
GRANCARE OF MICHIGAN, INC.
GRANCARE OF NORTH CAROLINA, INC.
GRANCARE OF NORTHERN CALIFORNIA, INC.
GRANCARE SOUTH CAROLINA, INC.
GRANCARE TRADING, INC.
HERITAGE OF LOUISIANA, INC.
HMI CONVALESCENT CARE, INC.
HOSTMASTERS, INC.
NATIONAL HERITAGE REALTY, INC.
OMEGA/INDIANA CARE CORPORATION
RENAISSANCE MENTAL HEALTH CENTER, INC.
STONECREEK MANAGEMENT COMPANY, INC.
By: /s/ M. Henry Day, Jr.
----------------------------------
Title: Assistant Secretary
<PAGE>
AMERICAN PHARMACEUTICAL SERVICES, INC.
AMERICAN REHABILITY MANAGEMENT, INC.
AMERICAN REHABILITY SERVICES, INC.
AMERICAN SENIOR HEALTH SERVICES, INC.
APS HOLDING COMPANY, INC.
APS PHARMACY MANAGEMENT, INC.
BRIAN CENTER HEALTH & REHABILITATION/TAMPA, INC.
BRIAN CENTER HEALTH & RETIREMENT/ALLEGHANY, INC.
BRIAN CENTER HEALTH & RETIREMENT/BASTIAN, INC.
BRIAN CENTER HEALTH & RETIREMENT/WALLACE, INC.
BRIAN CENTER MANAGEMENT CORPORATION
BRIAN CENTER NURSING CARE/AUSTELL, INC.
BRIAN CENTER NURSING CARE/FINCASTLE, INC.
BRIAN CENTER NURSING CARE/HICKORY, INC.
BRIAN CENTER NURSING CARE/POWDER SPRINGS, INC.
BRIAN CENTER OF ASHEBORO, INC.
BRIAN CENTER OF CENTRAL COLUMBIA, INC.
BRIAN CENTERS HEALTH & RETIREMENT/WALLACE, INC.
DEVCON HOLDING COMPANY
EXTENDED ACUTE HOSPITALS OF AMERICA, INC.
GULF COAST PHYSICAL THERAPY GROUP, INC.
HOME HEALTH MANAGEMENT ASSOCIATES OF AMERICA, INC.
HOMECARE ASSOCIATES OF AMERICA, INC.
HOSPICE ASSOCIATES OF AMERICA, INC.
HOSPICE CARE OF TENNESSEE, INC.
HOSPICE MANAGEMENT PARTNERS, INC.
LC MANAGEMENT COMPANY
LCA OPERATIONAL HOLDING COMPANY
LCR, INC.
LIVING CENTERS DEVELOPMENT COMPANY
LIVING CENTERS - EAST, INC.
LIVING CENTERS HOLDING COMPANY
LIVING CENTERS LTCP DEVELOPMENT COMPANY
LIVING CENTERS OF TEXAS, INC.
LIVING CENTERS - ROCKY MOUNTAIN, INC.
LIVING CENTERS - SOUTHEAST DEVELOPMENT CORPORATION
LIVING CENTERS - SOUTHEAST, INC.
MED-CARE SALES AND RENTALS, INC.
MED-THERAPY REHABILITATION SERVICES, INC.
PROFESSIONAL RX SYSTEMS, INC.
PROGRESSIVE CARE CENTERS OF AMERICA, INC.
REHABILITY HEALTH SERVICES, INC.
REHABILITY HOSPITAL SERVICES, INC.
THERACARE HOME HEALTH AGENCY, INC.
THERAPY MANAGEMENT INNOVATIONS, INC.
TOICA, INC.
WORKHEALTH HEALTHCARE MANAGEMENT INC.
By: /s/ Boyd P. Gentry
--------------------------------------
Title: Vice President
<PAGE>
Address for Notices:
Paragon Health Network, Inc.
One Ravinia Drive, 15th Floor
Atlanta, Georgia 30346
Attention: Chief Financial Officer
Telecopy: (770) 393-8599
<PAGE>
EXHIBIT 10.52
LEASE
between
FBTC LEASING CORP.,
as Lessor,
and
LIVING CENTERS HOLDING COMPANY
as Lessee
___________________________
Dated as of October 10, 1996
___________________________
================================================================================
This Lease is subject to a security interest in favor of The Chase Manhattan
Bank, as agent (the "Agent"), under a Credit Agreement, dated as of October 10,
1996 among FBTC Leasing Corp., the Lenders, and the Agent, as amended or
supplemented. This Lease has been executed in several counterparts. To the
extent, if any, that this Lease constitutes chattel paper (as such term is
defined in the Uniform Commercial Code of the State where the Properties are
located, no security interest in this Lease may be created through the transfer
or possession of any counterpart other than the original counterpart containing
the receipt therefor executed by the Agent on the signature page hereof.
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. DEFINITIONS............................... 1
1.1 Defined Terms.................................................... 1
SECTION 2. PROPERTY AND TERM........................ 1
2.1 Property......................................................... 1
2.2 Lease Term....................................................... 1
2.3 Title............................................................ 1
2.4 Lease Supplements................................................ 1
SECTION 3. RENT.............................. 1
3.1 Rent............................................................. 1
3.2 Supplemental Rent................................................ 2
3.3 Performance on a Non-Business Day................................ 2
SECTION 4. UTILITY CHARGES......................... 2
4.1 Utility Charges.................................................. 2
SECTION 5. QUIET ENJOYMENT......................... 3
5.1 Quiet Enjoyment.................................................. 3
SECTION 6. NET LEASE............................ 3
6.1 Net Lease; No Setoff; Etc........................................ 3
6.2 No Termination or Abatement...................................... 4
SECTION 7. OWNERSHIP OF PROPERTY...................... 4
7.1 Ownership of the Property........................................ 4
SECTION 8. CONDITION OF PROPERTY...................... 5
8.1 Condition of the Property........................................ 5
8.2 Possession and Use of the Property............................... 6
SECTION 9. COMPLIANCE........................... 6
9.1 Compliance with Legal Requirements and Insurance Requirements.... 6
SECTION 10.................................. 6
10.1 Maintenance and Repair; Return................................... 6
10.2 Right of Inspection.............................................. 7
10.3 Environmental Inspection......................................... 7
SECTION 11. MODIFICATIONS......................... 8
11.1 Modifications, Substitutions and Replacements.................... 8
-i-
<PAGE>
SECTION 12. TITLE............................. 9
12.1 Warranty of Title................................................ 9
12.2 Grants and Releases of Easements................................. 9
SECTION 13. PERMITTED CONTESTS....................... 10
13.1 Permitted Contests Other Than in Respect of Impositions.......... 10
SECTION 14. INSURANCE........................... 10
14.1 Public Liability and Workers' Compensation Insurance............. 10
14.2 Hazard and Other Insurance....................................... 11
14.3 Coverage......................................................... 11
SECTION 15. CONDEMNATION AND CASUALTY................... 12
15.1 Casualty and Condemnation........................................ 12
15.2 Environmental Matters............................................ 13
SECTION 16. LEASE TERMINATION....................... 14
16.1 Termination upon Certain Events.................................. 14
16.2 Procedures....................................................... 14
SECTION 17. DEFAULT............................ 14
17.1 Lease Events of Default.......................................... 14
17.2 Final Liquidated Damages......................................... 16
17.3 Lease Remedies................................................... 16
17.4 Waiver of Certain Rights......................................... 18
17.5 Assignment of Rights Under Contracts............................. 18
17.6 Remedies Cumulative.............................................. 18
17.7 Covenant Defaults................................................ 18
SECTION 18. LESSOR'S RIGHT TO CURE..................... 19
18.1 Lessor's Right to Cure Lessee's Lease Defaults................... 19
SECTION 19. LEASE TERMINATION....................... 19
19.1 Provisions Relating to Lessee's Termination of this
Lease or Exercise of Purchase Option............................. 19
19.2 Aggregate Tranche A Percentage................................... 20
SECTION 20. PURCHASE OPTION........................ 20
20.1 Purchase Option.................................................. 20
20.2 Maturity Date Purchase Option.................................... 20
20.3 Obligation to Purchase All Properties............................ 20
SECTION 21. SALE OF PROPERTY........................ 20
21.1 Sale Procedure................................................... 21
21.2 Application of Proceeds of Sale.................................. 21
21.3 Indemnity for Excessive Wear..................................... 21
-ii-
<PAGE>
21.4 Appraisal Procedure.............................................. 22
21.5 Certain Obligations Continue..................................... 22
SECTION 22. HOLDING OVER.......................... 22
22.1 Holding Over..................................................... 22
SECTION 23. RISK OF LOSS.......................... 23
23.1 Risk of Loss..................................................... 23
SECTION 24. SUBLETTING AND ASSIGNMENT................... 23
24.1 Subletting and Assignment........................................ 23
24.2 Subleases........................................................ 23
SECTION 25. ESTOPPEL CERTIFICATES..................... 23
25.1 Estoppel Certificates............................................ 23
SECTION 26. NO WAIVER........................... 24
26.1 No Waiver........................................................ 24
SECTION 27. ACCEPTANCE OF SURRENDER.................... 24
27.1 Acceptance of Surrender.......................................... 24
SECTION 28. NO MERGER OF TITLE....................... 24
28.1 No Merger of Title............................................... 24
SECTION 29. NOTICES............................ 24
29.1 Notices.......................................................... 24
SECTION 30. MISCELLANEOUS......................... 25
30.1 Miscellaneous.................................................... 25
30.2 Amendments and Modifications..................................... 25
30.3 Successors and Assigns........................................... 26
30.4 Headings and Table of Contents................................... 26
30.5 Counterparts..................................................... 26
30.6 GOVERNING LAW.................................................... 26
30.7 Limitations on Recourse.......................................... 26
30.8 Memorandum of Lease.............................................. 26
30.9 Priority......................................................... 26
31.1 Ground Lease..................................................... 26
Exhibits
Exhibit A Lease Supplement
Exhibit B Memorandum of Lease
-iii-
<PAGE>
LEASE (this "Lease"), dated as of October 10, 1996, between FBTC
LEASING CORP., a New York corporation, having its principal office at Two World
Trade Center, New York, New York 10048, as lessor (the "Lessor"), and LIVING
CENTERS HOLDING COMPANY, a Delaware corporation, having its principal office at
15415 Katy Freeway, Suite 800, Houston, Texas 77094, as lessee (the "Lessee").
In consideration of the mutual agreements herein contained, and of
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. Capitalized terms used herein but not otherwise
defined in this Lease shall have the respective meanings specified in Annex A to
the Participation Agreement dated as of the date hereof among Lessee, Lessor,
Agent and the Lenders named therein.
SECTION 2. PROPERTY AND TERM
2.1 Property. Subject to the terms and conditions hereinafter set
forth and contained in the respective Lease Supplement relating to each
Property, Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor,
each Property.
2.2 Lease Term. The Property is leased for the Term, unless extended
or earlier terminated in accordance with the provisions of this Lease.
2.3 Title. Each Property is leased to Lessee without any
representation or warranty, express or implied, by Lessor and subject to the
rights of parties in possession, the existing state of title (including the
Permitted Exceptions) and all applicable Legal Requirements. Lessee shall in no
event be excused in its obligation to pay Rent for any defect in title to the
Property.
2.4 Lease Supplements. On each Property Closing Date, Lessee and
Lessor shall each execute and deliver a Lease Supplement for the Property to be
leased on such date in substantially the form of Exhibit A hereto and thereafter
such Property shall be subject to the terms of this Lease.
SECTION 3. RENT
3.1 Rent. (a) On each applicable Payment Date occurring after the
termination of the Construction Period for a Property and on any date when this
Lease shall terminate, Lessee shall pay the Basic Rent attributable to such
Property.
<PAGE>
2
(b) Basic Rent shall be due and payable in lawful money of the United
States and shall be paid by wire transfer of immediately available funds on or
before the due date therefor to such account or accounts at such bank or banks
or to such other Person or in such other manner as Lessor shall from time to
time direct.
(c) Neither Lessee's inability or failure to take possession of all,
or any portion, of the Property when delivered by Lessor, nor Lessor's inability
or failure to deliver all or any portion of the Property to Lessee, whether or
not attributable to any act or omission of Lessee or any act or omission of
Lessor, or for any other reason whatsoever, shall delay or otherwise affect
Lessee's obligation to pay Rent in accordance with the terms of this Lease.
3.2 Supplemental Rent. (a) Lessee shall pay to Lessor or the Person
entitled thereto any and all Supplemental Rent promptly as the same shall become
due and payable, and if Lessee fails to pay any Supplemental Rent, Lessor shall
have all rights, powers and remedies provided for herein or by law or equity or
otherwise in the case of nonpayment of Basic Rent. Lessee shall pay to Lessor
as Supplemental Rent, among other things, on demand, to the extent permitted by
applicable Legal Requirements, interest at the applicable Overdue Rate on any
installment of Basic Rent not paid when due for the period for which the same
shall be overdue and on any payment of Supplemental Rent not paid when due or
demanded by Lessor for the period from the due date or the date of any such
demand, as the case may be, until the same shall be paid. The expiration or
other termination of Lessee's obligations to pay Basic Rent hereunder shall not
limit or modify the obligations of Lessee with respect to Supplemental Rent.
Unless expressly provided otherwise in this Lease or any other Operative
Agreement, in the event of any failure on the part of Lessee to pay and
discharge any Supplemental Rent as and when due, Lessee shall also promptly pay
and discharge any fine, penalty, interest or cost which may be assessed or added
for nonpayment or late payment of such Supplemental Rent, all of which shall
also constitute Supplemental Rent.
(b) Lessee shall make a payment of Supplemental Rent equal to the
Maximum Residual Guarantee Amount in accordance with Section 21.1(c).
3.3 Performance on a Non-Business Day. If any payment is required
hereunder on a day that is not a Business Day, then such payment shall be due on
the next succeeding Business Day.
SECTION 4. UTILITY CHARGES
4.1 Utility Charges. Lessee shall pay, or cause to be paid, all
charges for electricity, power, gas, oil, water, telephone, sanitary sewer
service and all other rents and utilities used in or on each Property during
the Term. Lessee shall be entitled to receive any credit or refund with respect
to any utility charge paid by Lessee and the amount of any credit or refund
received by Lessor on account of any utility charges paid by Lessee, net of the
costs and expenses incurred by Lessor in obtaining such credit or refund, shall
be promptly paid over to Lessee. All charges for utilities imposed with respect
to the Property for a billing period during which this Lease expires or
terminates shall be adjusted and prorated on a daily basis between
<PAGE>
3
Lessor and Lessee, and each party shall pay or reimburse the other for each
party's pro rata share thereof.
SECTION 5. QUIET ENJOYMENT
5.1 Quiet Enjoyment. So long as no Lease Event of Default shall have
occurred and be continuing, Lessee shall peaceably and quietly have, hold and
enjoy each Property for the Term, free of any claim or other action by Lessor or
anyone rightfully claiming by, through or under Lessor with respect to any
matters arising from and after the Lease Commencement Date.
SECTION 6. NET LEASE
6.1 Net Lease; No Setoff; Etc. This Lease shall constitute a net
lease and, notwithstanding any other provision of this Lease, it is intended
that Basic Rent and Supplemental Rent shall be paid without counterclaim,
setoff, deduction or defense of any kind and without abatement, suspension,
deferment, diminution or reduction of any kind, and Lessee's obligation to pay
all such amounts is absolute and unconditional. The obligations and liabilities
of Lessee hereunder shall in no way be released, discharged or otherwise
affected for any reason, including, without limitation, to the maximum extent
permitted by law: (a) any defect in the condition, merchantability, design,
construction, quality or fitness for use of any portion of any Property, or any
failure of any Property to comply with all Legal Requirements, including any
inability to occupy or use any Property by reason of such non-compliance; (b)
any damage to, abandonment, loss, contamination of or Release from or
destruction of or any requisition or taking of any Property or any part thereof,
including eviction; (c) any restriction, prevention or curtailment of or
interference with any use of any Property or any part thereof, including
eviction; (d) any defect in title to or rights to any Property or any Lien on
such title or rights or on any Property; (e) any change, waiver, extension,
indulgence or other action or omission or breach in respect of any obligation or
liability of or by Lessor, Agent or any Lender; (f) any bankruptcy, insolvency,
reorganization, composition, adjustment, dissolution, liquidation or other like
proceedings relating to Lessee, Lessor, Agent, any lender or any other Person,
or any action taken with respect to this Lease by any trustee or receiver of
Lessee, Lessor, Agent, any lender or any other Person, or by any court, in any
such proceeding; (g) any claim that Lessee has or might have against any Person,
including Lessor, Agent or any Lender; (h) any failure on the part of Lessor to
perform or comply with any of the terms of this Lease, any other Operative
Agreement or of any other agreement; (i) any invalidity or unenforceability or
disaffirmance against or by Lessee of this Lease or any provision hereof or any
of the other Operative Agreements or any provision of any thereof; (j) the
impossibility of performance by Lessee, Lessor or both; (k) any action by any
court, administrative agency or other Governmental Authority; any restriction,
prevention or curtailment of or any interference with the construction on or any
use of any Property or any part thereof; or (m) any other occurrence whatsoever,
whether similar or dissimilar to the foregoing, whether or not Lessee shall have
notice or knowledge of any of the foregoing. This Lease shall be noncancellable
by Lessee for any reason whatsoever except as expressly provided herein, and
Lessee, to the extent permitted by Legal Requirements, waives all rights now or
hereafter conferred by statute or otherwise to quit, terminate or surrender this
Lease, or to any diminution, abatement or reduction of Rent payable
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4
by Lessee hereunder. If for any reason whatsoever this Lease shall be terminated
in whole or in part by operation of law or otherwise, except as otherwise
expressly provided herein, Lessee shall, unless prohibited by Legal
Requirements, nonetheless pay to Lessor (or, in the case of Supplemental Rent,
to whomever shall be entitled thereto) an amount equal to each Rent payment at
the time and in the manner that such payment would have become due and payable
under the terms of this Lease if it had not been terminated in whole or in part,
and in such case, so long as such payments are made and no Lease Event of
Default shall have occurred and be continuing, Lessor will deem this Lease to
have remained in effect. Each payment of Rent made by Lessee hereunder shall be
final and, absent manifest error in the computation of the amount thereof,
Lessee shall not seek or have any right to recover all or any part of such
payment from Lessor, Agent or any party to any agreements related thereto for
any reason whatsoever. Lessee assumes the sole responsibility for the condition,
use, operation, maintenance, and management of the Property and Lessor shall
have no responsibility in respect thereof and shall have no liability for damage
to the property of Lessee or any subtenant of Lessee on any account or for any
reason whatsoever.
6.2 No Termination or Abatement. Lessee shall remain obligated under
this Lease in accordance with its terms and shall not take any action to
terminate, rescind or avoid this Lease, notwithstanding any action for
bankruptcy, insolvency, reorganization, liquidation, dissolution, or other
proceeding affecting Lessor, or any action with respect to this Lease which may
be taken by any trustee, receiver or liquidator of Lessor or by any court with
respect to Lessor, except as otherwise expressly provided herein. Lessee hereby
waives all right (i) to terminate or surrender this Lease, except as otherwise
expressly provided herein, or (ii) to avail itself of any abatement, suspension,
deferment, reduction, setoff, counterclaim or defense with respect to any Rent.
Lessee shall remain obligated under this Lease in accordance with its terms and
Lessee hereby waives any and all rights now or hereafter conferred by statute or
otherwise to modify or to avoid strict compliance with its obligations under
this Lease. Notwithstanding any such statute or otherwise, Lessee shall be
bound by all of the terms and conditions contained in this Lease.
SECTION 7. OWNERSHIP OF PROPERTY
7.1 Ownership of the Property. (a) Lessor and Lessee intend that (i)
for financial accounting purposes with respect to Lessee (A) this Lease will be
treated as an "operating lease" pursuant to Statement of Financial Accounting
Standards (SFAS) No. 13, as amended, (B) Lessor will be treated as the owner and
lessor of the Property and (C) Lessee will be treated as the lessee of the
Property, but (ii) for federal, state and local income tax and all other
purposes (A) this Lease will be treated as a financing arrangement, (B) the
Lenders will be treated as senior lenders making loans to Lessee in an amount
equal to the Loans, which Loans will be secured by the Property, (C) Lessor will
be treated as a subordinated lender making a loan to Lessee in an amount equal
to the Lessor Contribution, which loan is secured by the Property, and (D)
Lessee will be treated as the owner of the Property and will be entitled to all
tax benefits ordinarily available to an owner of property like the Property for
such tax purposes.
(b) Lessor and Lessee further intend and agree that, for the purpose
of securing Lessee's obligations for the repayment of the above-described loans,
(i) this Lease shall also be
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5
deemed to be a security agreement and financing statement within the meaning of
Article 9 of the Uniform Commercial Code and a real property mortgage or deed of
trust, as applicable; (ii) the Lease provided for in Section 2 shall be deemed a
grant of a security interest in and a mortgage lien on the Lessee's right, title
and interest in the Properties (including the right to exercise all remedies as
are contained in the applicable Mortgage and Memorandum of Lease upon the
occurrence of a Lease Event of Default) and all proceeds of the conversion,
voluntary or involuntary, of the foregoing into cash, investments, securities or
other property, whether in the form of cash, investments, securities or other
property, for the benefit of the Lessor to secure the Lessee's payment of all
amounts owed by the Lessee under this Lease and the other Operative Agreements
and Lessor holds title to the Properties so as to create and grant a first lien
and prior security interest in each Property (A) pursuant to this Lease for the
benefit of the Agent under the Assignment of Lease, to secure to the Agent the
obligations of the Lessee under the Lease and (B) pursuant to the Mortgages to
secure to the Agent the obligations of the Lessor under the Mortgages and the
Notes; (iii) the possession by Lessor or any of its agents of notes and such
other items of property as constitute instruments, money, negotiable documents
or chattel paper shall be deemed to be "possession by the secured party" for
purposes of perfecting the security interest pursuant to Section 9-305 of the
Uniform Commercial Code; and (iv) notifications to Persons holding such
property, and acknowledgements, receipts or confirmations from financial
intermediaries, bankers or agents (as applicable) of Lessee shall be deemed to
have been given for the purpose of perfecting such security interest under
applicable law. Lessor and Lessee shall, to the extent consistent with this
Lease, take such actions as may be necessary to ensure that, if this Lease were
deemed to create a security interest in the Properties in accordance with this
Section, such security interest would be deemed to be a perfected security
interest of first priority under applicable law and will be maintained as such
throughout the Basic Term. Nevertheless, Lessee acknowledges and agrees that
none of Lessor, Agent, or any Lender has provided or will provide tax,
accounting or legal advice to Lessee regarding this Lease, the Operative
Agreements or the transactions contemplated hereby and thereby, or made any
representations or warranties concerning the tax, accounting or legal
characteristics of the Operative Agreements, and that Lessee has obtained and
relied upon such tax, accounting and legal advice concerning the Operative
Agreements as it deems appropriate.
(c) Lessor and Lessee further intend and agree that in the event of
any insolvency or receivership proceedings or a petition under the United States
bankruptcy laws or any other applicable insolvency laws or statute of the United
States of America or any State or Commonwealth thereof affecting Lessee or
Lessor, the transactions evidenced by this Lease shall be regarded as loans made
by an unrelated third party lender to Lessee.
SECTION 8. CONDITION OF PROPERTY
8.1 Condition of the Property. LESSEE ACKNOWLEDGES AND AGREES THAT IT
IS RENTING EACH PROPERTY "AS IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT
(EXPRESS OR IMPLIED) BY LESSOR AND SUBJECT TO (A) THE EXISTING STATE OF TITLE,
(B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF, (C) ANY STATE OF FACTS
WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW AND (D) VIOLATIONS OF
LEGAL REQUIREMENTS WHICH MAY EXIST ON THE DATE HEREOF. NONE OF LESSOR,
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6
THE AGENT AND ANY LENDER HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY
REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED, INCLUDING THE
CONDITION OF ANY IMPROVEMENTS THEREON, THE SOIL CONDITION, OR ANY ENVIRONMENTAL
OR HAZARDOUS MATERIAL CONDITION) OR SHALL BE DEEMED TO HAVE ANY LIABILITY
WHATSOEVER AS TO THE TITLE, VALUE, HABITABILITY, USE, CONDITION, DESIGN,
OPERATION, OR FITNESS FOR USE OF THE PROPERTY (OR ANY PART THEREOF), OR ANY
OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED, WITH
RESPECT TO ANY PROPERTY (OR ANY PART THEREOF) AND NONE OF LESSOR, THE AGENT AND
ANY LENDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREIN OR
THE FAILURE OF ANY PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY LEGAL
REQUIREMENT.
8.2 Possession and Use of the Property. Each Property shall be used
in a manner consistent with the Agency Agreement and, after the Completion Date
for the Property, as a skilled nursing or assisted living Facility. Lessee
shall pay, or cause to be paid, all charges and costs required in connection
with the use of the Properties. Lessee shall not commit or permit any waste of
any Property or any part thereof.
SECTION 9. COMPLIANCE
9.1 Compliance with Legal Requirements and Insurance Requirements.
Subject to the terms of Section 13 relating to permitted contests, Lessee, at
its sole cost and expense, shall (a) comply in all material respects with all
Legal Requirements (including all Environmental Laws) and Insurance Requirements
relating to each Property, including the use, construction, operation,
maintenance, repair and restoration thereof, whether or not compliance therewith
shall require structural or extraordinary changes in the Improvements or
interfere with the use and enjoyment of each Property, and (b) procure, maintain
and comply in all material respects with all licenses, permits, orders,
approvals, consents and other authorizations required for the construction,
renovation, use, maintenance and operation of each Property and for the use,
operation, maintenance, repair and restoration of the Improvements.
SECTION 10. MAINTENANCE AND REPAIR
10.1 Maintenance and Repair; Return. (a) Lessee, at its sole cost
and expense, shall maintain each Property in good condition (ordinary wear and
tear excepted) and make all necessary repairs thereto, of every kind and nature
whatsoever, whether interior or exterior, ordinary or extraordinary, structural
or nonstructural or foreseen or unforeseen, in each case in substantial
compliance with all Legal Requirements and Insurance Requirements and on a basis
reasonably consistent with the operation and maintenance of commercial
properties comparable in type and location to the applicable Property subject,
however, to the provisions of Section 15 with respect to Condemnation and
Casualty.
(b) Lessor shall under no circumstances be required to build any
improvements on any Property, make any repairs, replacements, alterations or
renewals of any nature or
<PAGE>
7
description to any Property, make any expenditure whatsoever in connection with
this Lease or maintain any Property in any way. Lessor shall not be required to
maintain, repair or rebuild all or any part of any Property, and Lessee waives
the right to (i) require Lessor to maintain, repair, or rebuild all or any part
of any Property, or (ii) make repairs at the expense of Lessor pursuant to any
Legal Requirement, Insurance Requirement, contract, agreement, covenants,
condition or restriction at any time in effect.
(c) Lessee shall, upon the expiration or earlier termination of the
Term with respect to a Property, vacate, surrender and transfer such Property to
Lessor, at Lessee's own expense, free and clear of all Liens other than (i)
Liens of the types described in clause (i) of the definition of Permitted Liens,
(ii) Liens of the type described in clause (ii) of the definition of Permitted
Exceptions and (iii) Lessor Liens, in as good condition as they were on the
applicable Property Closing Date or, if later, the Completion Date in respect of
such Property, ordinary wear and tear excepted, and in compliance with all Legal
Requirements and the other requirements of this Lease (and in any event without
(x) any asbestos installed or maintained in any part of such Property, (y) any
polychlorinated byphenyls (PCBs) in, on or used, stored or located at such
Property, and (z) any other Hazardous Substances in violation of Applicable
Environmental Laws). Lessee shall cooperate with any independent purchaser of
such Property in order to facilitate the ownership and operation by such
purchaser of such Property after such expiration or earlier termination of the
Term, including providing all books, reports and records regarding the
maintenance, repair and ownership of such Property and all data and technical
information relating thereto, granting or assigning all licenses necessary for
the operation and maintenance of such Property and cooperating in seeking and
obtaining all necessary licenses, permits and approvals of Governmental
Authorities. Lessee shall have also paid the total cost for the completion of
all Modifications commenced prior to such expiration or earlier termination of
the Term. The obligation of Lessee under this Section 10.1(c) shall survive the
expiration or termination of this Lease.
10.2 Right of Inspection. Lessor may, at reasonable times and with
reasonable prior notice, enter upon, inspect and examine at its own cost and
expense (unless a Lease Event of Default exists, in which case the out-of-pocket
costs and expenses of Lessor shall be paid by Lessee), any Property. Upon
request of the Agent, Lessee shall furnish to Lessor statements, no more than
once per year, accurate in all material respects, regarding the condition and
state of repair of each Property. Lessor shall have no duty to make any such
inspection or inquiry and shall not incur any liability or obligation by reason
of not making any such inspection or inquiry.
10.3 Environmental Inspection. Upon surrender of possession of each
Property, or not more than 120 days nor less than 30 days prior to the
Expiration Date (unless Lessee has previously irrevocably exercised the Purchase
Option), Lessee shall, at its sole cost and expense, provide to Lessor a report
by an environmental consultant selected by Lessee and reasonably satisfactory to
Lessor certifying that Hazardous Substances have not at any time during the Term
been generated, used, treated or stored on, transported to or from, Released at,
on or from or deposited at or on such Property, and no portion of such Property
has been used for such purposes other than (i) as necessary to use, operate,
maintain, repair and restore such Property and (ii) in full compliance with all
Environmental Laws. If such is not the case, the report shall set forth a
remedial response plan relating to such Property (which remedial response plan,
if required by any Environmental Law or Governmental Authority, shall be
approved by the
<PAGE>
8
appropriate Governmental Authority). Such remedial response plan shall include,
but shall not be limited to, plans for full response, remediation, removal, or
other corrective action, and the protection, or mitigative action associated
with the protection, of natural resources including wildlife, aquatic species,
and vegetation associated with such Property, as required by all applicable
Environmental Laws. If such report includes a remedial response plan, Lessee
shall promptly deposit funds in escrow with the Agent sufficient to ensure the
full execution and implementation of such plan.
SECTION 11. MODIFICATIONS
11.1 Modifications, Substitutions and Replacements. (a) So long as
no Lease Event of Default has occurred and is continuing, Lessee, at its sole
cost and expense, may at any time and from time to time make alterations,
renovations, improvements and additions to a Property or any part thereof
(collectively, "Modifications"); provided, that: (i) except for any Modification
required to be made pursuant to a Legal Requirement or an Insurance Requirement,
no Modification, individually, or when aggregated with any (A) other
Modification or (B) grant, dedication, transfer or release pursuant to Section
12.2, shall impair the value of such Property or the utility or useful life of
such Property from that which existed immediately prior to such Modification;
(ii) the Modification shall be performed expeditiously and in a good and
workmanlike manner; (iii) Lessee shall comply with all Legal Requirements
(including all Environmental Laws) and Insurance Requirements applicable to the
Modification, including the obtaining of all permits and certificates of
occupancy, and the structural integrity of such Property shall not be adversely
affected; (iv) Lessee shall maintain or cause to be maintained builders' risk
insurance at all times when a Modification is in progress; (v) subject to the
terms of Section 13 relating to permitted contests, Lessee shall pay all costs
and expenses and discharge any Liens arising with respect to the Modification;
(vi) such Modifications shall comply with Sections 8.2 and 10.1 and shall not
change the primary character of such Property; and (vii) no Improvements shall
be demolished, except to the extent such demolition does not impair the value,
utility or useful life of such Property. All Modifications (other than those
that may be readily removed without impairing the value, utility or remaining
useful life of such Property) shall remain part of the realty and shall be
subject to this Lease, and title thereto shall immediately vest in Lessor. So
long as no Lease Event of Default has occurred and is continuing, Lessee may
place upon a Property any inventory, trade fixtures, machinery, equipment or
other property belonging to Lessee or third parties and may remove the same at
any time during the term of this Lease; provided that such inventory, trade
fixtures, machinery, equipment or other property, or their respective
operations, do not impair the value, utility or remaining useful life of such
Property.
(b) Following the Completion Date with respect to any Property, Lessee
shall notify Lessor of the undertaking of any construction, repairs or
alterations to the Property the cost of which is anticipated to exceed $500,000.
Prior to undertaking any such construction or alterations costing in excess of
such amount, Lessee shall deliver to Lessor (i) a brief narrative of the work to
be done and a copy of the plans and specifications relating to such work; and
(ii) an Officer's Certificate stating that such work when completed will not
impair the value, utility or remaining life of such Property. Lessor, by itself
or its agents, shall have the right, but not the
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9
obligation, from time to time to inspect such construction to ensure that the
same is completed consistent with the plans and specifications.
(c) Following the Completion Date with respect to any Property, Lessee
shall not without the consent of Lessor undertake any construction or
alterations to such Property if such construction or alterations cannot, in the
reasonable judgement of Agent, be completed on or prior to the date that is
twelve months prior to the Expiration Date.
SECTION 12. TITLE
12.1 Warranty of Title. (a) Lessee agrees that, except as otherwise
provided herein and subject to the terms of Section 13 relating to permitted
contests, Lessee shall not directly or indirectly create or allow to remain, and
shall promptly discharge at its sole cost and expense, any Lien, defect,
attachment, levy, title retention agreement or claim upon any Property or any
Modifications or any Lien, attachment, levy or claim with respect to the Rent or
with respect to any amounts held by the Agent pursuant to the Credit Agreement,
other than Permitted Liens. Lessee shall promptly notify Lessor in the event it
receives knowledge that a Lien (other than a Permitted Lien or a Lessor Lien)
exists with respect to the Property unless Lessee promptly removes such Lien.
(b) Nothing contained in this Lease shall be construed as constituting
the consent or request of Lessor, expressed or implied, to or for the
performance by any contractor, mechanic, laborer, materialman, supplier or
vendor of any labor or services or for the furnishing of any materials for any
construction, alteration, addition, repair or demolition of or to any Property
or any part thereof. NOTICE IS HEREBY GIVEN THAT LESSOR IS NOT AND SHALL NOT BE
LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO
LESSEE, OR TO ANYONE HOLDING ANY PROPERTY OR ANY PART THEREOF THROUGH OR UNDER
LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR
MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LESSOR IN AND TO ANY
PROPERTY.
12.2 Grants and Releases of Easements. Provided that no Lease Event
of Default shall have occurred and be continuing and subject to the provisions
of Sections 8, 9, 10 and 11, Lessor hereby consents to the following actions by
Lessee, in the name and stead of Lessor, but at Lessee's sole cost and expense:
(a) the granting (prior to the Lien of the Mortgage) of easements, licenses,
rights-of-way and other rights and privileges in the nature of easements
reasonably necessary or desirable for the construction, use, repair, renovation
or maintenance of any Property as herein provided; (b) the release (free and
clear of the Lien of the Mortgage) of existing easements or other rights in the
nature of easements which are for the benefit of any Property; (c) the
dedication or transfer (prior to the Lien of the Mortgage) of unimproved
portions of any Property for road, highway or other public purposes; (d) the
execution of petitions to have any Property annexed to any municipal corporation
or utility district; and (e) the execution of amendments to any covenants and
restrictions affecting any Property; provided, that in each case Lessee shall
have delivered to Lessor an Officer's Certificate stating that: (i) such grant,
release, dedication or transfer does not impair the value of utility or
remaining useful life of the applicable Property, (ii) such grant, release,
dedication or transfer is necessary in connection with the construction, use,
maintenance, alteration, renovation or improvement of the
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10
applicable Property, (iii) Lessee shall remain obligated under this Lease and
under any instrument executed by Lessee consenting to the assignment of Lessor's
interest in this Lease as security for indebtedness, in each such case in
accordance with their terms, as though such grant, release, dedication or
transfer, had not been effected and (iv) Lessee shall pay and perform any
obligations of Lessor under such grant, release, dedication or transfer. Without
limiting the effectiveness of the foregoing, provided that no Lease Event of
Default shall have occurred and be continuing, Lessor shall, upon the request of
Lessee, and at Lessee's sole cost and expense, execute and deliver any
instruments necessary or appropriate to confirm any such grant, release,
dedication or transfer to any Person permitted under this Section.
SECTION 13. PERMITTED CONTESTS
13.1 Permitted Contests Other Than in Respect of Impositions. Except
to the extent otherwise provided for in Section 12.2 of the Participation
Agreement, Lessee, on its own or on Lessor's behalf but at Lessee's sole cost
and expense, may contest, by appropriate administrative or judicial proceedings
conducted in good faith and with due diligence, the amount, validity or
application, in whole or in part, of any Legal Requirement, or utility charges
payable pursuant to Section 4.1 or any Lien, attachment, levy, encumbrance or
encroachment, and Lessor agrees not to pay, settle or otherwise compromise any
such item, provided that (a) the commencement and continuation of such
proceedings shall suspend the collection thereof from, and suspend the
enforcement thereof against the applicable Properties, Lessor, the Agent and the
Lenders; (b) there shall be no risk of the imposition of a Lien (other than a
Permitted Lien) on any Property and no part of any Property nor any Rent would
be in any danger of being sold, forfeited, lost or deferred; (c) at no time
during the permitted contest shall there be a risk of the imposition of criminal
liability or civil liability on Lessor, the Agent or any Lender for failure to
comply therewith; and (d) in the event that, at any time, there shall be a
material risk of extending the application of such item beyond the earlier of
the Maturity Date and the Expiration Date for the applicable Property, then
Lessee shall deliver to Lessor an Officer's Certificate certifying as to the
matters set forth in clauses (a), (b) and (c) of this Section 13.1. Lessor, at
Lessee's sole cost and expense, shall execute and deliver to Lessee such
authorizations and other documents as may reasonably be required in connection
with any such contest and, if reasonably requested by Lessee, shall join as a
party therein at Lessee's sole cost and expense.
SECTION 14. INSURANCE
14.1 Public Liability and Workers' Compensation Insurance. During
the Term, Lessee shall procure and carry, at Lessee's sole cost and expense,
commercial general liability insurance for claims for injuries or death
sustained by persons or damage to property while on each Property. Such
insurance shall be on terms and in amounts that are no less favorable than
insurance maintained by owners of similar properties and that are in accordance
with normal industry practice, provided that Lessee shall be permitted to self-
insure such liability up to $1,000,000. The policy shall be endorsed to name
Lessor, the Agent and the Lenders as additional insureds. The policy shall also
specifically provide that the policy shall be considered primary insurance which
shall apply to any loss or claim before any contribution by any insurance which
Lessor, the Agent or the Lenders may have in force. Lessee shall, in the
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11
operation of the Property, comply with the applicable workers' compensation laws
and protect Lessor against any liability under such laws.
14.2 Hazard and Other Insurance. (a) During the Term, Lessee shall
keep each Property insured against loss or damage by fire and other risks on
terms and in amounts that are no less favorable than insurance maintained by
owners of similar properties, that are in accordance with normal industry
practice, are in amounts equal to the actual replacement cost of the
Improvements. So long as no Lease Event of Default exists, any loss payable
under the insurance policy required by this Section will be paid to and adjusted
solely by Lessee, subject to Section 15. So long as no Lease Event of Default
exists, any loss payable under any title insurance policy covering any Property
will be paid to and adjusted solely by Lessee, subject to Section 15.
(b) If at any time during the Term the area in which any Property is
located is designated a "flood-prone" area pursuant to the Flood Disaster
Protection Act of 1973 or any amendments or supplements thereto, then Lessee
shall comply with the National Flood Insurance Program as set forth in the Flood
Disaster Protection Act of 1973, as may be amended. In addition, Lessee will
fully comply with the requirements of the National Flood Insurance Act of 1968
and the Flood Disaster Protection Act of 1973, as each may be amended from time
to time, and with any other Legal Requirement, concerning flood insurance to the
extent that it apply to any Property.
14.3 Coverage. (a) Lessee shall furnish Lessor and the Agent with
certificates showing the insurance required under Sections 14.1 and 14.2 to be
in effect and naming Agent, the Lenders and the Lessor as an additional insured
with respect to liability insurance and showing the mortgagee endorsement
required by Section 14.3(c). All such insurance shall be at the cost and
expense of Lessee. Such certificates shall include a provision in which the
insurer agrees to provide thirty (30) days' advance written notice by the
insurer to Lessor and the Agent in the event of cancellation or modification of
such insurance. If a Lease Event of Default has occurred and is continuing and
Lessor so requests, Lessee shall deliver to Lessor copies of all insurance
policies required by this Lease.
(b) Lessee agrees that the insurance policy or policies required by
this Lease shall include an appropriate clause pursuant to which such policy
shall provide that it will not be invalidated should Lessee waive, in writing,
prior to a loss, any or all rights of recovery against any party for losses
covered by such policy. Lessee hereby waives any and all such rights against
Lessor, the Agent and the Lenders to the extent of payments made under such
policies.
(c) All insurance policies required by Section 14.2 shall include a
"New York" or standard form mortgagee endorsement in favor of the Agent and, if
available, the Lessor.
(d) Neither Lessor nor Lessee shall carry separate insurance
concurrent in kind or form or contributing in the event of loss with any
insurance required under this Lease except that Lessor may carry separate
liability insurance so long as (i) Lessee's insurance is designated as primary
and in no event excess or contributory to any insurance Lessor may have in force
which would apply to a loss covered under Lessee's policy and (ii) each such
insurance policy
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12
will not cause Lessee's insurance required under this Lease to be subject to a
coinsurance exception of any kind.
(e) Lessee shall pay as they become due all premiums for the insurance
required by this Lease, shall renew or replace each policy prior to the
expiration date thereof and shall promptly deliver to Lessor and the Agent
certificates for renewal and replacement policies.
SECTION 15. CONDEMNATION AND CASUALTY
15.1 Casualty and Condemnation. (a) Subject to the provisions of
this Section 15 and Section 16 (in the event Lessee delivers, or is obligated to
deliver, a Termination Notice), and prior to the occurrence and continuation of
a Lease Default, Lessee shall be entitled to receive (and Lessor hereby
irrevocably assigns to Lessee all of Lessor's right, title and interest in) any
award, compensation or insurance proceeds to which Lessee or Lessor may become
entitled by reason of their respective interests in a Property (i) if all or a
portion of such Property is damaged or destroyed in whole or in part by a
Casualty or (ii) if the use, access, occupancy, easement rights or title to such
Property or any part thereof is the subject of a Condemnation; provided,
however, if a Lease Default shall have occurred and be continuing such award,
compensation or insurance proceeds shall be paid directly to Lessor or, if
received by Lessee, shall be held in trust for Lessor, and shall be paid over by
Lessee to Lessor, and provided further that in the event of any Casualty or
Condemnation, the estimated cost of restoration of which is in excess of
$1,000,000, any such award, compensation or insurance proceeds shall be paid
directly to Lessor, or if received by Lessee, shall be held in trust for Lessor
and shall be paid over by Lessee to Lessor.
(b) So long as no Lease Event of Default has occurred and is
continuing, Lessee may appear in any proceeding or action to negotiate,
prosecute, adjust or appeal any claim for any award, compensation or insurance
payment on account of any such Casualty or Condemnation and shall pay all
expenses thereof; provided that if the estimated cost of restoration of the
Property or the payment on account of such title defect is in excess of
$1,000,000, then Lessor shall be entitled to participate in any such proceeding
or action. At Lessee's reasonable request, and at Lessee's sole cost and
expense, Lessor and the Agent shall participate in any such proceeding, action,
negotiation, prosecution or adjustment. Lessor and Lessee agree that this Lease
shall control the rights of Lessor and Lessee in and to any such award,
compensation or insurance payment.
(c) If Lessor or Lessee shall receive notice of a Casualty or a
possible Condemnation of a Property or any interest therein, Lessor or Lessee,
as the case may be, shall give notice thereof to the other and to the Agent
promptly after the receipt of such notice.
(d) In the event of a Casualty or receipt of notice by Lessee or
Lessor of a Condemnation, Lessee shall, not later than thirty (30) days after
such occurrence, deliver to Lessor and the Agent an Officer's Certificate
stating that either (i) (x) such Casualty is not a Significant Casualty or (y)
such Condemnation is neither a Total Condemnation nor a Significant Condemnation
and that this Lease shall remain in full force and effect with respect to the
applicable Property and, at Lessee's sole cost and expense, Lessee shall
promptly and diligently
<PAGE>
13
restore the applicable Property in accordance with the terms of Section 15.1(e)
or (ii) this Lease shall terminate with respect to the applicable Property in
accordance with Section 16.1.
(e) If pursuant to this Section 15.1, this Lease shall continue in
full force and effect following a Casualty or Condemnation with respect to the
affected Property, Lessee shall, at its sole cost and expense, promptly and
diligently repair any damage to the applicable Property caused by such Casualty
or Condemnation in conformity with the requirements of Sections 10.1 and 11.1
using the as-built plans and specifications for the applicable Property (as
modified to give effect to any subsequent Modifications, any Condemnation
affecting the Property and all applicable Legal Requirements) so as to restore
the applicable Property to the same condition, operation, function and value as
existed immediately prior to such Casualty or Condemnation. In such event,
title to the applicable Property shall remain with Lessor.
(f) In no event shall a Casualty or Condemnation with respect to which
this Lease remains in full force and effect under this Section 15.1 affect
Lessee's obligations to pay Rent pursuant to Section 3.1.
(g) Notwithstanding anything to the contrary set forth in Section
15.1(a) or Section 15.1(e), if during the Term a Casualty occurs with respect to
a Property or Lessee receives notice of a Condemnation with respect to a
Property, and following such Casualty or Condemnation, such Property cannot
reasonably be restored on or before the date which is twelve months prior to the
Maturity Date to substantially the same condition as existed immediately prior
to such Casualty or Condemnation or before such day such Property is not in fact
so restored, then Lessee shall exercise its Purchase Option with respect to such
Property on the next Payment Date or irrevocably agree in writing to exercise
the Maturity Date Purchase Option with respect to such Property, and in either
such event such remaining Casualty or Condemnation proceeds shall be paid to the
Agent, which shall pay such funds to Lessee upon the closing of the purchase of
such Property.
15.2 Environmental Matters. (a) Promptly upon Lessee's actual
knowledge of the presence of Hazardous Substances in any portion of a Property
in concentrations and conditions that constitute an Environmental Violation,
Lessee shall notify Lessor in writing of such condition. In the event of such
Environmental Violation, Lessee shall, not later than thirty (30) days after
Lessee has actual knowledge of such Environmental Violation, either deliver to
Lessor and the Agent an Officer's Certificate and a Termination Notice with
respect to such Property pursuant to Section 16.1, if applicable, or, at
Lessee's sole cost and expense, promptly and diligently undertake any response,
clean up, remedial or other action necessary to remove, cleanup or remediate the
Environmental Violation in accordance with the terms of Section 9.1. If Lessee
does not deliver a Termination Notice with respect to such Property pursuant to
Section 16.1, Lessee shall, upon completion of remedial action by Lessee, cause
to be prepared by an environmental consultant reasonably acceptable to Lessor a
report describing the Environmental Violation and the actions taken by Lessee
(or its agents) in response to such Environmental Violation, and a statement by
the consultant that the Environmental Violation has been remedied in full
compliance with applicable Environmental Laws.
(b) In addition, Lessee shall provide to Lessor, within five (5)
Business Days of receipt, copies of all written communications with any
Governmental Authority relating to any
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14
Environmental Law in connection with any Property. Lessee shall also promptly
provide such detailed reports of any such environmental claims as reasonably may
be requested by Lessor and the Agent.
SECTION 16. LEASE TERMINATION
16.1 Termination upon Certain Events. (a) If Lessor or Lessee shall
have received notice of a Total Condemnation, then Lessee shall be obligated,
within thirty (30) days after Lessee receives notice thereof, to deliver a
written notice in the form described in Section 16.2(a) (a "Termination Notice")
of the termination of this Lease with respect to the applicable Property.
(b) If either: (i) Lessee or Lessor shall have received notice of a
Condemnation, and Lessee shall have delivered to Lessor an Officer's Certificate
that such Condemnation is a Significant Condemnation; or (ii) a Casualty occurs,
and Lessee shall have delivered to Lessor an Officer's Certificate that such
Casualty is a Significant Casualty; or (iii) an Environmental Violation occurs
or is discovered and Lessee shall have delivered to Lessor an Officer's
Certificate stating that, in the reasonable, good-faith judgment of Lessee, the
cost to remediate the same will exceed 10% of the Property Cost of such
Property; then, Lessee shall, simultaneously with the delivery of the Officer's
Certificate pursuant to the preceding clause (i), (ii) or (iii), deliver a
Termination Notice with respect to the affected Property.
16.2 Procedures. (a) A Termination Notice shall contain: (i)
notice of termination of this Lease with respect to the affected Property on a
date not more than thirty (30) days after Lessor's receipt of such Termination
Notice (the "Termination Date"); (ii) a binding and irrevocable agreement of
Lessee to pay the Termination Value and purchase such Property on such
Termination Date and (iii) the Officer's Certificate described in Section
16.1(b).
(b) On the Termination Date, Lessee shall pay to Lessor the
Termination Value for the applicable Property, plus all amounts owing in respect
of Rent for such Property (including Supplemental Rent) theretofore accruing and
Lessor shall convey such Property to Lessee (or Lessee's designee) all in
accordance with Section 19.1.
SECTION 17. DEFAULT
17.1 Lease Events of Default. If any one or more of the following
events (each a "Lease Event of Default") shall occur:
(a) Lessee shall fail to make payment of (i) any Basic Rent or any
Supplemental Rent representing amounts owed under the Credit Agreement or
the other Credit Documents within five (5) Business Days after the same has
become due and payable or (ii) any Maximum Residual Guarantee Amount,
Purchase Option Price or Termination Value after the same has become due
and payable; or
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15
(b) Lessee shall fail to make payment of any other Supplemental Rent
due and payable within five (5) Business Days after receipt of notice
thereof; or
(c) Lessee shall fail to maintain insurance as required by Section 14;
or
(d) (i) subject to the limitations contained in Section 17.7 as to the
Lessee only, Lessee or any Guarantor shall fail to observe or perform any
term, covenant or condition of Lessee or such Guarantor, respectively,
under this Lease, the Participation Agreement, the Guarantee or any other
Operative Agreement to which it is a party (other than those set forth in
Section 17.1(a), (b) or (c) hereof) and such default shall remain
unremedied for a period of 30 days, provided that such 30 day period shall
be extended (up to a maximum period of 180 days) as to defaults which
cannot be cured with the payment of money but are curable though not
reasonably capable of cure within such 30 day period, provided that Lessee
has commenced to cure such default prior to the end of such 30 day period
and prosecutes such cure to completion or (ii) any representation or
warranty by Lessee or any Guarantor, respectively, set forth in this Lease,
the Guaranty or in any other Operative Agreement or in any document entered
into in connection herewith or therewith or in any document, certificate or
financial or other statement delivered in connection herewith or therewith
shall be false or inaccurate in any material way; or
(e) an Agency Agreement Event of Default shall have occurred and be
continuing; or
(f) Lessee or any Guarantor shall (i) admit in writing its inability
to pay its debts generally as they become due, (ii) file a petition under
the United States bankruptcy laws or any other applicable insolvency law or
statute of the United States of America or any State or Commonwealth
thereof, (iii) make a general assignment for the benefit of its creditors,
(iv) consent to the appointment of a receiver of itself or the whole or any
substantial part of its property, (v) fail to cause the discharge of any
custodian, trustee or receiver appointed for Lessee or any such Guarantor
or the whole or a substantial part of its property within ninety (90) days
after such appointment, or (vi) file a petition or answer seeking or
consenting to reorganization under the United States bankruptcy laws or any
other applicable insolvency law or statute of the United States of America
or any State or Commonwealth thereof; or
(g) insolvency proceedings or a petition under the United States
bankruptcy laws or any other applicable insolvency law or statute of the
United States of America or any State or Commonwealth thereof shall be
filed against Lessee or any Guarantor and not dismissed within ninety (90)
days from the date of its filing, or a court of competent jurisdiction
shall enter an order or decree appointing, without its consent of, a
receiver of Lessee or any Guarantor or the whole or a substantial part of
its property, and such order or decree shall not be vacated or set aside
within ninety (90) days from the date of the entry thereof; or
(h) a Credit Agreement Event of Default shall have occurred and be
continuing; or
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16
(i) an event of default under the Corporate Credit Agreement shall
have occurred and be continuing;
then, in any such event, Lessor may, in addition to the other rights and
remedies provided for in this Section 17 and in Section 18.1, terminate this
Lease by giving Lessee five (5) days notice of such termination, and this Lease
shall terminate. Lessee shall, to the fullest extent permitted by law, pay as
Supplemental Rent all costs and expenses incurred by or on behalf of Lessor,
including fees and expenses of counsel, as a result of any Lease Event of
Default hereunder.
17.2 Final Liquidated Damages. If a Lease Event of Default shall
have occurred and be continuing, Lessor shall have the right to recover, by
demand to Lessee and at Lessor's election, and Lessee shall pay to Lessor, as
and for final liquidated damages, but exclusive of the indemnities payable under
Section 13 of the Participation Agreement, and in lieu of all damages beyond the
date of such demand the sum of (a) the Termination Value, plus (b) all other
amounts owing in respect of Rent and Supplemental Rent theretofore accruing
under this Lease. Upon payment of the amount specified pursuant to the first
sentence of this Section 17.2, Lessee shall be entitled to receive from Lessor,
at Lessee's request and cost, an assignment of Lessor's right, title and
interest in the Properties, in each case in recordable form and otherwise in
conformity with local custom and free and clear of the Lien of all mortgages
(including the Mortgages) and any Lessor Liens. Lessee (or Lessee's designee)
shall execute and deliver to Lessor an assumption of all of Lessor's obligations
under the Ground Leases, if any. The Properties shall be conveyed to Lessee (or
Lessee's designee) "AS IS" and in their then present physical condition. If any
statute or rule of law shall limit the amount of such final liquidated damages
to less than the amount agreed upon, Lessor shall be entitled to the maximum
amount allowable under such statute or rule of law; provided, that Lessee shall
not be entitled to receive an assignment of Lessor's interest under the Ground
Leases, if any, or in the Properties unless Lessee shall have paid in full the
Termination Value of each of the Properties.
17.3 Lease Remedies. Lessor and Lessee intend that for commercial
law and bankruptcy law purposes, this Lease will be treated as a financing
arrangement, as set forth in Section 7. If, as a result of applicable state
law, which cannot be waived, this Lease is deemed to be a lease of the
Properties, rather than a financing arrangement, and Lessor is unable to enforce
the remedies set forth in Section 17.2, the following remedies shall be
available to Lessor:
(a) Surrender of Possession. If a Lease Event of Default shall have
occurred and be continuing, and whether or not this Lease shall have been
terminated pursuant to Section 17.1, Lessee shall, upon thirty (30) days written
notice, surrender to Lessor possession of the Property and Lessee shall quit the
same. Lessor may enter upon and repossess the Property by such means as are
available at law or in equity, and may remove Lessee and all other Persons and
any and all personal property and Lessee's equipment and personalty and
severable Modifications from the Property. Lessor shall have no liability by
reason of any such entry, repossession or removal performed in accordance with
applicable law.
(b) Reletting. If a Lease Event of Default shall have occurred and be
continuing, and whether or not this Lease shall have been terminated pursuant to
Section 17.1, Lessor may, but shall be under no obligation to, relet all, or any
portion, of the Property, for the account of Lessee or otherwise, for such term
or terms (which may be greater or less than the
<PAGE>
17
period which would otherwise have constituted the balance of the Term) and on
such conditions (which may include concessions or free rent) and for such
purposes as Lessor may determine, and Lessor may collect, receive and retain the
rents resulting from such reletting. Lessor shall not be liable to Lessee for
any failure to relet the Property or for any failure to collect any rent due
upon such reletting.
(c) Damages. None of (i) the termination of this Lease pursuant to
Section 17.1; (ii) the repossession of the Property; or (iii) except to the
extent required by applicable law, the failure of Lessor to relet all, or any
portion, of the Property, the reletting of all or any portion thereof, nor the
failure of Lessor to collect or receive any rentals due upon any such reletting
shall relieve Lessee of its liability and obligations hereunder, all of which
shall survive any such termination, repossession or reletting. If any Lease
Event of Default shall have occurred and be continuing and notwithstanding any
termination of this Lease pursuant to Section 17.1, Lessee shall forthwith pay
to Lessor all Basic Rent and other sums due and payable hereunder to and
including the date of such termination. Thereafter, on the days on which the
Basic Rent or Supplemental Rent, as applicable, are payable under this Lease or
would have been payable under this Lease if the same had not been terminated
pursuant to Section 17.1 and until the end of the Term or what would have been
the Term in the absence of such termination, Lessee shall pay Lessor, as current
liquidated damages (it being agreed that it would be impossible accurately to
determine actual damages) an amount equal to the Basic Rent and Supplemental
Rent that are payable under this Lease or would have been payable by Lessee
hereunder if this Lease had not been terminated pursuant to Section 17.1, less
the net proceeds, if any, which are actually received by Lessor with respect to
the period in question of any reletting of the Property or any portion thereof;
provided that Lessee's obligation to make payments of Basic Rent and
Supplemental Rent under this Section 17.4 shall continue only so long as Lessor
shall not have received the amounts specified in Section 17.5 or Section 17.6.
In calculating the amount of such net proceeds from reletting, there shall be
deducted all of Lessor's, the Agent's and any Lenders' expenses in connection
therewith, including repossession costs, brokerage commissions, fees and
expenses for counsel and any necessary repair or alteration costs and expenses
incurred in preparation for such reletting. To the extent Lessor receives any
damages pursuant to this Section 17.4, such amounts shall be regarded as amounts
paid on account of Rent.
(d) Acceleration of Rent. If a Lease Event of Default shall have
occurred and be continuing, and this Lease shall not have been terminated
pursuant to Section 17.1, and whether or not Lessor shall have collected any
current liquidated damages pursuant to Section 17.3(c), Lessor may upon written
notice to Lessee accelerate all payments of Basic Rent due hereunder and, upon
such acceleration, Lessee shall immediately pay Lessor, as and for final
liquidated damages and in lieu of all current liquidated damages on account of
such Lease Event of Default beyond the date of such acceleration (it being
agreed that it would be impossible accurately to determine actual damages) an
amount equal to the sum of (a) all Basic Rent (assuming interest at a rate per
annum equal to the Overdue Rate), as applicable, due from the date of such
acceleration until the end of the Term, plus (b) the Maximum Residual Guarantee
Amount that would be payable under Section 21.1(c) assuming the proceeds of the
sale pursuant to such Section 21.1(c) are equal to zero, which sum is then
discounted to present value at a rate equal to the rate then being paid on
United States treasury securities with maturities corresponding to the then
remaining Term. Following payment of such amount by Lessee, Lessee will be
permitted to stay in possession of the Property for the remainder of the Term,
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18
subject to the terms and conditions of this Lease, including the obligation to
pay Supplemental Rent, provided that no further Lease Event of Default shall
occur and be continuing, following which Lessor shall have all the rights and
remedies set forth in this Section 17 (but not including those set forth in this
Section 17.3). If any statute or rule of law shall limit the amount of such
final liquidated damages to less than the amount agreed upon, Lessor shall be
entitled to the maximum amount allowable under such statute or rule of law.
17.4 Waiver of Certain Rights. If this Lease shall be terminated
pursuant to Section 17.1, Lessee waives, to the fullest extent permitted by law,
(a) any notice of re-entry or the institution of legal proceedings to obtain re-
entry or possession; (b) any right of redemption, re-entry or repossession; (c)
the benefit of any laws now or hereafter in force exempting property from
liability for rent or for debt; and (d) any other rights which might otherwise
limit or modify any of Lessor's rights or remedies under this Section 17.
17.5 Assignment of Rights Under Contracts. If a Lease Event of
Default shall have occurred and be continuing, and whether or not this Lease
shall have been terminated pursuant to Section 17.1, Lessee shall upon Lessor's
demand immediately assign, transfer and set over to Lessor all of Lessee's
right, title and interest in and to each agreement executed by Lessee in
connection with the construction, renovation, development, use or operation of
the Property (including all right, title and interest of Lessee with respect to
all warranty, performance, service and indemnity provisions), as and to the
extent that the same relate to the construction renovation, and operation of the
Property.
17.6 Remedies Cumulative. The remedies herein provided shall be
cumulative and in addition to (and not in limitation of) any other remedies
available at law, equity or otherwise including any mortgage foreclosure
remedies contained in the Memorandum of Lease.
17.7 Covenant Defaults.
(a) The occurrence of any event which would give rise to a Lease
Default or Lease Event of Default pursuant to Section 17.1(d) for the
failure by the Lessee to observe or perform any term, covenant or condition
of Lessee under this Lease or the Participation Agreement relating to a
specific Property (a "Covenant Default") shall not be deemed to be a Lease
Default or a Lease Event of Default so long as the following conditions
shall be satisfied:
(i) such Covenant Default does not relate to the breach by the
Lessee of any of its obligations under this Lease or the other
Operative Agreements with respect to any environmental matters or
Environmental Claims;
(ii) such Covenant Default shall not have a Material Adverse
Effect;
(iii) there is no material risk that such Covenant Default will
cause any lien (other than a Permitted Exception) to attach to a
Property or subject the Lessor or any Lender to any criminal
liability;
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19
(iv) there shall not at any time exist Covenant Defaults
relating to Properties which have an aggregate Property Cost in excess
of the lesser of (a) 10% of the Property Costs of all of the
Properties and (b) $7,500,000 and
(v) the Lessee shall have delivered to Lessor an Officer's
Certificate stating that, in reasonable, good faith judgment of
Lessee, (a) the cost to remediate all such Covenant Defaults will not
exceed $3,000,000 and (b) the costs to remediate any Covenant Default
on a specific Property will not exceed 10% of the Property Cost of
such Property.
(b) If (i) each of the foregoing conditions set forth in Section
17.7(a) shall not be satisfied or (ii) such Covenant Default shall not be
cured prior to the date which is twelve months prior to the Maturity Date,
a Lease Event of Default shall be deemed to have occurred.
SECTION 18. LESSOR'S RIGHT TO CURE
18.1 Lessor's Right to Cure Lessee's Lease Defaults. Lessor, without
waiving or releasing any obligation or Lease Event of Default, may (but shall be
under no obligation to) remedy any Lease Event of Default for the account and at
the sole cost and expense of Lessee, including the failure by Lessee to maintain
any insurance required by Section 14, and may, to the fullest extent permitted
by law, and notwithstanding any right of quiet enjoyment in favor of Lessee,
enter upon any Property for such purpose and take all such action thereon as may
be necessary or appropriate therefor. No such entry shall be deemed an eviction
of Lessee. All out-of-pocket costs and expenses so incurred (including the fees
and expenses of counsel), together with interest thereon at the Overdue Rate
from the date on which such sums or expenses are paid by Lessor, shall be paid
by Lessee to Lessor on demand as Supplemental Rent.
SECTION 19. LEASE TERMINATION
19.1 Provisions Relating to Lessee's Termination of this Lease or
Exercise of Purchase Option. In connection with any termination of this Lease
with respect to any Property pursuant to the terms of Section 16.2, or in
connection with Lessee's exercise of its Purchase Option or Maturity Date
Purchase Option, upon the date on which this Lease is to terminate with respect
to the applicable Property or upon the Expiration Date with respect to the
applicable Property, and upon tender by Lessee of the amounts set forth in
Section 16.2(b), 20.1 or 20.2, as applicable:
(a) Lessor shall execute and deliver to Lessee (or to Lessee's
designee) at Lessee's cost and expense an assignment of Lessor's entire
interest in the applicable Properties, in each case in recordable form and
otherwise in conformity with local custom and free and clear of the Lien of
the applicable Mortgage and any Lessor Liens; and
(b) The applicable Property shall be conveyed to Lessee "AS IS" and in
then present physical condition.
<PAGE>
20
19.2 Aggregate Tranche A Percentage. Notwithstanding any other
provision of this Lease or the other Operative Agreements, (i) the Lessee shall
not be permitted to terminate this Lease with respect to a Property pursuant to
Section 16 or exercise its Purchase Option with respect to a Property pursuant
to Section 20.1 and (ii) Lessee shall not permit a Property to be sold pursuant
to Section 21.1(b) and Lessor shall not be obligated to accept a bid and sell a
Property pursuant to Section 21.1(b) if, in the case of either clause (i) or
(ii) above, the Aggregate Tranche A Percentage, after giving effect to the
termination of the Lease with respect to such Property, would be less than
82.50%.
SECTION 20. PURCHASE OPTION
20.1 Purchase Option. At any time prior to the commencement of the
Marketing Period and provided that neither the Agent nor any Lender has
commenced foreclosure proceedings or other proceedings initiating a sale of a
Property under any of the Mortgages, Lessee shall have the option (exercisable
by giving Lessor irrevocable written notice (the "Purchase Notice") of Lessee's
election to exercise such option not less than ten (10) days prior to the date
of purchase pursuant to such option) to purchase one or more of the Properties
on the date specified in such Purchase Notice at a price equal to the
Termination Value (the "Purchase Option Price") (which the parties do not intend
to be a "bargain" purchase price) of such Property. If Lessee exercises its
option to purchase one or more of the Properties pursuant to this Section 20.1
(the "Purchase Option"), Lessor shall transfer to Lessee or Lessee's designee
all of Lessor's right, title and interest in and to such Property as of the date
specified in the Purchase Notice upon receipt of the Purchase Option Price and
all Rent and other amounts then due and payable under this Lease and any other
Operative Agreement, in accordance with Section 19.1.
20.2 Maturity Date Purchase Option. Not less than twelve months
prior to the Maturity Date, Lessee may give Lessor and Agent irrevocable written
notice (the "Maturity Date Election Notice") that Lessee is electing to exercise
the Maturity Date Purchase Option. If Lessee does not give a Maturity Date
Election Notice on or before the date twelve months prior to the Maturity Date,
then Lessee shall be obligated to remarket the Properties pursuant to Section
21.1. If Lessee has elected to exercise the Maturity Date Purchase Option, then
on the Maturity Date Lessee shall pay to Lessor an amount equal to the
Termination Value for all the Properties (which the parties do not intend to be
a "bargain" purchase price) and, upon receipt of such amount plus all Rent and
other amounts then due and payable under this Lease and any other Operative
Agreement, Lessor shall transfer to Lessee or Lessee's designee all of Lessor's
right, title and interest in and to the Properties in accordance with Section
19.1.
20.3 Obligation to Purchase All Properties . If on the date which is
twelve months prior to the Maturity Date the then Termination Value of all the
Properties (including any Substitute Property) is less than the Maximum Purchase
Option Amount, then the Lessee shall be required to exercise its Purchase Option
on the Maturity Date with respect to all remaining Properties.
SECTION 21. SALE OF PROPERTY
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21.1 Sale Procedure. (a) With respect to each Property, at the
expiration of the Term, unless Lessee shall have elected to purchase such
Property and has paid the Purchase Option Price with respect thereto, or
otherwise terminated this Lease with respect thereto and paid the Termination
Value with respect thereto, Lessee shall (i) pay to Lessor the Maximum Residual
Guarantee Amount for such Property, and (ii) sell such Property to one or more
third parties for cash in accordance with Section 21.1(b).
(b) During the Marketing Period, Lessee, as nonexclusive broker for
Lessor, shall use its best efforts to obtain bids for the cash purchase of each
Property being sold for the highest price available, shall notify Lessor
promptly of the name and address of each prospective purchaser and the cash
price which each prospective purchaser shall have offered to pay for such
Property and shall provide Lessor with such additional information about the
bids and the bid solicitation procedure as Lessor may request from time to time.
Lessor may reject any and all bids and may assume sole responsibility for
obtaining bids by giving Lessee written notice to that effect; provided,
however, that notwithstanding the foregoing, Lessor may not reject a bid if such
bid is greater than or equal to the sum of the Limited Recourse Amount and all
costs and expenses referred to in Section 21.1(i) and is a bona fide offer by a
third party purchaser who is not an Affiliate of Lessee. If the price which a
prospective purchaser shall have offered to pay for all or any of the Properties
is less than the sum of the Limited Recourse Amount and all costs and expenses
referred to in Section 21.1(i), Lessor may elect to retain the Property by
giving Lessee at least two Business Days' prior written notice of Lessor's
election to retain the Property, and upon receipt of such notice, Lessee shall
surrender the Property to Lessor pursuant to Section 10.1(c). Unless Lessor
shall have elected to retain the Property pursuant to the preceding sentence,
Lessor shall sell the Property free of any Lessor Liens attributable to it,
without recourse or warranty, for cash to the purchaser or purchasers identified
by Lessee or Lessor, as the case may be. Lessee shall surrender the Property so
sold to each purchaser in the condition specified in Section 10.1.
(c) On each date during the Marketing Period on which a Property is
sold pursuant to Section 21.1(b), and on the Maturity Date with respect to any
Properties remaining unsold, Lessee shall pay to Lessor the Maximum Residual
Guarantee Amount for such Property.
21.2 Application of Proceeds of Sale. Lessor shall apply the
proceeds of sale of each Property in the following order of priority:
(i) FIRST, to pay or to reimburse Lessor for the payment of all
reasonable costs and expenses incurred by Lessor in connection with the
sale; and
(ii) SECOND, the balance shall be paid to the Agent to be
applied pursuant to the provisions of the Credit Agreement.
21.3 Indemnity for Excessive Wear. If the proceeds of the sale
described in Section 21.1(b) with respect to any Property, less all expenses
incurred by Lessor in connection with such sale, shall be less than the Limited
Recourse Amount for such Property at the time of such sale and if it shall have
been determined (pursuant to the Appraisal Procedure) that the Fair Market Sales
Value of such Property shall have been impaired by greater than expected wear
and tear during the Term, Lessee shall pay to Lessor within ten (10) days after
receipt of Lessor's
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22
written statement (i) the amount of such excess wear and tear determined by the
Appraisal Procedure or (ii) the amount of the Net Sale Proceeds Shortfall,
whichever amount is less.
21.4 Appraisal Procedure. For determining the Fair Market Sales
Value of a Property or any other amount which may, pursuant to any provision of
any Operative Agreement, be determined by an appraisal procedure, Lessor and
Lessee shall use the following procedure (the "Appraisal Procedure"). Lessor
and Lessee shall endeavor to reach a mutual agreement as to such amount for a
period of ten (10) days from commencement of the Appraisal Procedure, and if
they cannot agree within ten (10) days, then two qualified appraisers, one
chosen by Lessee and one chosen by Lessor, shall mutually agree thereupon, but
if either party shall fail to choose an appraiser within twenty (20) days after
notice from the other party of the selection of its appraiser, then the
appraisal by such appointed appraiser shall be binding on Lessee and Lessor. If
the two appraisers cannot agree within twenty (20) days after both shall have
been appointed, then a third appraiser shall be selected by the two appraisers
or, failing agreement as to such third appraiser within thirty (30) days after
both shall have been appointed, by the American Arbitration Association. The
decisions of the three appraisers shall be given within twenty (20) days of the
appointment of the third appraiser and the decision of the appraiser most
different from the average of the other two shall be discarded and such average
shall be binding on Lessor and Lessee; provided that if the highest appraisal
and the lowest appraisal are equidistant from the third appraisal, the third
appraisal shall be binding on Lessor and Lessee. The fees and expenses of all
of the appraisers shall be paid by the Lessee.
21.5 Certain Obligations Continue. During the Marketing Period, the
obligation of Lessee to pay Rent with respect to each Property (including the
installment of Basic Rent due on the Maturity Date) shall continue undiminished
until payment in full to Lessor of the sale proceeds, the Maximum Residual
Guarantee Amount, if any, the amount due under Section 21.3, if any, and all
other amounts due to Lessor with respect to the Property. Lessor shall have the
right, but shall be under no duty, to solicit bids, to inquire into the efforts
of Lessee to obtain bids or otherwise to take action in connection with any such
sale, other than as expressly provided in this Section 21.
SECTION 22. HOLDING OVER
22.1 Holding Over. If Lessee shall for any reason remain in
possession of a Property after the expiration or earlier termination of this
Lease (unless the Property is conveyed to Lessee), such possession shall be as a
tenancy at sufferance during which time Lessee shall continue to pay
Supplemental Rent that would be payable by Lessee hereunder were the Lease then
in full force and effect with respect to such Property and Lessee shall continue
to pay Basic Rent at an annual rate equal to the rate payable hereunder
immediately preceding such expiration or earlier termination; provided, however,
that from and after the sixtieth (60th) day Lessee shall remain in possession of
such Property after such expiration or earlier termination, Lessee shall pay
Basic Rent at an annual rate equal to two hundred percent (200%) of the Basic
Rent payable hereunder immediately preceding such expiration or earlier
termination. Such Basic Rent shall be payable from time to time upon demand by
Lessor. During any period of tenancy at sufferance, Lessee shall, subject to
the second preceding sentence, be obligated to perform and observe all of the
terms, covenants and conditions of this Lease, but shall have no rights
<PAGE>
23
hereunder other than the right, to the extent given by law to tenants at
sufferance, to continue its occupancy and use of the Property. Nothing
contained in this Section 22 shall constitute the consent, express or implied,
of Lessor to the holding over of Lessee after the expiration or earlier
termination of this Lease as to any Property and nothing contained herein shall
be read or construed as preventing Lessor from maintaining a suit for possession
of any Property or exercising any other remedy available to Lessor at law or in
equity.
SECTION 23. RISK OF LOSS
23.1 Risk of Loss. The risk of loss of or decrease in the enjoyment
and beneficial use of the Property as a result of the damage or destruction
thereof by fire, the elements, casualties, thefts, riots, wars or otherwise is
assumed by Lessee, and Lessor shall in no event be answerable or accountable
therefor.
SECTION 24. SUBLETTING AND ASSIGNMENT
24.1 Subletting and Assignment. Lessee may not assign this Lease or
any of its rights or obligations hereunder in whole or in part other than to any
Guarantor, provided that notwithstanding any such assignment, Lessee shall not
be released and shall remain obligated for all of its obligations under this
Lease and the other Operative Agreements. Lessee may, without the consent of
Lessor, sublease the Property or a portion thereof to any Person. No sublease
or other relinquishment of possession of the Property shall in any way discharge
or diminish any of Lessee's obligations to Lessor hereunder and Lessee shall
remain directly and primarily liable under this Lease as to the Property, or any
portion thereof, so sublet. Any sublease of the Property shall be made subject
to and subordinate to this Lease and to the rights of Lessor hereunder, and
shall expressly provide for the surrender of the Property after a Lease Event of
Default hereunder and such sublease shall expressly provide for termination at
or prior to the Expiration Date.
24.2 Subleases. Promptly following the execution and delivery of any
sublease permitted by this Section 24, Lessee shall deliver a copy of such
executed sublease to Lessor and the Agent.
SECTION 25. ESTOPPEL CERTIFICATES
25.1 Estoppel Certificates. At any time and from time to time upon
not less than twenty (20) days' prior request by Lessor, the Lessee shall
furnish to the Lessor a certificate signed by an individual having the office of
vice president or higher in the Certifying Party certifying that this Lease is
in full force and effect (or that this Lease is in full force and effect as
modified and setting forth the modifications); the dates to which the Basic Rent
and Supplemental Rent have been paid; to the best knowledge of the signer of
such certificate, whether or not the Lessor is in default under any of its
obligations hereunder (and, if so, the nature of such alleged default); and such
other matters under this Lease as the Lessor may reasonably request. Any such
certificate furnished pursuant to this Section 25 may be relied
<PAGE>
24
upon by the Lessor, and any existing or prospective mortgagee, purchaser or
lender, and any accountant or auditor, of, from or to the Lessor (or any
Affiliate thereof).
SECTION 26. NO WAIVER
26.1 No Waiver. No failure by Lessor or Lessee to insist upon the
strict performance of any term hereof or to exercise any right, power or remedy
upon a default hereunder, and no acceptance of full or partial payment of Rent
during the continuance of any such default, shall constitute a waiver of any
such default or of any such term. To the fullest extent permitted by law, no
waiver of any default shall affect or alter this Lease, and this Lease shall
continue in full force and effect with respect to any other then existing or
subsequent default.
SECTION 27. ACCEPTANCE OF SURRENDER
27.1 Acceptance of Surrender. Except as otherwise expressly provided
in this Lease, no surrender to Lessor of this Lease or of all or any portion of
the Property or of any interest therein shall be valid or effective unless
agreed to and accepted in writing by Lessor and, prior to the payment or
performance of all obligations under the Credit Documents, the Agent, and no act
by Lessor or the Agent or any representative or agent of Lessor or the Agent,
other than a written acceptance, shall constitute an acceptance of any such
surrender.
SECTION 28. NO MERGER OF TITLE
28.1 No Merger of Title. There shall be no merger of this Lease or
of the leasehold estate created hereby by reason of the fact that the same
Person may acquire, own or hold, directly or indirectly, in whole or in part,
(a) this Lease or the leasehold estate created hereby or any interest in this
Lease or such leasehold estate, (b) the fee estate in the Property, except as
may expressly be stated in a written instrument duly executed and delivered by
the appropriate Person, or (c) a beneficial interest in Lessor.
SECTION 29. NOTICES
29.1 Notices. Unless otherwise specifically provided herein, all
notices, consents, directions, approvals, instructions, requests and other
communications required or permitted by the terms hereof to be given to any
Person shall be given in writing by nationally recognized courier service and
any such notice shall become effective one Business Day after delivery to such
nationally recognized courier service specifying overnight delivery and shall be
directed to the address of such Person as indicated:
If to Lessee:
Living Centers Holding Company
<PAGE>
25
15415 Katy Freeway, Suite 800
Houston, Texas 77094
Attn: Mr. Boyd Gentry
Telecopy No.: (713) 578-4735
If to Lessor:
FBTC Leasing Corp.
Two World Trade Center
New York, New York 10048
Attn: Mr. Carl Marcantonio
Telecopy No.: (212) 321-9408
with a copy to the Agent:
The Chase Manhattan Bank
270 Park Avenue
New York, New York
Attn: Global Lease Finance
Telecopy No.: (212) 270-2132
or such additional parties and/or other address as such party may hereafter
designate.
SECTION 30. MISCELLANEOUS
30.1 Miscellaneous. Anything contained in this Lease to the contrary
notwithstanding, all claims against and liabilities of Lessee or Lessor arising
from events commencing prior to the expiration or earlier termination of this
Lease shall survive such expiration or earlier termination. If any term or
provision of this Lease or any application thereof shall be declared invalid or
unenforceable, the remainder of this Lease and any other application of such
term or provision shall not be affected thereby. If any right or option of
Lessee provided in this Lease, including any right or option described in
Sections 15, 16, 22 or 21, would, in the absence of the limitation imposed by
this sentence, be invalid or unenforceable as being in violation of the rule
against perpetuities or any other rule of law relating to the vesting of an
interest in or the suspension of the power of alienation of property, then such
right or option shall be exercisable only during the period which shall end
twenty-one (21) years after the date of death of the last survivor of the
descendants of Franklin D. Roosevelt, the former President of the United States,
Henry Ford, the deceased automobile manufacturer, and John D. Rockefeller, the
founder of the Standard Oil Company, known to be alive on the date of the
execution and delivery of this Lease.
30.2 Amendments and Modifications. Neither this Lease nor any
provision hereof may be amended, waived, discharged or terminated except by an
instrument in writing signed by Lessor and Lessee.
<PAGE>
26
30.3 Successors and Assigns. All the terms and provisions of this
Lease shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
30.4 Headings and Table of Contents. The headings and table of
contents in this Lease are for convenience of reference only and shall not limit
or otherwise affect the meaning hereof.
30.5 Counterparts. This Lease may be executed in any number of
counterparts, each of which shall be an original, but all of which shall
together constitute one and the same instrument.
30.6 GOVERNING LAW. THIS LEASE HAS BEEN DELIVERED IN, AND SHALL IN
ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY
WITHIN SUCH STATE, EXCEPT AS TO MATTERS RELATING TO THE CREATION, PERFECTION AND
ENFORCEMENT OF LIENS AND SECURITY INTERESTS AND THE EXERCISE OF REMEDIES WITH
RESPECT THERETO, WHICH SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE IN WHICH THE APPLICABLE PROPERTY IS LOCATED.
30.7 Limitations on Recourse. The parties hereto agree that the
Lessor shall have no personal liability whatsoever to the Lessee or its
respective successors and assigns for any claim based on or in respect of this
Lease or any of the other Operative Agreements or arising in any way from the
transactions contemplated hereby or thereby; provided, however, that the Lessor
shall be personally liable (a) for its own willful misconduct or gross
negligence, (b) for liabilities that result from its breach of any of its
covenants, agreements or obligations set forth in or from any misrepresentation
of Lessor in any of the Operative Agreements, (c) for any Tax based on or
measured by any fees, commission or compensation received by it for acting as
the Lessor as contemplated by the Operative Agreements or (d) as the other
Operative Agreements expressly provide that the Lessor shall have personal
liability. It is understood and agreed that, except as provided in the
preceding proviso: (i) the Lessor shall have no personal liability under any of
the Operative Agreements as a result of acting pursuant to and consistent with
any of the Operative Agreements; (ii) all obligations of the Lessor to the
Lessee are solely nonrecourse obligations and shall be enforceable solely
against the interest of the Lessor in the Properties; and (iii) all such
personal liability of the Lessor is expressly waived and released as a condition
of, and as consideration for, the execution and delivery of the Operative
Agreements by the Lessor.
30.8 Memorandum of Lease. This Lease shall not be recorded, but
Lessor and Lessee shall, upon the execution and delivery of each Lease
Supplement, execute and deliver a memorandum of this Lease (a "Memorandum of
Lease") substantially in the form of Exhibit B and otherwise in form suitable
for recording under the laws of the jurisdiction in which the Property covered
by such Memorandum of Lease is located, which memorandum shall be recorded at
Lessee's sole cost and expense.
<PAGE>
27
30.9 Priority. On and prior to the Maturity Date, the Mortgages
shall be subject and subordinate to this Lease and following the Maturity Date,
the Mortgages, at the sole election of the Agent, shall be senior to this Lease
without any further act by any Person.
SECTION 31.
31.1 Ground Lease. During the Basic Term, Lessee shall observe and
perform all of the obligations of Lessor under any Ground Lease (including the
payment of all rent and other amounts thereunder) and, in connection therewith,
shall, prior to the occurrence and continuation of a Lease Event of Default,
have the benefit of all of Lessor's rights as lessee under any Ground Lease.
<PAGE>
28
IN WITNESS WHEREOF, the parties have caused this Lease be duly
executed and delivered as of the date first above written.
LIVING CENTERS HOLDING COMPANY
By: /s/ Boyd P. Gentry
----------------------------
Name: Boyd P. Gentry
Title: Vice President
FBTC LEASING CORP.
By: ____________________________________
Name:
Title:
<PAGE>
29
Receipt of this original counterpart of the foregoing Lease is hereby
acknowledged on this ____ day of October, 1996.
THE CHASE MANHATTAN BANK, as the
Agent for the Lenders
By: ____________________________________
Name:
Title:
<PAGE>
1
Exhibit A
---------
LEASE SUPPLEMENT NO. __
THIS LEASE SUPPLEMENT NO. __ (this "Lease Supplement") dated as of
_____________, between FBTC LEASING CORP., a New York corporation, as lessor
(the "Lessor"), and LIVING CENTERS HOLDING COMPANY, a Delaware corporation, as
lessee (the "Lessee").
WHEREAS, the Lessor is the owner of the Property described on Schedule
I hereto (the "Leased Property") and wishes to lease the same to the Lessee;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Definitions; Rules of Usage. For purposes of this Lease
Supplement, capitalized terms used herein and not otherwise herein shall have
the meanings assigned to them in Annex A to the Participation Agreement, dated
as of October ___, 1996, among the Lessee, the Lessor, the Agent, and the
Lenders.
2. The Properties. Attached hereto as Schedule I is the description
of the Leased Property. Effective upon the execution and delivery of this Lease
Supplement by the Lessor and the Lessee, the Leased Property shall be subject to
the terms and provisions of the Lease.
3. Ratification. Except as specifically modified hereby, the terms
and provisions of the Lease are hereby ratified and confirmed and remain in full
force and effect.
4. Original Lease Supplement. The single executed original of this
Lease Supplement marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART"
on the signature page thereof and containing the receipt of the Agent therefor
on or following the signature page thereof shall be the Original Executed
Counterpart of this Lease Supplement (the "Original Executed Counterpart"). To
the extent that this Lease Supplement constitutes chattel paper, as such term is
defined in the Uniform Commercial Code as in effect in any applicable
jurisdiction, no security interest in this Lease Supplement may be created
through the transfer or possession of any counterpart other than the Original
Executed Counterpart.
5. GOVERNING LAW. THIS LEASE HAS BEEN DELIVERED IN, AND SHALL IN ALL
RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE
OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN
SUCH STATE, EXCEPT AS TO
<PAGE>
2
MATTERS RELATING TO THE CREATION, PERFECTION AND ENFORCEMENT OF LIENS AND
SECURITY INTERESTS AND THE EXERCISE OF REMEDIES WITH RESPECT THERETO, WHICH
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE IN
WHICH THE APPLICABLE PROPERTY IS LOCATED.
6. Counterpart Execution. This Lease Supplement may be executed in
any number of counterparts and by each of the parties hereto in separate
counterparts, all such counterparts together constituting but one and the same
instrument.
7. Recordation. The Lessor and the Lessee agree that a memorandum of
this Lease Supplement No. __ shall be recorded at the Lessee's sole cost and
expense as required by the Lease.
<PAGE>
3
IN WITNESS WHEREOF, the parties have caused this Lease Supplement
No.__ be duly executed and delivered as of the date first above written.
LIVING CENTERS HOLDING COMPANY
By: ____________________________________
Name:
Title:
FBTC LEASING CORP.
By: ______________________________
Name:
Title:
<PAGE>
4
Receipt of this original counterpart of the foregoing Lease is hereby
acknowledged on this ____ day of _________, ____.
THE CHASE MANHATTAN BANK, as the
Agent for the Lenders
By: ____________________________________
Name:
Title:
<PAGE>
EXHIBIT 10.53
AMENDMENT TO LEASE
AMENDMENT TO LEASE dated as of November 4, 1997 (this "Amendment")
between FBTC LEASING CORP., a New York corporation (the "Lessor") and LIVING
CENTERS HOLDING COMPANY, a Delaware corporation (the "Lessee").
Background
A. The Lessor and the Lessee are parties to that certain Lease (as
amended, supplemented or otherwise modified from time to time, the "Lease")
dated as of October 10, 1996.
B. The Lessor and the Lessee have agreed to amend the Lease to modify
certain terms and conditions all as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by each of the parties hereto, the Lessor and the Lessee hereby
agree for themselves, their successors and assigns as follows:
1. Amendments.
(a) Section 1.1 to the Lease is hereby deleted and the following
inserted in its place:
"1.1 Defined Terms. Capitalized terms used but not otherwise defined
in this Agreement shall have the meanings set forth in Annex A to the
Amended and Restated Participation Agreement dated as of November 4, 1997
among Lessor, Lessee, Agent and the Lenders (as such parties are defined in
such Annex A)."
(b) Section 17.1(d) to the Lease is hereby deleted and the following
inserted in its place:
"(d) (i) subject to the limitations contained in Section 17.7 as to
the Lessee only, Lessee or any Guarantor shall fail to observe or perform
any term, covenant or condition of Lessee or such Guarantor, respectively,
under this Lease, the Participation Agreement, the Guarantee, the
Completion Guarantee or any other Operative Agreement to which it is a
party (other than those set forth in Section 17.1(a), (b) or (c) hereof)
and such default shall remain unremedied for a period ending after the
earlier of 30 days from the occurrence of such default and the Maturity
Date, provided that such period shall be extended (up to a maximum period
of 180 days but in no event beyond the Maturity Date) as to defaults which
cannot be cured with the payment of money but are curable though not
reasonably capable of cure within such period, provided that Lessee has
commenced to
<PAGE>
2
cure such default prior to the end of such period and prosecutes such cure
to completion or (ii) any representation or warranty by Lessee or any
Guarantor or Completion Guarantor, respectively, set forth in this Lease,
the Guarantee, the Completion Guaranty or in any other Operative Agreement
or in any document entered into in connection herewith or therewith or in
any document, certificate or financial or other statement delivered in
connection herewith or therewith shall be false or inaccurate in any
material way; or"
(c) Section 17.2 to the Lease is hereby amended by deleting paragraph
(a) and replacing it with the following in its place:
"(a) the aggregate Termination Value of all of the
Properties, plus"
2. Lease Supplements. This Amendment shall operate as an amendment
to the Lease as supplemented by each Lease Supplement executed on or prior to
the date hereof.
3. Counterparts. This Amendment may be executed in separate
counterparts and such counterparts, taken together, shall be deemed to
constitute one and the same instrument.
<PAGE>
3
IN WITNESS WHEREOF, this Amendment has been duly executed by the
Lessor and the Lessee on the date first above written.
FBTC LEASING CORP.
By:_____________________________
Name:
Title:
LIVING CENTERS HOLDING COMPANY
By:____________________________
Name:
Title:
<PAGE>
EXHIBIT 10.59
AGREEMENT RESPECTING TERMINATION
OF EMPLOYEE-EMPLOYER RELATIONSHIP
THIS AGREEMENT Regarding Termination of Employee-Employer Relationship
(this "Agreement") is made as of the 6th day of November, 1997, by and between
PARAGON HEALTH NETWORK, INC., a Delaware corporation ("Paragon") (as used
herein, the term "Company" includes Paragon and all its Affiliates (as defined
below), including, without limitation, GranCare, Inc., a Delaware corporation
("GranCare"), and all its subsidiaries), and KEITH KREIN, an individual resident
of the State of Texas (the "Employee").
STATEMENT OF FACTS
Pursuant to the terms of an employment agreement executed by the Employee
on December 22, 1995 and by Living Centers of America, Inc. ("LCA"), and LC
Management Company (the "Employment Agreement") on December 27, 1995, Employee
has served in an executive capacity with LCA, a predecessor to Paragon. The
Employment Agreement has been modified by the Board of Directors of LCA and
through other oral understandings. In light of the fact that the Company and
the Employee have agreed that the Employee's employment with the Company
terminated as of November 4, 1997, the Company and Employee wish to clarify the
terms of the Employment Agreement.
In terminating the employee-employer relationship between the Company and
the Employee, the Company recognizes that the Employee possesses valuable
information and skills, which if used in competition with the Company would have
a significant and detrimental effect on the Company's business and prospects.
The Company also owns or has access or rights to certain confidential and
proprietary information, which information is vital to the success of the
Company. The Company wishes to protect and maintain this information, which has
been developed by or which has become known to Employee during Employee's
employment by the Company and which, if disclosed to the Company's competitors
or if used in a competitive way, would be detrimental to the Company's business.
Furthermore, the Company employs individuals and engages other employees
and consultants in which it has invested or will invest substantial time and
money in training in ways to make the Company competitive and successful, and
such employees and consultants possess important skills and knowledge which have
been obtained by them during their employment or engagement, and the Company
wishes to protect and maintain its relationships with its employees and
consultants in order to further its business.
In recognition of these facts, the Company and the Employee wish to clarify
and supercede the terms of the Employment Agreement to better reflect the
parties understanding of their relative rights and duties with respect to their
post-employment relationship.
<PAGE>
STATEMENT OF TERMS
In consideration of the covenants and undertakings and the releases
contained in this Agreement, and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the Employee and the Company agree
as follows:
1. SEPARATION. Employee acknowledges that his last day of employment
with the Company was November 4, 1997. Employee's employment records will show
that he resigned from the Company.
2. CONSIDERATION.
(a) In consideration of the termination of the Employment Agreement
and in consideration of Employee's past services to the Company, the
Company will pay to Employee the following:
(i) The sum of $430,000.00, payable in one lump sum immediately
following the execution of this Agreement;
(ii) The payment of $22,000.00 in lieu of Company provided
medical and life insurance benefit continuation in one lump sum
immediately upon the execution of this Agreement;
(iii) Employee may retain medical journals, periodicals and
textbooks in his office;
(iv) All stock options granted to Employee under the Living
Centers of America, Inc. 1992 Stock Option Plan, as amended (the
"Option Plan"), will be cashed out as provided in the merger agreement
among LCA, GranCare, Inc., and Apollo Advisors, L.P.,
(v) 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 a successor or
similar provisions, with respect to any payments for benefits received
or to be received from the Company, whether provided under this
Agreement or otherwise, the Company 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 amount of the
Basic Excise Tax. The Employee shall not take any position
inconsistent with the Company's treatment of any payment to the
Employee pursuant to this Agreement or otherwise from the Company, its
affiliates, predecessors and successors, for purposes of the excise
tax imposed pursuant to Code Section 4999 or a successor or similar
provision. In the event
2
<PAGE>
that the Employee receives actual notice from the Internal Revenue
Service of an audit, deficiency, assessment or other challenge (a
"Dispute") relating to the treatment under Code Section 280G or 4999
of the amounts paid to the Employee pursuant to this Agreement or any
other payments he receives from the Company, its predecessors or
successors, the Employee shall promptly notify the Company of such
Dispute. The Company shall promptly appoint qualified legal and/or
accounting representatives to represent the Employee in connection
with the Dispute and shall pay their fees and expenses, and shall have
the right to control all matters with respect to the Dispute.
Notwithstanding the foregoing, the Company reserves the right to
settle the Dispute at its discretion. The Employee covenants and
agrees that he shall pay the amount of the Special Reimbursement to
the appropriate taxing authorities as soon a possible following his
receipt of the Special Reimbursement payment from the Company; and
(vi) THE COMPANY AGREES TO DEFEND THE EMPLOYEE WITH RESPECT TO
THE DISPUTE AND TO INDEMNIFY AND HOLD THE EMPLOYEE HARMLESS FROM ANY
AND ALL TAXES, INTEREST AND PENALTIES THAT THE EMPLOYEE MAY INCUR IN
CONNECTION WITH ANY DISPUTE THAT IS DIRECTLY RELATED TO THE PAYMENT
(OR NONPAYMENT) OF A SPECIAL REIMBURSEMENT AND/OR THE BASIC EXCISE
TAX, IF THE EMPLOYEE'S POSITION IN SUCH DISPUTE IS CONSISTENT WITH THE
COMPANY'S TREATMENT OF THE PAYMENTS MADE PURSUANT TO THIS AGREEMENT.
SUCH INDEMNIFICATION SHALL APPLY IN THE CIRCUMSTANCES DESCRIBED ABOVE
EVEN IF SUCH ACTION OR INACTION IS CONSIDERED A NEGLIGENT ACT OR
OMISSION OF THE EMPLOYEE. NOTWITHSTANDING ANYTHING TO THE CONTRARY
CONTAINED HEREIN, IN NO EVENT SHALL THE COMPANY INDEMNIFY THE EMPLOYEE
FOR ANY TAXES, PENALTIES OR INTEREST WHICH ARE ATTRIBUTABLE TO THE
BREACH BY THE EMPLOYEE OF THE COVENANT CONTAINED IN THE LAST SENTENCE
OF PARAGRAPH (V) HEREOF REGARDING THE PROMPT PAYMENT OF THE AMOUNT OF
THE SPECIAL REIMBURSEMENT PAYMENT TO APPROPRIATE TAXING AUTHORITIES.
(b) In consideration for the covenant contained in Sections 3 and 17
hereof, the Company will pay to Employee the following amounts: $240,000.00
immediately after the execution of the Agreement and $50,000.00 on November
1, 1998.
3. RESTRICTIVE COVENANTS.
(a) Agreement Not to Solicit Employees or Consultants. For a period
-------------------------------------------------
of two (2) years following the date hereof, Employee shall not, either
directly or indirectly, on Employee's own behalf or on behalf of others,
solicit, divert or hire away, or attempt to solicit, divert or hire away,
any person employed by the Company, whether or not such
3
<PAGE>
employee is a full-time or temporary employee of the Company and whether or
not such employment is pursuant to a written agreement for a determined
period of time or at will, or any consultant engaged by the Company.
(b) Noncompetition. During the period of one hundred eighty (180)
--------------
days following the November 4, 1997, Employee shall not, directly or
indirectly, undertake, engage in or perform for any Competing Business in
the Territory any of the same types of services which have been performed
by Employee on behalf of the Company. The provisions hereof shall not
prevent Employee from owning as much as three percent (3%) of the issued
and outstanding publicly traded shares of any Competing Business.
(c) Restrictions on Use and Disclosure of Company Information.
---------------------------------------------------------
Employee agrees that, with respect to Confidential Information, for a
period of one (1) year following the date hereof and, with respect to Trade
Secrets, for so long as such Company Information qualifies as a trade
secret under applicable law:
(i) Employee will receive and hold all the Company Information
in trust and in strictest confidence;
(ii) Employee will protect the Company Information from
disclosure and will in no event take any action causing any of the
Company Information to lose its character as Company Information, or
fail to take the action necessary in order to prevent any Company
Information from losing its status as Company Information; and
(iii) Employee will not, directly or indirectly, use, publish,
disseminate or otherwise disclose any Company Information to any third
party without the prior written consent of the Company, which may be
withheld in the Company's absolute discretion.
(d) Return of Materials. All Materials are the property of the
-------------------
Company. Employee will not remove from the Company's premises or copy or
reproduce any Materials (except as Employee's employment by the Company
shall require), and Employee will leave with the Company, or immediately
return to the Company, all Materials or copies or reproductions thereof in
Employee's possession, power or control.
(e) Copyrights.
----------
(i) Employee agrees that any Works created by Employee in the
course of Employee's duties as an employee of the Company are subject
to the "Work for Hire" provisions contained in Sections 101 and 201 of
the United States Copyright Law, Title 17 of the United States Code.
All right, title and interest to copyrights in all Works that have
been or will be prepared by Employee within the scope of Employee's
employment with the Company will be the property of the Company.
Employee acknowledges and agrees that, to the extent the provisions of
Title 17 of
4
<PAGE>
the United States Code do not vest in the Company the copyrights to
any Works, Employee hereby assigns to the Company all right, title and
interest to copyrights which Employee may have in the Works.
(ii) Employee must disclose to the Company all Works referred to
in Section 4(e) and will execute and deliver all applications,
registrations, and documents relating to the copyrights to the Works
and will provide assistance to secure the Company's title to the
copyrights in the Works. The Company will be responsible for all
expenses incurred in connection with the registration of all such
copyrights that it decides to register.
(iii) Employee has no ownership rights in any Works.
(f) Definitions. As used in this Section 3, the following terms shall
-----------
have the following meanings:
(i) "Affiliate" means any business entity that controls, is
---------
controlled by, or is under common control with Paragon.
(ii) "Business of the Company" means the business of owning
-----------------------
and/or operating skilled nursing facilities, an institutional pharmacy
business and the provisions of management services to physician
practices.
(iii) "Company Information" means Confidential Information and
-------------------
Trade Secrets.
(iv) "Competing Business" means the skilled nursing facility
------------------
business, institutional pharmacy business or the provision of
management services to physician practices business; provided,
however, the activities of American Geriatric Management Services,
Inc., which is seventy-five percent (75%) owned by a subsidiary of the
Company shall not be deemed to be a Competing Business.
(v) "Confidential Information" means confidential data and
------------------------
confidential information relating to the business of the Company
(which does not rise to the status of a trade secret under applicable
law) which is or has been disclosed to Employee or of which Employee
became aware as a consequence of or through Employee's employment with
the Company and which has value to the Company and is not generally
known to its competitors and which is designated by the Company as
confidential. Confidential Information shall not include any data or
information that (i) has been voluntarily disclosed to the general
public by the Company, (ii) has been independently developed and
disclosed to the general public by others, or (iii) otherwise enters
the public domain through lawful means.
5
<PAGE>
(vi) "Materials" means all documents or tangible or intangible
---------
materials, including computer data, provided to or obtained by
Employee during the course of employment by the Company which contain
the Company Information.
(vii) "Territory" means any state in the United States of
---------
America where the Company has operations.
(viii) "Trade Secrets" means information of the Company, without
-------------
regard to form, including, but not limited to, technical or
nontechnical data, formulas, patterns, compilations, programs,
devices, methods, techniques, drawings, processes, financial data,
financial plans, product or service plans or lists of actual or
potential customers or suppliers which is not commonly known by or
available to the public and which information (i) derives economic
value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by, other persons who can
obtain economic value from its disclosure or use; and (ii) is the
subject of efforts that are reasonable under the circumstances to
maintain its secrecy.
(ix) "Work" means a copyrightable work of authorship, including
----
without limitation, any technical descriptions for products, user's
guides, illustrations, advertising materials, computer programs
(including the contents of read only memories) and any contribution to
such materials.
(g) Remedies. Employee agrees that the covenants contained in
--------
Subsections (a), (b), (c), (d) and (e) of this Section are of the essence
of this Agreement; that each of such covenants is reasonable and necessary
to protect and preserve the business, interests and properties of the
Company, and that irreparable loss and damage will be suffered by the
Company should Employee breach any of such covenants. Therefore, Employee
agrees and consents that, in addition to all other remedies provided at law
or in equity, the Company shall be entitled to a temporary restraining
order and temporary and permanent injunctions to prevent a breach or
contemplated breach of any of such covenants, and Employee shall be
obligated to return to the Company that portion of the consideration
provided in Section 4 which is attributable to the covenant which was
breached and which is prorated based on the period during which such breach
was in effect. The existence of any claim, demand, action or cause of
action of Employee against the Company shall not constitute a defense to
the enforcement by the Company of any of the covenants or agreements
herein. No action or monetary penalty (other than injunctive relief or a
temporary restraining order) may be taken against the Employee, however,
until the Company has provided the Employee with notice of breach of such
provisions and a five (5) day opportunity to cure such alledged breach.
4. SEVERABILITY. The parties agree that each of the provisions included
in this Agreement is separate, distinct and severable from the other and
remaining provisions of this Agreement, and that the invalidity or
unenforceability of any Agreement provision shall not affect the validity and
enforceability of any other provision or provisions of this Agreement. Further,
if
6
<PAGE>
any provision of this Agreement is ruled invalid or unenforceable by a court of
competent jurisdiction because of a conflict between such provision and any
applicable law or public policy, such provision shall be valid and enforceable
to the extent such provision is consistent with such law or public policy.
5. CONSULTING SERVICES. Employee agrees that following the date hereof,
other than death or a permanent disability that prevents Employee's cooperation,
Employee shall, upon reasonable notice from the Company, (i) furnish such
information and give such assistance to the Company in any controversy or matter
involving any controversy or actual or potential litigation as may reasonably be
requested by the Company, (ii) discuss with the Company's personnel or advisors
any events that involved LCA and its subsidiaries during Employee's employment
by the Company, and (iii) help the Company in its search for a new Director of
Medical Services and to establish the office of Chief Medical Officer. Employee
shall not be required to perform more than twenty (20) hours per month in the
performance of consulting services hereunder. In consideration for Employee's
services pursuant to this Section 5, the Company shall pay to Employee the sum
of $100,000.00, payable in four quarterly installments of $25,000 each, with the
first installment being payable on or before November 7, 1997 and subsequent
installments payable on January 31, 1998, April 30, 1998 and July 31, 1998. The
Company shall compensate Employee for all reasonable expenses incurred while so
assisting the Company. Employee is not obligated to assist in any controversy
or litigation between the Company and Employee.
6. NOVATION AND WAIVER. This Agreement supercedes and replaces the
Employment Agreement, as well as any other amendments or modifications thereto,
all of which shall be and become null and void as to all parties thereto. The
Company shall have no obligation to pay any other consideration to Employee
except as provided in this Agreement.
7. FURTHER ACTION. The parties agree to perform all further acts and
execute, acknowledge and deliver any documents that may be reasonably necessary,
appropriate or desirable to carry out the provisions of this Agreement.
8. NOTICES. Any notice, request, demand, or other communication required
to be given hereunder shall be made in writing and shall be deemed to have been
fully given if personally delivered or if mail by overnight delivery to the
parties at the following addresses, or at such other addresses as shall be given
in writing by either party to the other party hereto:
If to the Company:
Paragon Heath Network, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346
Attn: Susan Whittle, Esq.
7
<PAGE>
With a copy to:
Powell, Goldstein, Frazer & Murphy LLP
191 Peachtree Street, N.E.
Sixteenth Floor
Atlanta, Georgia 30303-1740
Attn: Richard Miller, Esq.
If to Employee:
Keith Krein
963 Enclave Parkway
Houston, Texas 77077
9. ASSIGNMENT. This Agreement and the rights and obligations of the
Company hereunder may be assigned by the Company and shall inure to the benefit
of, shall be binding upon, and shall be enforceable by any such assignee. This
Agreement and the rights and obligations of Employee hereunder may not be
assigned by Employee.
10. WAIVER. No consent or waiver by a party with respect to any breach or
default by the other party hereunder shall be effective unless in writing, and
no such waiver or consent shall be deemed or construed to be a consent or waiver
with respect to any other breach or default by such party of the same provision
or any other provision of this Agreement. Failure on the part of a party to
complain of any act or failure to act of the other party or to declare such
other party in default shall not be deemed or constitute a waiver of any rights
hereunder.
11. GOVERNING LAW. This Agreement shall be governed and construed as to
both substantive and procedural matters in accordance with the laws of the State
of Texas, without regard to the conflict of laws principles thereof.
12. INTERPRETATION. Should any provision of this Agreement require a
judicial interpretation, it is agreed that the judicial body interpreting or
construing this Agreement shall not apply the assumption that the terms of this
Agreement shall be more strictly construed against one party by reason of the
rule of legal construction that an instrument is to be construed more strictly
against the party which itself or through its agents prepared the agreement.
The parties acknowledge and agree that they and their agents have each
participated equally in the negotiations and preparation of this Agreement, and
Employee acknowledges that Employee has had the opportunity to consult legal
counsel regarding the terms hereof.
13. CONSENT TO JURISDICTION. Each party (i) submits to personal
jurisdiction in the State of Texas for the enforcement of this Agreement, and
(ii) waives any and all rights under the laws of any state to object to
jurisdiction within the State of Texas for the purposes of litigation to enforce
this Agreement. Notwithstanding the foregoing, nothing contained in this
Agreement shall prevent a party from bringing any action against the other party
within any other state or country. Initiating such proceeding or taking such
action in any jurisdiction shall not constitute a
8
<PAGE>
waiver of the agreement that the laws of the State of Texas shall govern or of
the submission made by a party to personal jurisdiction within the State
of Texas.
14. HEADINGS. Titles and captions contained in this Agreement are
inserted only as a matter of convenience and for reference and in no way define,
limit or extend or describe the scope of this Agreement or the intent of any
provision contained in this Agreement.
15. ENTIRE AGREEMENT. This Agreement embodies the entire agreement of the
parties on the subject matter herein. No amendment or modification of this
Agreement shall be valid or binding upon the Company or Employee unless made in
writing and signed by the parties hereto. All prior understandings and
agreements relating to the subject matter of this Agreement are hereby expressly
terminated.
16. NON-ADMISSION. Employee agrees and acknowledges that neither this
Agreement nor the Company's offer to enter into this Agreement should be
construed as an admission by the Company that it has acted wrongfully towards
Employee or anyone else, and that the Company expressly denies any liability to
or having engaged in any wrongful acts or omissions against Employee.
17. STATEMENTS REGARDING THE COMPANY. Employee and the Company agree not
to make any written or verbal statements in any form concerning the other or as
to the Company, its predecessors, Living Centers of America, Inc. and GranCare,
Inc., the Employee's employment with the Company and its predecessors, or the
termination of his employment with the Company to any person or entity if such
statements are injurious or inimical to the best interests of the Company or
Employee. Employee acknowledges that he has no knowledge of any actions or
inactions by any current or former directors, officers, employees or agents of
the Company (or any related entity) which he believes could possibly constitute
a basis for a claimed violation of any federal, state or local law, any common
law or any rule promulgated by an administrative body which might have
jurisdiction over the Company. The Company acknowledges that it has no knowledge
of any actions or inactions by the Employee which it believes could possible
constitute a basis for a claimed violation of any federal, state or local law,
any common law or any rule promulgated by an administrative body which might
have jurisdiction over the Employee or the Company.
18. CONFIDENTIALITY. Employee agrees to keep the terms, conditions and
fact of this Agreement completely confidential and not to disclose any
information concerning this Agreement to any other person, except Employee's
immediate family, personal financial advisor, tax advisor and attorney, provided
they agree to keep this information confidential. Without limiting the
generality of the foregoing, Employee will not respond to or in any way
participate in or contribute to any public discussion, notice or publicity
concerning or in any way related to the execution of this Agreement or the
events (including any negotiations) which led to its execution. In addition,
without limiting the generality of the foregoing, Employee specifically agrees
not to disclose information regarding this Agreement or the fact of this
Agreement to any other current or former employee of the Company. Employee
agrees that the disclosure by him of the fact of
9
<PAGE>
this Agreement or any of its terms and conditions in violation of the foregoing
will constitute a breach of this Agreement.
19. MERGER OF UNDERSTANDING. This Agreement constitutes and contains the
entire agreement and understanding concerning Employee's employment, the
termination thereof and the other matters addressed herein between the parties,
and supersedes and replaces all prior negotiations and all agreements proposed
or otherwise, whether written or oral, concerning the subject matter hereof.
This Agreement shall not be modified, altered, changed or amended in any respect
unless in writing and signed by both parties. Notwithstanding the foregoing, in
no event shall this Agreement be construed to change, alter or limit the
Company's obligations to the Employee;
(i) under any existing employee benefit plan or programs, the
benefits under which shall continued to be governed in
accordance with their terms;
(ii) for payment to the Employee of his base salary through his last
day of employment with the Company;
(iii) the payment of accrued, but unused, vacation of the Employee
through the Employee's last day of employment;
(iv) for the payment of a prorated bonus for the fiscal year of
termination; and
(v) for the bonus which is owed to the Employee under the Company's
bonus plan for the 1997 fiscal year.
20. EXPENSES. The Company shall reimburse Employee for his reasonable
legal expenses incurred in connection with his entering into this Agreement
within ten (10) days of presentation to the Company of invoice for such
expenses. Additionally, the Company shall reimburse the Employee up to $500 for
independent professional fees related to the review of any Special Reimbursement
payment described in Section 2(a)(vi) hereof.
21. EMPLOYEE'S FURTHER ACKNOWLEDGMENTS. EMPLOYEE ACKNOWLEDGES AND
REPRESENTS THAT HE HAS READ AND ACCEPTS AND AGREES TO THE PROVISIONS OF THIS
AGREEMENT AND HAS HAD SUFFICIENT TIME AND OPPORTUNITY TO CONSULT WITH
INDIVIDUALS OF EMPLOYEE'S OWN CHOICE. EMPLOYEE EXECUTES THIS AGREEMENT
VOLUNTARILY WITH FULL UNDERSTANDING OF ITS CONSEQUENCES.
10
<PAGE>
IN WITNESS WHEREOF, Paragon and Employee have each executed and delivered
this Agreement as of the date first shown above.
EMPLOYEE:
/s/ Keith Krein
--------------------------------------
Print Name: Keith Krein
---------------------------
THE COMPANY:
PARAGON HEALTH NETWORK, INC.
/s/ KEITH B. PITTS
By:___________________________________
Print Name: Keith B. Pitts
Title: Chief Executive Officer
11
<PAGE>
EXHIBIT 10.60
AGREEMENT RESPECTING TERMINATION
OF EMPLOYEE-EMPLOYER RELATIONSHIP
THIS AGREEMENT Regarding Termination of Employee-Employer Relationship
(this "Agreement") is made as of the 4th day of November, 1997, by and between
PARAGON HEALTH NETWORK, INC., a Delaware corporation ("Paragon") (as used
herein, the term "Company" includes Paragon and all its Affiliates (as defined
below), including, without limitation, GranCare, Inc. a Delaware corporation
("GranCare"), and all its subsidiaries), and EDWARD L. KUNTZ, an individual
resident of the State of Texas (the "Employee").
STATEMENT OF FACTS
Pursuant to the terms of an employment agreement dated March 24, 1995, by
and among the Employee, Living Centers of America, Inc. ("LCA"), and LC
Management Company (the "Employment Agreement"), Employee has served in an
executive capacity with LCA, a predecessor to the Paragon. The Employment
Agreement has been modified by the Board of Directors of LCA and through other
oral understandings. In light of the fact that the Company and the Employee
have agreed that the Employee's employment with the Company will terminate as of
the closing of the merger of GranCare, Inc and Living Centers of America, Inc.
(the "Closing"), the Company and Employee wish to clarify the terms of the
Employment Agreement.
In terminating the employee-employer relationship between the Company and
the Employee, the Company recognizes that the Employee possesses valuable
information and skills, which if used in competition with the Company would have
a significant and detrimental effect on the Company's business and prospects.
The Company also owns or has access or rights to certain confidential and
proprietary information, which information is vital to the success of the
Company. The Company wishes to protect and maintain this information, which has
been developed by or which has become known to Employee during Employee's
employment by the Company and which, if disclosed to the Company's competitors
or if used in a competitive way, would be detrimental to the Company's business.
Furthermore, the Company employs individuals and engages other employees
and consultants in which it has invested or will invest substantial time and
money in training in ways to make the Company competitive and successful, and
such employees and consultants possess important skills and knowledge which have
been obtained by them during their employment or engagement, and the Company
wishes to protect and maintain its relationships with its employees and
consultants in order to further its business.
In recognition of these facts, the Company and the Employee wish to clarify
and supercede the terms of the Employment Agreement to better reflect the
parties understanding of their relative rights and duties with respect to their
post-employment relationship.
<PAGE>
STATEMENT OF TERMS
In consideration of the covenants and undertakings and the releases
contained in this Agreement, and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the Employee and the Company agree
as follows:
1. SEPARATION. Employee acknowledges that his last day of employment
with the Company will be as of the Closing. Employee's employment records will
show that he resigned from the Company.
2. CONSIDERATION.
(a) In consideration of the waiver of the obligations under the
Employment Agreement and in consideration of Employee's past services to
the Company, the Company will pay to Employee the following:
(i) The sum of $1,000,000.00, payable in one lump sum at the
closing of the merger of LCA with GranCare, Inc. (the "Closing");
(ii) The transfer of the title to the Cadillac Seville
presently used by the Employee; and
(iii) The payment of $24,000.00 in lieu of Company provided
welfare benefit continuation;
(iv) All stock options granted to Employee under the Living
Centers of America, Inc. 1992 Stock Option Plan, as amended (the
"Option Plan"), will be cashed out as provided in the merger agreement
among LCA, GranCare, Inc., and Apollo Advisors, L.P., and
(v) 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 a successor or
similar provisions, with respect to any payments for benefits received
or to be received from the Company, whether provided under this
Agreement or otherwise, the Company 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 amount of the
Basic Excise Tax. The Employee shall not take any position
inconsistent with the Company's treatment of any payment to the
Employee pursuant to this Agreement or otherwise from the Company, its
affiliates, predecessors and successors, for purposes of the excise
tax imposed pursuant to Code Section 4999 or a successor or similar
provision. In the event that the Employee receives notice from the
Internal Revenue Service of an audit,
2
<PAGE>
deficiency, assessment or other challenge (a "Dispute") relating to
the treatment under Code Section 280G or 4999 of the amounts paid to
the Employee pursuant to this Agreement or any other payments he
receives from the Company, its predecessors or successors, the
Employee shall promptly notify the Company of such Dispute. The
Company shall be entitled to appoint representatives for the Employee
in connection with the Dispute and to control all matters with respect
to the Dispute. The Company agrees to indemnify and hold the Employee
harmless from any and all taxes, interest and penalties that the
Employee may incur in connection with any such Dispute which are
directly related to the payment (or nonpayment) of a Special
Reimbursement; provided, however, that the Company shall not indemnify
the Employee for any taxes, penalties or interest due to the failure
of the Employee to report or to pay taxes and/or excise taxes on any
Special Reimbursement relating to any period following the payment of
the Special Reimbursement by the Company to the Employee. The Employee
covenants and agrees that he shall pay the amount of the Special
Reimbursement to the appropriate taxing authorities as soon a possible
following his receipt of such payment.
(b) In consideration for the covenants contained in Sections 3 and 17
hereof, the Company will pay to Employee the following amounts:
$1,800,000.00 at the Closing, $575,000.00 on November 1, 1998 and $75,000
on November 1, 1999.
3. RESTRICTIVE COVENANTS.
(a) Agreement Not to Solicit Employees or Consultants. For a period
-------------------------------------------------
of two (2) years following the date hereof, Employee shall not, either
directly or indirectly, on Employee's own behalf or on behalf of others,
solicit, divert or hire away, or attempt to solicit, divert or hire away,
any person employed by the Company, whether or not such employee is a full-
time or temporary employee of the Company and whether or not such
employment is pursuant to a written agreement for a determined period of
time or at will, or any consultant engaged by the Company.
(b) Noncompetition. During the period of ninety (90) days following
--------------
the Closing, Employee shall not, directly or indirectly, undertake, engage
in or perform any of the same types of services which have been performed
by Employee on behalf of the Company for any Competing Business in the
Territory. The provisions hereof shall not prevent Employee from owning as
much as three percent (3%) of the issued and outstanding publicly-traded
shares of any Competing Business.
(c) Restrictions on Use and Disclosure of Company Information.
---------------------------------------------------------
Employee agrees that, with respect to Confidential Information, for a
period of three (3) years following the date hereof and, with respect to
Trade Secrets, for so long as such Company Information qualifies as a trade
secret under applicable law:
3
<PAGE>
(i) Employee will receive and hold all the Company Information
in trust and in strictest confidence;
(ii) Employee will in no event take any action causing any of
the Company Information to lose its character as Company Information, or
fail to take the action necessary in order to prevent any Company
Information from losing its status as Company Information; and
(iii) Except as may be required by applicable laws, Employee
will not, directly or indirectly, use, publish, disseminate or otherwise
disclose any Company Information to any third party without the prior
written consent of the Company, which may be withheld in the Company's
absolute discretion,.
(d) Return of Materials. All Materials are the property of the
-------------------
Company. Employee will not remove from the Company's premises or copy or
reproduce any Materials (except as Employee's employment by the Company
shall require), and Employee will leave with the Company, or immediately
return to the Company, all Materials or copies or reproductions thereof in
Employee's possession, power or control.
(e) Copyrights.
----------
(i) Employee agrees that any Works created by Employee in the
course of Employee's duties as an employee of the Company are subject
to the "Work for Hire" provisions contained in Sections 101 and 201 of
the United States Copyright Law, Title 17 of the United States Code.
All right, title and interest to copyrights in all Works that have
been or will be prepared by Employee within the scope of Employee's
employment with the Company will be the property of the Company.
Employee acknowledges and agrees that, to the extent the provisions of
Title 17 of the United States Code do not vest in the Company the
copyrights to any Works, Employee hereby assigns to the Company all
right, title and interest to copyrights which Employee may have in the
Works.
(ii) Employee must disclose to the Company all Works referred
to in Section 3(e) and will execute and deliver all applications,
registrations, and documents relating to the copyrights to the Works
and will provide assistance to secure the Company's title to the
copyrights in the Works. The Company will be responsible for all
expenses incurred in connection with the registration of all such
copyrights that it decides to register.
(iii) Employee has no ownership rights in any Works.
(f) Definitions. As used in this Section 3, the following terms shall
-----------
have the following meanings:
4
<PAGE>
(i) "Affiliate" means any business entity that controls, is
---------
controlled by, or is under common control with the Paragon.
(ii) "Business of the Company" means the business of owning and/or
-----------------------
operating skilled nursing facilities or an institutional pharmacy business.
(iii) "Company Information" means Confidential Information and Trade
-------------------
Secrets.
(iv) "Competing Business" means the skilled nursing facility
------------------
business or institutional pharmacy business.
(v) "Confidential Information" means confidential data and
------------------------
confidential information relating to the business of the Company (which
does not rise to the status of a trade secret under applicable law) which
is or has been disclosed to Employee or of which Employee became aware as a
consequence of or through Employee's employment with the Company and which
has value to the Company and is not generally known to its competitors and
which is designated by the Company as confidential. Confidential
Information shall not include any data or information that (i) has been
voluntarily disclosed to the general public by the Company, (ii) has been
independently developed and disclosed to the general public by others, or
(iii) otherwise enters the public domain through no violation of the
covenants contained in this Section by the Employee.
(vi) "Materials" means all documents or tangible or intangible
---------
materials, including computer data, provided to or obtained by Employee
during the course of employment by the Company which contain the Company
Information.
(vii) "Territory" means any state in the United States of America
---------
where the Company has operations.
(viii) "Trade Secrets" means information of the Company, without
-------------
regard to form, including, but not limited to, technical or nontechnical
data, formulas, patterns, compilations, programs, devices, methods,
techniques, drawings, processes, financial data, financial plans, product
or service plans or lists of actual or potential customers or suppliers
which is not commonly known by or available to the public and which
information (i) derives economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by proper means by,
other persons who can obtain economic value from its disclosure or use; and
(ii) is the subject of efforts that are reasonable under the circumstances
to maintain its secrecy.
(ix) "Work" means a copyrightable work of authorship, including
----
without limitation, any technical descriptions for products, user's
guides,
5
<PAGE>
illustrations, advertising materials, computer programs (including the
contents of read only memories) and any contribution to such
materials.
(g) Remedies. Employee agrees that the covenants contained in
--------
Subsections (a), (b), (c), (d) and (e) of this Section are of the essence
of this Agreement; that each of such covenants is reasonable and necessary
to protect and preserve the business, interests and properties of the
Company, and that irreparable loss and damage will be suffered by the
Company should Employee breach any of such covenants. Therefore, Employee
agrees and consents that, in addition to all other remedies provided at law
or in equity, the Company shall be entitled to a temporary restraining
order and temporary and permanent injunctions to prevent a breach or
contemplated breach of any of such covenants, and Employee shall be
obligated to return to the Company a portion of the consideration provided
in Section 4 which is attributable to the covenant which was breached and
which is prorated based on the period during which such breach was in
effect. The existence of any claim, demand, action or cause of action of
Employee against the Company shall not constitute a defense to the
enforcement by the Company of any of the covenants or agreements herein.
4. SEVERABILITY. The parties agree that each of the provisions included
in this Agreement is separate, distinct and severable from the other and
remaining provisions of this Agreement, and that the invalidity or
unenforceability of any Agreement provision shall not affect the validity and
enforceability of any other provision or provisions of this Agreement. Further,
if any provision of this Agreement is ruled invalid or unenforceable by a court
of competent jurisdiction because of a conflict between such provision and any
applicable law or public policy, such provision shall be valid and enforceable
to the extent such provision is consistent with such law or public policy.
5. CONSULTING SERVICES. Employee agrees that following the date hereof,
other than death or a permanent disability that prevents Employee's cooperation,
Employee shall, upon reasonable notice, (i) furnish such information and give
such assistance to the Company in any controversy or matter involving any
controversy or actual or potential litigation as may reasonably be requested by
the Company and (ii) discuss with the Company's personnel or advisors any events
that involved LCA and its subsidiaries during Employee's employment by the
Company. Employee also agrees to serve as Paragon's representative to the
multi-facility committee of the American Health Care Association (the "AHCA").
Employee shall provide the services described in this Section 5 for a period of
three (3) years; provided that the Company may terminate Employee's appointment
as Paragon's representative to the multi-facility committee of the AHCA at any
time upon thirty (30) days notice to Employee, but his other obligations
pursuant to this Section 5 shall continue. In consideration for Employee's
services pursuant to this Section 6, the Company shall pay to Employee the sum
of $100,000.00 per year, payable in advance at the beginning of each one-year
period hereunder. The Company shall compensate Employee for all reasonable
expenses incurred while so assisting the Company for the services hereunder.
Employee is not obligated to assist in any controversy or litigation between the
Company and Employee or any of the Employee's future employers.
6
<PAGE>
6. NOVATION AND WAIVER. This Agreement supercedes and replaces the
Employment Agreement, as well as any other amendments or modifications thereto,
all of which shall be and become null and void as to all parties thereto. The
Company shall have no obligation to pay any other consideration to Employee
except as provided in this Agreement.
7. FURTHER ACTION. The parties agree to perform all further acts and
execute, acknowledge and deliver any documents that may be reasonably necessary,
appropriate or desirable to carry out the provisions of this Agreement.
8. NOTICES. Any notice, request, demand, or other communication required
to be given hereunder shall be made in writing and shall be deemed to have been
fully given if personally delivered or if mail by overnight delivery to the
parties at the following addresses, or at such other addresses as shall be given
in writing by either party to the other party hereto:
If to the Company:
Paragon Heath Network, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346
Attn: Henry Day, Esq.
With a copy to:
Powell, Goldstein, Frazer & Murphy LLP
191 Peachtree Street, N.E.
Sixteenth Floor
Atlanta, Georgia 30303-1740
Attn: Richard Miller, Esq.
If to Employee:
Edward L. Kuntz
8807 Stable Crest Boulevard
Houston, Texas 77024
9. ASSIGNMENT. This Agreement and the rights and obligations of the
Company hereunder may be assigned by the Company and shall inure to the benefit
of, shall be binding upon, and shall be enforceable by any such assignee. This
Agreement and the rights and obligations of Employee hereunder may not be
assigned by Employee.
10. WAIVER. No consent or waiver by a party with respect to any breach or
default by the other party hereunder shall be effective unless in writing, and
no such waiver or consent shall be deemed or construed to be a consent or waiver
with respect to any other breach or default by
7
<PAGE>
such party of the same provision or any other provision of this Agreement.
Failure on the part of a party to complain of any act or failure to act of the
other party or to declare such other party in default shall not be deemed or
constitute a waiver of any rights hereunder.
11. GOVERNING LAW. This Agreement shall be governed and construed as to
both substantive and procedural matters in accordance with the laws of the State
of Texas, without regard to the conflict of laws principles thereof.
12. INTERPRETATION. Should any provision of this Agreement require a
judicial interpretation, it is agreed that the judicial body interpreting or
construing this Agreement shall not apply the assumption that the terms of this
Agreement shall be more strictly construed against one party by reason of the
rule of legal construction that an instrument is to be construed more strictly
against the party which itself or through its agents prepared the agreement.
The parties acknowledge and agree that they and their agents have each
participated equally in the negotiations and preparation of this Agreement, and
Employee acknowledges that Employee has had the opportunity to consult legal
counsel regarding the terms hereof.
13. CONSENT TO JURISDICTION. Each party (i) submits to personal
jurisdiction in the State of Texas for the enforcement of this Agreement, and
(ii) waives any and all rights under the laws of any state to object to
jurisdiction within the State of Texas for the purposes of litigation to enforce
this Agreement. Notwithstanding the foregoing, nothing contained in this
Agreement shall prevent a party from bringing any action against the other party
within any other state or country. Initiating such proceeding or taking such
action in any jurisdiction shall not constitute a waiver of the agreement that
the laws of the State of Texas shall govern or of the submission made by a party
to personal jurisdiction within the State of Texas.
14. HEADINGS. Titles and captions contained in this Agreement are
inserted only as a matter of convenience and for reference and in no way define,
limit or extend or describe the scope of this Agreement or the intent of any
provision contained in this Agreement.
15. ENTIRE AGREEMENT. This Agreement embodies the entire agreement of the
parties on the subject matter herein. No amendment or modification of this
Agreement shall be valid or binding upon the Company or Employee unless made in
writing and signed by the parties hereto. All prior understandings and
agreements relating to the subject matter of this Agreement are hereby expressly
terminated.
16. NON-ADMISSION. Employee agrees and acknowledges that neither this
Agreement nor the Company's offer to enter into this Agreement should be
construed as an admission by the Company that it has acted wrongfully towards
Employee or anyone else, and that the Company expressly denies any liability to
or having engaged in any wrongful acts or omissions against Employee.
17. STATEMENTS REGARDING THE COMPANY. Except as may be required by
applicable law, Employee agrees not to make any written or verbal statements in
any form concerning the Company, its predecessors, Living Centers of America,
Inc. and GranCare, Inc., his employment
8
<PAGE>
with the Company and its predecessors, or the termination of his employment with
the Company to any person or entity if such statements are intentionally
designed to be injurious or inimical to the best interests of the Company or
Employee.
18. CONFIDENTIALITY. Employee agrees to keep the terms, conditions and
fact of this Agreement completely confidential and not to disclose any
information concerning this Agreement to any other person, except Employee's
immediate family, personal financial advisor, tax advisor and attorney, provided
they agree to keep this information confidential, and except as may be required
by law. Without limiting the generality of the foregoing, Employee will not
respond to or in any way participate in or contribute to any public discussion,
notice or publicity concerning or in any way related to the execution of this
Agreement or the events (including any negotiations) which led to its execution.
In addition, without limiting the generality of the foregoing, Employee
specifically agrees not to disclose information regarding this Agreement or the
fact of this Agreement to any other current or former employee of the Company
19. PARTICIPATION IN OTHER ACTIONS. Employee agrees not to participate in
any legal action of any kind by any other employee or former employee of the
Company and will not testify or otherwise provide evidence in any investigation,
hearing, or trial of any such action, except under subpoena. Employee also
agrees not to solicit, counsel, advise, suggest, assist, or encourage any
claims, demands, rights, or causes of action of any kind of other persons
against the Company.
20. MERGER OF UNDERSTANDING. This Agreement constitutes and contains the
entire agreement and understanding concerning Employee's employment, the
termination thereof and the other matters addressed herein between the parties,
and supersedes and replaces all prior negotiations and all agreements proposed
or otherwise, whether written or oral, concerning the subject matter hereof.
This Agreement shall not be modified, altered, changed or amended in any respect
unless in writing and signed by both parties. Notwithstanding the foregoing, in
no event shall this Agreement be construed to change, alter or limit the
Company's obligations to the Employee;
(i) under any existing employee benefit plan or programs, the
benefits under which shall continued to be governed in accordance with
their terms;
(ii) for payment to the Employee of his base salary through his last
day of employment with the Company;
(iii) the payment of accrued, but unused, vacation of the Employee
through the Closing, which shall be paid at Closing;
(iv) for the payment of a prorated bonus for the fiscal year of
termination (which through October 31, 1997 was $18,667), which shall be
paid at Closing; and
9
<PAGE>
(v) for the bonus in the amount of $275,520 which is owed to the
Employee under the Company's bonus plan for the 1997 fiscal year, which
shall be paid at Closing.
21. EXPENSES. The Company shall reimburse Employee for his reasonable legal
expenses incurred in connection with his entering into this Agreement.
22. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one and the same instrument.
23. EMPLOYEE'S FURTHER ACKNOWLEDGMENTS. EMPLOYEE ACKNOWLEDGES AND
REPRESENTS THAT HE HAS READ AND ACCEPTS AND AGREES TO THE PROVISIONS OF THIS
AGREEMENT AND HAS HAD SUFFICIENT TIME AND OPPORTUNITY TO CONSULT WITH
INDIVIDUALS OF EMPLOYEE'S OWN CHOICE. EMPLOYEE EXECUTES THIS AGREEMENT
VOLUNTARILY WITH FULL UNDERSTANDING OF ITS CONSEQUENCES.
IN WITNESS WHEREOF, Paragon and Employee have each executed and delivered
this Agreement as of the date first shown above.
EMPLOYEE:
/s/ Edward L. Kuntz
--------------------------------------------------
Print Name: Edward L. Kuntz
--------------------------------------
THE COMPANY:
PARAGON HEALTH NETWORK, INC.
/s/ KEITH B. PITTS
By:_______________________________________________
Print Name: Keith B. Pitts
Title: Chief Executive Officer
10
<PAGE>
EXHIBIT 11
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
ASSUMING FULL DILUTION (a)
Net Income............................................. $43,917 $43,180 $24,234
Pro forma taxes (b).................................... 0 0 599
------- ------- -------
Pro forma net income................................... $43,917 $43,180 $23,635
======= ======= =======
APPLICABLE COMMON SHARES:
Weighted average shares outstanding during the
period.............................................. 58,614 60,372 56,553
Weighted average shares issuable upon exercise of
common stock options using the treasury stock
method.............................................. 1,194 573 579
Weighted average shares issuable upon exercise of
warrants using the treasury stock method............ -- -- --
------- ------- -------
Total shares......................................... 59,808 60,945 57,132
======= ======= =======
Earnings per share (fully diluted)..................... $ 0.73 $ 0.71 $ 0.42
======= ======= =======
Pro forma earnings per share (fully diluted)........... $ 0.73 $ 0.71 $ 0.41
======= ======= =======
</TABLE>
- --------
(a) This calculation is submitted in accordance with Regulation S-K, item 601
(b) (11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in less than 3% dilution.
(b) The pro forma provision is included to reflect the estimated taxes that
would have been incurred on the BCC Entities S corporations
<PAGE>
EXHIBIT 21
PARAGON HEALTH NETWORK, INC.
DIRECT AND INDIRECT SUBSIDIARIES
<TABLE>
<CAPTION>
STATE/COUNTRY
INCORPORATED
-------------
<S> <C>
Living Centers of America, Inc.................................... DE
SUBSIDIARIES
Beaver Properties/Newco, Inc.................................... NC
LCA Acquisition Sub, Inc........................................ DE
LC Management Company........................................... DE
LCR, Inc........................................................ DE
LCA Insurance Co., Ltd.......................................... Cayman
Islands
LCA Operational Holding Company................................. DE
Living Centers--Southeast, Inc................................ NC
Living Centers Southeast Development Corporation............ 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
Brian Center Nursing Care/Austell, Inc...................... GA
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
American Pharmaceutical Services of Georgia, LLC............ GA
Allied Pharmacy Management, Inc............................. TX
APS Holding Company, Inc.................................. TN
Nann-Dan Corporation.................................... FL
Professional RX Systems, Inc............................ FL
Progressive Care Centers of America, Inc...................... DE
Brian Center Health & Retirement/Wallace, Inc................. NC
Brian Center Nursing Care/Powder Springs, Inc................. NC
Brian Center Nursing Care/Hickory, 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
Rehability Hospital Services, Inc......................... TN
Workhealth Healthcare Management, Inc..................... DE
Therapy Management Innovations, Inc....................... NV
Med-Therapy Rehabilitation Services, Inc.................. NC
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE/COUNTRY
INCORPORATED
-------------
<S> <C>
Living Centers LTCP Development Company....................... DE
American Geriatric Management Service, Inc. (75%)........... TX
Hospice Associates of America, Inc............................ DE
Heart of America Hospice, LLC............................... KS
Hospice Care of Louisiana, LLC.............................. LA
Hospice Management Partners, Inc............................ DE
American Geriatric Management Services, Inc................... DE
Living Centers Holding Company................................ DE
Hospice of Houston, LP (50%).................................. TX
American Senior Health Services, Inc............................ DE
Homecare Associates of America, Inc........................... DE
Home Health Management Associates of America, Inc............. DE
GranCare, Inc................................................... DE
AMS Properties, Inc........................................... DE
Cornerstone Health Management Corporation..................... DE
StoneCreek Management Company, Inc.......................... MO
Evergreen Healthcare, Inc..................................... GA
Omega/Indiana Care Corporation.............................. DE
Connerwood Healthcare, Inc.................................. IN
Heritage of Louisiana, Inc.................................. LA
National Heritage Realty, Inc............................... LA
EH Acquisition Corp......................................... GA
EH Acquisition Corp. II................................... GA
EH Acquisition Corp. III.................................... GA
Evergreen Healthcare Ltd., L.P. ( EHI-Limited Partner;
Omega/Indiana Care Corporation-General Partner)............. IN
GranCare Trading, Inc......................................... GA
GranCare GPO Services, Inc.................................... GA
American-Cal Medical Services, Inc............................ CA
AMS Green Tree, Inc........................................... WI
Renaissance Mental Health Center, Inc......................... WI
GCI Palm Court, Inc........................................... CA
GranCare South Carolina, Inc.................................. SC
GCI Rehab, Inc................................................ CA
GCI -Cal Therapies Company.................................. CA
GCI Therapies, Inc.......................................... CA
HMI Convalescent Care, Inc.................................... CA
GranCare of Michigan, Inc..................................... MI
GranCare Home Health Services, Inc............................ CA
Coordinated Home Health Services, Inc....................... CA
GranCare Nursing Services and Hospice, Inc.................. WI
GCI-Cal Health Care Centers, Inc.............................. CA
GCI Realty, Inc............................................... DE
GCI Jolley Acres, Inc......................................... SC
GCI Prince George, Inc........................................ SC
GCI Springdale Village, Inc................................... SC
GCI Village Green, Inc........................................ SC
GCI Faith Nursing Home, Inc................................... SC
GCI East Valley Medical & Rehabilitation Center, Inc.......... AZ
GCI-Wisconsin Properties, Inc................................. WI
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE/COUNTRY
INCORPORATED
-------------
<S> <C>
GranCare of Northern California, Inc.......................... CA
GranCare of North Carolina, Inc............................... NC
GCI Colter Village, Inc....................................... AZ
GCI Bella Vita, Inc........................................... CO
GCI Health Care Centers, Inc.................................. DE
GC Services, Inc.............................................. CA
HostMasters, Inc.............................................. CA
Professional Health Care Management, Inc...................... MI
Cambridge Bedford, Inc...................................... MI
Cambridge East, Inc......................................... MI
Cambridge North, Inc........................................ MI
Cambridge South, Inc........................................ MI
ClintonAire Nursing Home, Inc............................... MI
Crestmont Health Center, Inc................................ MI
Frenchtown Nursing Home, Inc................................ MI
Heritage Nursing Home, Inc.................................. MI
International Health Care Management, Inc................... MI
International X-Ray, Inc.................................... MI
Madonna Nursing Center, Inc................................. MI
Middlebelt-Hope Nursing Home, Inc........................... MI
Middlebelt Nursing Home, Inc................................ MI
Nightingale East Nursing Center, Inc........................ MI
St. Anthony Nursing Home, Inc............................... MI
GCI Camellia Care Center, Inc................................. CO
GCI Indemnity, Inc............................................ VT
GCI Valley Manor, Inc......................................... CO
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-39485) pertaining to the Paragon Health Network, Inc., Long-
Term Incentive Plan, GranCare, Inc., 401(k) Savings Plan, GranCare, Inc., 1996
Stock Incentive Plan, GranCare, Inc., 1996 Replacement Stock Option Plan,
GranCare, Inc., Outside Directors' Stock Incentive Plan of our report dated
December 10, 1997, with respect to the consolidated financial statements and
schedule of Paragon Health Network, Inc. included in this Annual Report (Form
10-K) for the year ended September 30, 1997, filed with the Securities and
Exchange Commission.
ERNST & YOUNG LLP
Houston, Texas
December 26, 1997
<PAGE>
EXHIBIT 24
PARAGON HEALTH NETWORK, INC.
DIRECTORS'
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT each of the undersigned directors of
Paragon Health Network, Inc., a Delaware corporation (the "Company"), does
hereby make, constitute and appoint Charles B. Carden, Susan Thomas Whittle,
and Stefano M. Miele, or any of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and 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, 1997 for
the Company 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 each of said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing as said attorneys and agents 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 each of
said attorneys-in-fact and agents, or his or her substitute or substitutes, 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 December 29, 1997.
/s/ Keith B. Pitts /s/ Baltej S. Maini
- ------------------------- --------------------------------
Keith B. Pitts Baltej S. Maini, M.D.
/s/ Donald C. Beaver /s/ Williams G. Petty
- ------------------------- --------------------------------
Donald C. Beaver Williams G. Petty, Jr.
/s/ Laurence M. Berg /s/ Robert L. Rosen
- ------------------------- --------------------------------
Laurence M. Berg Robert L. Rosen
/s/ Gene E. Burleson
- -------------------------
Gene E. Burleson
/s/ Peter P. Copses
- -------------------------
Peter P. Copses
/s/ Jay M. Gellert
- -------------------------
Jay M. Gellert
/s/ Joel S. Kanter
- -------------------------
Joel S. Kanter
/s/ John H. Kissick
- -------------------------
John H. Kissick
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 14,355
<SECURITIES> 0
<RECEIVABLES> 245,127
<ALLOWANCES> 33,138
<INVENTORY> 21,237
<CURRENT-ASSETS> 287,229
<PP&E> 512,500
<DEPRECIATION> 210,117
<TOTAL-ASSETS> 874,367
<CURRENT-LIABILITIES> 185,125
<BONDS> 252,763
0
0
<COMMON> 608
<OTHER-SE> 374,675
<TOTAL-LIABILITY-AND-EQUITY> 874,367
<SALES> 1,140,288
<TOTAL-REVENUES> 1,140,288
<CGS> 0
<TOTAL-COSTS> 1,045,180
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,852
<INCOME-PRETAX> 78,256
<INCOME-TAX> 33,604
<INCOME-CONTINUING> 43,917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.73
</TABLE>
