<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 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
Atlanta, Georgia 30346
(Address of principal executive offices) (Zip Code)
(770) 393-0199
(Registrant's telephone number, including area code)
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
------- -------
There were 41,146,662 shares outstanding of the issuer's only class of
common stock as of January 31, 1998.
<PAGE>
PARAGON HEALTH NETWORK, INC.
AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
December 31, 1997
PAGE
----
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements and Notes 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Not applicable
Item 3. Not applicable
Item 4. Submission of Matters
to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE PAGE 26
2
<PAGE>
PART 1 FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended December 31,
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Net Revenues
Nursing home revenue:
Net patient services $305,709 $182,684
Other 1,583 1,337
Non-nursing home revenue:
Pharmacy services 51,586 46,603
Therapy services 40,888 47,670
Home health, hospital services, and other 21,840 1,908
-------------- --------------
421,606 280,202
Costs and Expenses:
Salaries and wages 160,021 111,435
Employee benefits 35,634 24,276
Nursing, dietary and other supplies 20,178 13,479
Ancillary services 93,783 54,215
General and administrative 60,758 39,703
Depreciation and amortization 15,363 9,903
Provision for bad debts 8,705 5,509
Recapitalization, indirect merger and transition costs 80,687 -
-------------- --------------
475,129 258,520
-------------- --------------
Income (loss) from operations (53,523) 21,682
Other Income and Expense:
Interest expense 21,612 5,124
Interest and dividend income (2,284) (1,070)
-------------- --------------
19,328 4,054
-------------- --------------
Income (loss) before income taxes,
equity earnings/minority interest,
and extraordinary loss (72,851) 17,628
Provision (Benefit) for Income Taxes (17,699) 7,240
-------------- --------------
Income (loss) before equity earnings/
minority interest and extraordinary loss (55,152) 10,388
Equity Earnings/Minority Interest (172) (63)
-------------- --------------
Income (loss) before extraordinary loss (55,324) 10,325
Extraordinary Loss on Early Extinguishment
of Debt, net of $6,034 Income Tax Benefit (11,275) -
-------------- --------------
Net Income (Loss) ($66,599) $10,325
============== ==============
Earnings (Loss) Per Share:
Basic and diluted ($1.40) $0.18
============== ==============
Weighted Average Common
Shares Outstanding:
Basic 47,590 58,507
============== ==============
Diluted 47,590 58,957
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1997 1997
------------ -------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $66,593 $14,355
Receivables, less allowances of $71,193 and $33,138 400,448 211,989
Supplies 27,752 21,237
Deferred income taxes 85,022 24,294
Prepaid expenses and other current assets 19,476 15,354
------------ -------------
Total current assets 599,291 287,229
Property and Equipment:
Land, buildings and improvements 543,161 378,251
Furniture, fixtures and equipment 161,520 121,698
Leased property under capital leases 12,551 12,551
------------ -------------
717,232 512,500
Less accumulated depreciation 217,174 210,117
------------ -------------
500,058 302,383
Goodwill, net 462,493 196,120
Restricted Investments 103,805 51,976
Notes Receivable, net 31,696 11,200
Other Assets 91,022 25,459
------------ -------------
$1,788,365 $874,367
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current maturities of long-term debt $4,768 $43,196
Accounts payable 127,342 46,872
Accrued payroll and related expenses 88,740 66,866
Accrued interest 19,017 2,355
Other accrued expenses 83,507 25,836
------------ -------------
Total current liabilities 323,374 185,125
Long-Term Debt, net of current maturities 1,286,876 252,763
Long-Term Insurance Reserves 43,680 27,555
Deferred Income Taxes and Other Noncurrent Liabilities 71,842 33,641
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $0.01; 5,000,000 and 4,650,000
shares authorized; none issued - -
Series A - Junior participating preferred stock, par
value $0.01; none and 350,000 shares authorized and
reserved; none issued - -
Common stock, par value $0.01; 75,000,000 shares
authorized; 41,075,718 and 60,803,760 shares issued 411 608
Capital surplus 501,608 226,972
Retained earnings (deficit) (440,058) 164,650
Unrealized gain on securities available-for-sale 632 244
Treasury stock at cost - none and 2,004,444 shares - (17,191)
------------ -------------
Total stockholders' equity 62,593 375,283
------------ -------------
$1,788,365 $874,367
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars and shares in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Retained Unrealized Treasury Stock
------------------ Capital Earnings Gain on ---------------------
Shares Amount Surplus (Deficit) Securities Shares Amount Total
-------- -------- ---------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 60,804 $608 $226,972 $164,650 $244 2,004 ($17,191) $375,283
Net (loss) (66,599) (66,599)
Issuance of shares to Apollo
Management, L.P. and affiliates 17,778 178 239,822 240,000
Repurchase of shares in connection
with the Recapitalization Merger 54,461 (735,223) (735,223)
Retirement of treasury stock (55,082) (551) (202,060) (538,109) (55,082) 740,720 -
Issuance of shares and options
in exchange for GranCare
common stock and options 17,440 175 238,814 238,989
Funding of options exercised or
canceled under 1992 Employee
Stock Option Plan, net of tax (3,886) (1,350) 11,410 7,524
Funding of employee benefit plans 92 (32) 275 367
Issuance of treasury stock in
exchange for warrants (9) (1) 9 -
Issuance of stock under
various stock option plans,
net of tax 136 1 1,863 1,864
Unrealized gain on
securities available-for-sale 388 388
-------- -------- ---------- ---------- -------- ---------- ---------- ----------
Balance, December 31, 1997 41,076 $411 $501,608 ($440,058) $632 - - $ 62,593
======== ======== ========== ========== ======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended December 31,
--------------------------
1997 1996
----------- ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) ($66,599) $10,325
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 15,363 9,903
Income taxes deferred (370) (392)
Equity earnings/minority interest 172 63
Provision for bad debts 8,705 5,509
Changes in noncash working capital:
Receivables (8,586) (30,885)
Supplies (4,708) 590
Prepayments and other current assets 2,510 2,207
Accounts payable (21,783) (238)
Accrued expenses and other current liabilities 39,556 (497)
Changes in long-term insurance reserves 6,091 4,556
Other 2,835 (199)
----------- ------------
Net Cash Provided By (Used In) Operating Activities (26,814) 942
Cash Flows Used In Investing Activities:
Acquisitions and investments - (11,629)
Purchases of property and equipment (6,993) (11,298)
Disposals of property, equipment and
other assets 2,252 935
Restricted investments (10,454) (3,552)
Net collections on notes receivable 593 282
Deposits and other (7,463) 23
----------- ------------
Net Cash Used In Investing Activities (22,065) (25,239)
Cash Flows From Financing Activities:
Issuance of shares to Apollo Management, L.P.
and affiliates 240,000 -
Proceeds from Senior Credit Facility 740,000 -
Proceeds from Senior Subordinated Notes and
Senior Subordinated Discount Notes 448,871 -
Repurchase of shares in connection
with the Recapitalization Merger (735,223) -
Net draws under credit line - 24,972
Repayment of long-term debt (563,337) (830)
Deferred financing fees (31,678) -
Funding of options under 1992 employee stock
purchase plan, employee benefit plans, and other 2,484 83
----------- ------------
Net Cash Provided By Financing Activities 101,117 24,225
Increase (Decrease) in Cash and Cash Equivalents 52,238 (72)
Cash and Cash Equivalents, beginning of period 14,355 21,394
----------- ------------
Cash and Cash Equivalents, end of period $66,593 $21,322
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
PARAGON HEALTH NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Organization and Basis of Presentation
Organization
Paragon Health Network, Inc. ("Paragon" or the "Company"), 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 Notes 2 and
3. At the time of the GranCare Merger, GranCare operated long-term health care
facilities that provided skilled nursing and residential care services in 15
states, a specialty hospital geriatric services company, and home health
operations. The accompanying condensed consolidated financial statements include
the accounts of Paragon and its subsidiaries and all significant intercompany
accounts and transactions have been eliminated.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for annual financial statements. In the opinion of
management, all adjustments (which include normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three months ended December 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended September 30,
1998. These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended September
30, 1997 included in the Company's Annual Report filed with the Securities and
Exchange Commission on Form 10-K, file No. 1-10968.
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
Note 2. Recapitalization Merger
During 1997 the Company entered into a Recapitalization Merger Agreement
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 17.8 million shares
(adjusted for the three-for-one stock split, see Note 7), of newly issued common
stock of LCA. Concurrent with the Recapitalization Merger, LCA changed its name
to Paragon Health Network, Inc.
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 of up
to an additional $150 million. See Note 6.
Paragon used the $240 million invested by Apollo Investors and 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 $13.50 (adjusted for the three-for-one stock
split, see Note 7), (ii) to repay substantially all amounts outstanding under
the Company's and under GranCare's (see below for description of the GranCare
Merger) previous credit facilities and (iii) pay for certain costs associated
with the Mergers.
7
<PAGE>
PARAGON HEALTH NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 3. GranCare Merger
Effective November 1, 1997, and subsequent to the Company's
recapitalization, Paragon completed the merger acquisition of GranCare pursuant
to the terms of the previously announced GranCare Merger Agreement. In the
merger acquisition, approximately 17.4 million shares (adjusted for the three-
for-one stock split, see Note 7) of Paragon common stock were exchanged for
GranCare common stock and approximately 1.3 million options (adjusted for the
three-for-one stock split, see Note 7) to purchase shares of Paragon common
stock were exchanged for options to purchase GranCare common stock. The
Company's total purchase price of the acquisition was approximately $250.6
million including legal, consulting and other direct costs. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
results of GranCare's operations are included in the Company's consolidated
financial statements since the date of acquisition. The assets and liabilities
of GranCare have been recorded at fair market value based on a preliminary
purchase price allocation. The total purchase price has been allocated as
follows (in thousands):
Current assets............................................ $ 260,313
Property and equipment.................................... 203,075
Goodwill.................................................. 263,690
Restricted investments.................................... 40,987
Other long-term assets.................................... 46,721
Current liabilities....................................... ( 126,601)
Long-term debt............................................ ( 369,871)
Other non-current liabilities............................. ( 67,755)
--------------
Total purchase price...................................... $ 250,559
==============
At December 31, 1997, no adjustment had been made to record GranCare's
property and equipment at fair value, assign a purchase price to unfavorable
operating leases for property and equipment, or to assign a value to
identifiable intangible assets, if any. The Company is in the process of
revaluing these items. Goodwill is amortized on a straight-line basis over 30
years. The Omega Note (see Note 6) assumed by Paragon in the GranCare Merger has
been recorded at its fair value. The excess of fair value over the principal
amount of the related mortgage notes, approximately $25 million, has been
reflected in the accompanying balance sheets as other noncurrent liabilities.
Such amount is being amortized using the effective interest method over the
expected life of the note. Amortization, which was approximately $0.7 million
for the three months ended December 31, 1997, was recorded as a reduction to
interest expense.
Note 4. Recapitalization, Indirect Merger and Transition Costs
During the quarter ended December 31, 1997, the Company recognized a charge
for recapitalization, indirect merger and transition costs in connection with
the Mergers. The components of this charge were as follows (in thousands):
Recapitalization and Indirect Merger Costs:
Change of control and severance....................... $ 20,713
Bridge financing fees ................................ 8,139
Legal and accounting.................................. 6,047
Investment banking.................................... 4,616
Other................................................. 4,962
------------
44,477
Transition Costs:
Retention and employee severance...................... 13,443
Integration costs..................................... 9,809
Relocation and recruitment............................ 5,958
Other................................................. 7,000
------------
36,210
------------
Recapitalization, Indirect Merger and Transition Costs... $ 80,687
============
8
<PAGE>
PARAGON HEALTH NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Of this total, approximately $38.6 million was paid in the three months
ended December 31, 1997. The balance is expected to be paid during fiscal year
1998, primarily in the second and third quarters. Amounts unpaid at December 31,
1997 are reflected as other accrued expenses in the accompanying balance sheet.
Also during the three months ended December 31, 1997, the Company recognized an
extraordinary charge of $11.3 million, net of a $6.0 million income tax benefit,
associated with prepayment penalties incurred on the early extinguishment of
debt and the write-off of certain deferred financing fees in conjunction with
the Mergers.
Note 5. Pro Forma Financial Information
The following unaudited pro forma financial information (in thousands,
except per share data) presents the consolidated results of operations of LCA
and GranCare as if the Mergers had occurred effective October 1, 1997 and 1996,
respectively, after giving effect to certain adjustments, including amortization
of goodwill, increased interest expense on debt related to the Mergers, and
related income tax effects. Such adjustments also exclude a $12.0 million
charge, net of a $7.0 million income tax benefit, for termination fees paid by
GranCare to Vitalink Pharmacy Services, Inc. and Manor Care, Inc. in conjunction
with the GranCare Merger. The pro forma financial information is not necessarily
indicative of the results of operations that would have been achieved had the
Mergers been consummated as of those dates, nor are they necessarily indicative
of future operating results.
<TABLE>
<CAPTION>
Three Months Ended December 31,
1997 1996
----------------- -----------------
<S> <C> <C>
Net revenues................................................ $ 489,898 $ 476,983
================= =================
Net income (loss) before extraordinary item................. $ (60,235) $ 3,836
Extraordinary item.......................................... (11,275) --
----------------- -----------------
Net income (loss)........................................... $ (71,510) $ 3,836
================= =================
Earnings (loss) per share:
Basic:
Net income (loss) before extraordinary item............ $ (1.47) $ 0.10
Extraordinary item..................................... (0.28) --
----------------- -----------------
Net income (loss)...................................... $ (1.75) $ 0.10
================= =================
Diluted:
Net income (loss) before extraordinary item............ $ (1.47) $ 0.09
Extraordinary item..................................... (0.28) --
----------------- -----------------
Net income (loss)...................................... $ (1.75) $ 0.09
================= =================
</TABLE>
Note 6. Long-Term Debt
A summary of total debt as of December 31, 1997 is as follows (in
thousands):
Senior Debt:
------------
Senior Credit Facility:
Revolving Credit Facility...................... $ --
Term Loans..................................... 740,000
Mortgage notes..................................... 93,413
Obligations under capital leases................... 6,103
Other notes payable................................ 3,223
Subordinated Debt:
------------------
Senior Subordinated Notes due 2007................. 273,794
Senior Subordinated Discount Notes due 2007........ 175,111
---------------
1,291,644
Less short-term notes payable and
current maturities................................. ( 4,768)
---------------
Total long-term debt................................. $ 1,286,876
===============
9
<PAGE>
PARAGON HEALTH NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Senior Credit Facility. 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 $80.0 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 $13.7 million letter of credit
issuances, as of December 31, 1997, there were no amounts borrowed under the
Revolving Credit Facility.
Interest on outstanding borrowings 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. 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.
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
Loan remains 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.
Amounts applied as prepayments of the Revolving Credit Facility may be
reborrowed; amounts prepaid under the Term Loans may not be reborrowed.
10
<PAGE>
PARAGON HEALTH NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 at a rate of 10.5% per annum 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 GranCare Merger, 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.
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, 1992 (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 31, 1997.
The Omega Note 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
Note for the prior calendar year. The current interest rate is 15.0% per annum
which is paid monthly. Additional interest accrues on the outstanding principal
of the Omega Note 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 Note is due and payable on August 13, 2007. The
Omega Note may be prepaid without penalty during the first 100 days following
August 14, 2002. Payment of the Omega Note after acceleration upon the
occurrence of an event of default will result in a prepayment penalty in the
nature of a "make whole" premium.
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, which may be increased or
decreased under certain circumstances but may not be 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.
11
<PAGE>
PARAGON HEALTH NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. Stock Split
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 that
was paid on December 30, 1997. In all instances throughout the financial
statements and footnotes, common stock and additional paid-in capital have been
restated to reflect this split.
Note 8. Earnings per Share
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 was designed to simplify the standards for computing earnings per share
and increase the comparability of earnings per share data on an international
basis. SFAS 128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share and requires dual presentation of basic
and diluted earnings per share on the face of the statement of income of all
entities with complex capital structures. The Company adopted SFAS 128 in the
three months ended December 31, 1997 and, accordingly, earnings per share for
all prior periods presented have been restated to conform to the requirements of
this new standard. The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended December 31,
1997 1996
----------------- ----------------
<S> <C> <C>
Numerator for Basic and Diluted Earnings Per Share:
Net income (loss) before extraordinary item...................... $ (55,324) $ 10,325
Extraordinary item............................................... (11,275) --
----------------- ----------------
Net income (loss)................................................ $ (66,599) $ 10,325
================= ================
Denominator:
Denominator for basic earnings per share-weighted
average shares........................................... 47,590 58,507
Effect of dilutive securities - Stock options.................... -- 450
----------------- ----------------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions.......... 47,590 58,957
================= ================
Basic and Diluted Earnings Per Share:
Net income (loss) before extraordinary item...................... $ (1.16) $ 0.18
Extraordinary item............................................... (0.24) --
----------------- ----------------
Net income (loss) per common share............................... $ (1.40) $ 0.18
================= ================
</TABLE>
The effect of dilutive securities for the three months ended December 31,
1997 has been excluded because the effect is antidilutive.
Note 9. Income Taxes
For the three months ended December 31, 1997, the provision for income
taxes was affected by recapitalization, indirect merger, and transition expenses
that are not deductible for income tax purposes as well as non-deductible
amortization of goodwill associated with the GranCare Merger. Excluding the
effect of these non-deductible items, the effective income tax rate for the
three months ended December 31, 1997 was approximately 49.1% compared to 41.2%
for the same period in 1996. The effective income tax rate reflected the
continuation of previously existing non-deductible items and the lower pre-tax
book income.
Deferred income taxes reflected in current assets in the accompanying
balance sheets have increased from $24.3 million at September 30, 1997 to $85.0
million at December 31, 1997. This increase is primarily attributable to
deferred taxes recorded in the GranCare Merger.
12
<PAGE>
PARAGON HEALTH NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 10. Commitments and Contingencies
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 December 31, 1997,
approximately $37.4 million of this leasing arrangement was utilized. The
leasing program is accounted for as an operating lease.
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 businesses. 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 individual plaintiff is continuing
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 continues to vigorously contest these claims. No assurance can be given
that, if the plaintiff were to prevail in his claim, the resulting judgment
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.
13
<PAGE>
PARAGON HEALTH NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Effective November 1, 1997 the Company completed 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" or the "Company"). 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
under the purchase method of accounting and, accordingly, the results of
GranCare's operations have been included in the Company's consolidated financial
statements since the date of acquisition.
The Company provides a diverse range of services in the health care
continuum including: (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. 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. Subacute care refers
to complex medical care and intensive nursing care provided to patients with
high acuity disorders. 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.
Results of Operations
Nursing home revenues are derived from two basic sources: routine services
($224.8 million or 73.2% in the first quarter of fiscal 1998) and ancillary
services ($82.5 million or 26.8% in the first quarter of fiscal 1998) and are a
function of occupancy rates in the long-term care facilities and the payor mix.
Weighted average occupancy, as identified in the following table, increased by
0.7% which included a 0.3% improvement as a result of the GranCare Merger.
<TABLE>
<CAPTION>
Three Months
Ended December 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Weighted average licensed bed count 32,503 23,322
Weighted average number of residents 27,347 19,442
Weighted average occupancy 84.1% 83.4%
</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 government assistance through
the Medicare and Medicaid programs. Additional sources of private pay include
managed care companies, commercial insurers, health maintenance organizations,
and Veteran's Administration contractual payments.
15
<PAGE>
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. 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>
Three Months
Ended December 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Private pay 27.8% 34.1%
Medicare 32.7% 24.3%
Medicaid 39.5% 41.6%
</TABLE>
The percentage of revenue derived from private pay sources declined in the
three months ended December 31, 1997 primarily as a result of the GranCare
Merger. GranCare has historically had a lower percentage of private pay revenue
than LCA. Excluding GranCare, the percentage of revenues derived from private
pay and Medicare sources increased to 59.1% for the three months ended December
31, 1997 from 58.4% for the three months ended December 31, 1996, which was
primarily attributable to the growth in the Company's non-nursing home
operations and an increase in Medicare residents. The revenues from the
non-nursing home operations, which are primarily generated from private pay and
Medicare sources, result in a reduction of the percentage of net revenues
derived from the Medicaid program. In addition, average reimbursement rates for
Medicare patients have increased more rapidly than for Medicaid residents
primarily due 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. For cost reporting periods
beginning on or after July 1, 1998, the Medicare program will change its method
of payment to a flat per diem rate. See Capital Resources and Liquidity-Changes
in Healthcare Legislation.
First Quarter of Fiscal 1998 Compared to First Quarter of Fiscal 1997. Net
revenues comprising nursing home and non-nursing home operations totaled $421.6
million for the quarter ended December 31, 1997 an increase of $141.4 million or
50.5 %, as compared to the same period for fiscal 1997. Nursing home operations
contributed $123.3 million of the increase, which included the acquisition of
GranCare effective November 1, 1997 of $115.8 million, and at the former LCA
facilities, rate increases of $7.1 million, higher ancillary service billings
resulting from the improvement in mix, primarily Medicare, of $3.9 million., and
a $1.2 million reduction due to a lower average number of residents. Non-nursing
home operations contributed $18.1 million of the increase, consisting of an
increase of $5.0 million for pharmacy services, a decrease of $6.8 million for
therapy services, and an increase of $19.9 million from home health, hospital
services, and other. Home health, hospital services and other revenue increased
by $15.2 million as a result of the GranCare acquisition and $4.6 million from
the purchase of two home health agencies during fiscal year 1997.
Pre-tax recapitalization, indirect merger and transition costs related to
the Mergers totaled $80.7 million for the quarter ended December 31, 1997.
Recapitalization and indirect merger costs included change of control and
severance payments totaling $20.7 million, bridge financing fees of $8.1
million, legal, accounting, and investment banking fees of $10.7 million and
other recapitalization related costs of $5.0 million. Transition costs included
retention and employee severance of $13.4 million, integration and related costs
of $9.8 million and relocation, recruitment, and other transition related costs
of $13.0 million.
Costs and expenses excluding recapitalization, indirect merger, and
transition costs totaled $394.4 million for the quarter ended December 31, 1997,
an increase of $135.9 million or 52.6%, as compared to the same period for
fiscal 1997. The acquisition of GranCare contributed $123.8 million to the
increase in costs. Excluding GranCare, payroll, ancillary, and general and
administrative costs increased $0.9, $2.9, and $2.4 million, respectively. The
increase in ancillary services is primarily the result of higher pharmaceutical
costs related to the increase in pharmacy services revenue. Excluding GranCare,
bad debt expense increased $2.5 million primarily due to average days
outstanding for accounts receivable at therapy operations remaining at a high
level.
16
<PAGE>
Interest expense totaled $21.6 million for the quarter ended December 31,
1997, an increase of $16.5 million as compared to the same period for fiscal
1997, which was primarily a result of the additional debt incurred in
conjunction with the Mergers.
For the three months ended December 31, 1997, the provision for income
taxes was affected by recapitalization, indirect merger, and transition expenses
that are not deductible for income tax purposes as well as non-deductible
amortization of goodwill associated with the GranCare Merger. Excluding the
effect of these non-deductible items, the effective income tax rate for the
three months ended December 31, 1997 was approximately 49.1% compared to 41.2%
for the same period in 1996. The effective income tax rate reflected the
continuation of previously existing non-deductible items and the lower pre-tax
book income.
The Company recognized an extraordinary loss of $11.3 million (net of a
$6.0 million income tax benefit) associated with prepayment penalties on the
early extinguishment of debt and the write-off of certain deferred financing
fees.
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.
Capital Resources and Liquidity
Cash and cash equivalents were $66.6 million at December 31, 1997, and
working capital was $275.9 million, an increase of $173.8 million during the
first quarter of fiscal 1998 which included an increase of $133.7 million as a
result of the GranCare Merger. Cash used in operations was $26.8 million which
included approximately $38.6 million in payments for recapitalization, indirect
merger, and transition costs. Excluding accrued expenses acquired in the
GranCare Merger, accrued expenses and other current liabilities increased by
$39.6 million primarily as a result of the remaining accrual for
recapitalization, indirect merger and transition costs which totaled $42.1
million at December 31, 1997, an increase in accrued interest of $12.0 million,
and a reduction in income taxes payable of $7.7 million. The remaining
recapitalization, indirect merger, and transition costs are expected to be paid
during fiscal year 1998, primarily during the second and third quarters.
Excluding accounts payable acquired in the GranCare Merger, accounts payable
decreased by $21.8 million primarily as a result of the $19.0 million
termination fees paid to Vitalink Pharmacy Services, Inc. and Manor Care, Inc.
in consideration of the termination of a non-competition agreement in
conjunction with the GranCare Merger.
Excluding the accounts receivable acquired in the GranCare Merger, accounts
receivable increased by $8.6 million for the three months ended December 31,
1997. 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. The Company receives payment for
nursing facility services based on rates set by individual state Medicaid
programs. Although payment cycles for these programs vary, payments generally
are made within 30 to 60 days of services provided. The Federal Medicare
program, currently a cost-based reimbursement program (See Capital Resources and
Liquidity-Changes in Healthcare Legislation), pays interim rates, based on
estimated costs of services, on a 30 to 45-day basis. Final cost settlements,
based on the difference between audited costs and interim rates, are paid
following final cost report audits by Medicare fiscal intermediaries. Because of
the cost report and audit process, final settlement may not occur until up to 24
months after each facility's Medicare year end. Specialty medical services
generally increase the amount of payments received on a delayed basis. The
Company is also moving to a single operating platform for the post-acute care
division accounts receivable. At December 31, 1997, approximately 50% of the
former GranCare facilities had been converted to LCA's field-based accounts
receivable system.
Cash used in investing activities was $22.1 million in the first quarter of
fiscal 1998, as compared to $25.2 million in the first quarter of fiscal 1997.
Restricted investments increased by $10.5 million as a result of normal
quarterly funding to the Company's insurance company subsidiaries which was in
excess of actual disbursements for claim payments. Deposits and other primarily
included a deposit to HRPT of $15 million (see Capital Resources and
Liquidity-Other Significant Indebtedness) reduced by the cash received in the
GranCare Merger. Other investing activities for the three months ended December
31, 1997 included $7.0 million for routine capital expenditures. Capital
expenditures are expected to be funded by cash from operations or the Revolving
Credit Facility.
17
<PAGE>
Financing activities provided $101.1 million during the first fiscal
quarter of 1998. Cash provided by financing activities included $240.0 million
from the issuance of 17.8 million shares of stock to Apollo and certain other
investors, $740.0 million in proceeds from the Senior Credit Facility, and
$448.9 million in proceeds from the Senior Subordinated Notes and Senior
Subordinated Discount Notes. Cash of $735.2 million was used to purchase
approximately 90.5% of the issued and outstanding stock of the Company in
conjunction with the Recapitalization Merger, $563.3 million to repay
substantially all amounts outstanding under the Company's and GranCare's
previous credit facilities, and $31.7 million to pay financing fees associated
with the Senior Credit Facility and Senior Subordinated Notes.
Senior Credit Facility. 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 $13.7 million of letter of credit
issuances, as of December 31, 1997, there were no amounts borrowed under the
Revolving Credit Facility.
Interest on outstanding borrowings 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. 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.
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.
Amounts applied as prepayments of the Revolving Credit Facility may be
reborrowed; amounts prepaid under the Term Loans may not be reborrowed.
18
<PAGE>
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 at a rate of 10.5% per annum 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.
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 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 Manor Care,
Inc. ("Manor Care") in connection with the settlement of certain litigation
initiated by Vitalink and Manor Care seeking to enjoin the consummation of the
GranCare Merger.
19
<PAGE>
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 31, 1997.
The Omega Note 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
Note for the prior calendar year. The current interest rate is 15.0% per annum
which is paid monthly. Additional interest accrues on the outstanding principal
of the Omega Note 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 Note is due and payable on August 13, 2007. The
Omega Note may be prepaid without penalty during the first 100 days following
August 14, 2002. Payment of the Omega Note 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 Note 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 Note 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 Note 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 Note 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, which may be increased or
decreased under certain circumstances but may not be 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.
Changes in Healthcare Legislation. The Balanced Budget Act enacted in
August 1997 (the "Balanced Budget Act"), contains numerous changes to the
Medicare and Medicaid programs with the intent of reducing payments under these
programs by $115 billion and $13 billion, respectively, over the next five
years. While part of the reduction will be achieved through slowing the annual
growth rate of Medicare payments, a large portion of the reductions will also
come from changes to the Medicare and Medicaid programs.
The Balanced Budget Act amended the Medicare program by revising the
payment system. Currently, nursing homes are reimbursed under the Medicare
program based on the actual costs of services provided. However, the Balanced
Budget Act requires the establishment of a prospective payment system ("PPS")
for nursing homes for cost reporting periods beginning on or after July 1, 1998.
Under PPS, nursing homes will receive a per diem rate for each of their patients
which, during the first three years, will be based on a blend of facility
specific costs and Federal acuity adjusted rates. Thereafter, the per diem rates
will be based solely on Federal acuity adjusted rates. Subsumed in this per diem
rate will be ancillary services, such as pharmacy and rehabilitation services,
which historically have been provided to many of the Company's nursing
facilities by the Company's pharmacy and therapy subsidiaries.
20
<PAGE>
The Balanced Budget Act also requires the establishment of an interim
payment system for home health services for cost reporting periods beginning on
or after October 1, 1997. The interim system established per visit limits and
per beneficiary annual limits. A permanent prospective payment system for home
health services will be established by October 1, 1999. The PPS rates for
patients in the Company's nursing homes have not yet been set.
The Company is not able to predict at this time what effect the PPS system
will have on its nursing home, home health, pharmacy, rehabilitation and
hospital services businesses. The Company is evaluating the new regulations and
believes that while PPS may initially result in more intense price competition
and lower margins among ancillary service providers (including the Company's
pharmacy, therapy, and hospital services subsidiaries), opportunities will be
available to efficiently operated low cost providers who can achieve economies
of scale.
The Balanced Budget Act also repealed the Boren Amendment, which
had 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. Because of the repeal of Boren,
states now have considerable flexibility in establishing Medicaid payment rates.
In addition, Boren provided a dispute resolution mechanism whereby providers
could challenge Medicaid rates set by the various states, the repeal of which
will now make it more difficult to challenge these rates in the future. The
Company is not able to predict whether any states will adopt changes in their
Medicaid reimbursement programs, or, if adopted and implemented, what effect
such initiatives would have on the Company.
On January 30, 1998, the Health Care Financing Administration issued
its new salary equivalency guidelines which change Medicare reimbursement rates
for therapy services. Under salary equivalency, the Company is reimbursed for
therapy services based on the time spent on the premises times a fixed rate,
depending on the service provided. While the new rates for physical therapy
represent an increase over what the Company previously received for such
services, the new rates for occupational therapy and speech language pathology
represent decreases from what the Company was previously able to bill. The
salary equivalency guidelines will remain in effect until the facility at which
such services are provided, including the Company's facilities and other
facilities serviced by the Company's therapy subsidiaries, start billing under
PPS. The Company believes that while salary equivalency will have a slight
adverse effect on its therapy revenue, the Company does not believe that salary
equivalency will have a material adverse effect on the Company's consolidated
revenues.
Other Factors Affecting Liquidity and Capital Resources. 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
fiscal year 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.
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 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 December 31, 1997 approximately $37.4 million of this
leasing arrangement was utilized. The leasing program is accounted for as an
operating lease.
The Company currently maintains two captive insurance subsidiaries to
provide for reinsurance obligations under workers' compensation, general and
professional liability, and automobile liability. These obligations are funded
with long-term, fixed income investments which are not available to satisfy
other obligations of the Company.
21
<PAGE>
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 $136.3 million is expected to be available after considering
$13.7 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.
22
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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 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 individual plaintiff is continuing 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 continues to
vigorously contest these claims. No assurance can be given that, if the
plaintiff were to prevail in his claim, the resulting judgment 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.
23
<PAGE>
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.
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of stockholders of the Company was held on
October 28, 1997 in Houston, Texas. At that time the following matters
were voted on (the votes cast for, against, and withheld for each
matter are summarized below):
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Withheld
---------- ----------- ----------
<S> <C> <C> <C>
Approval and adoption of an Agreement and 14,757,964 11,795 10,954
Plan of Merger among Apollo Management, L.P.,
Apollo LCA Acquisition Corp. and Living
Centers of America, Inc. ("Living Centers")
dated as of May 7, 1997, as amended and
restated as of September 17,1997.
Approval of the issuance of shares of Paragon 14,756,336 11,894 12,483
Common Stock to the stockholders of GranCare,
Inc. pursuant to the Agreement and Plan of Merger
among Living Centers, GranCare, Inc. and Apollo
Management, L.P. dated as of May 7, 1997, as
amended and restated as of September 17, 1997.
Approval of certain amendments to the 10,913,927 273,655 13,649
Restated Certificate of Incorporation of Living
Centers, (excluding shares held by related
parties as required by Living Center's
Certificate of Incorporation).
</TABLE>
Item 5. Other Information
On January 8, 1998, Paragon Rehabilitation, Inc. ("PRI") filed a
complaint alleging that the Company's use of the name "Paragon" has
caused and is likely to cause confusion as to the affiliation of the
Company and PRI and that, therefore, the Company's use of "Paragon"
violates PRI's trade name and service mark. The Company is considering
its alternatives with respect to this litigation, including changing
its name.
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit Page
Number Number
------ ------
10.1 Employment Agreement between Paragon Health Network,
Inc. and Ann E. Weiser 27
27 Financial Data Schedule 44
(b) Reports on Form 8-K
On November 4, 1997 the Company filed Form 8-K announcing the
effectiveness of the merger of Apollo Acquisition Sub, Inc. with and
into Living Centers of America, Inc. and merger of GranCare, Inc. with
and into a wholly-owned subsidiary of Paragon Health Network, Inc.
On January 20, 1998 the Company filed Form 8-K/A updating the Pro
Forma Condensed Consolidated Financial Statements incorporated by
reference into Form 8-K filed November 4, 1997 to the Registrant's
fiscal year ended September 30, 1997.
25
<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 amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
February 17, 1998
PARAGON HEALTH NETWORK, INC.
(Registrant)
By: /s/ Charles B. Carden
----------------------------
Charles B. Carden
Executive Vice President and
Chief Financial Officer
By: /s/ Ronald W. Fleming
----------------------------
Ronald W. Fleming
Vice President, Controller,
and Chief Accounting Officer
26
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
Employment Agreement dated as of January 9, 1998 between Ann E. Weiser
(the "Executive") and Paragon Health Network, Inc., a Delaware corporation
(the "Company").
WHEREAS, the Company desires to employ the Executive as the Senior Vice
President and Chief Human Resources 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 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 and Chief Human Resources 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 her skills and render services to the best of
her 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 and Chief Human Resources 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 her duties and
--------------------
conduct her business at the principal executive offices of the Company, except
for required travel on the Company's business.
<PAGE>
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder shall
-----------
be $280,000.00 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
$280,000.00 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 her 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 $125,000 (subject to any applicable payroll or other
taxes required to be withheld).
(d) Relocation Bonus. On the Effective Date, the Company shall
----------------
pay to the Executive $50,000 (subject to applicable payroll or other
taxes required to be withheld) to assist the Executive with other
expenses of relocation, which shall be in addition to the payments
under the Company's relocation policy. The Executive shall not be
required to account to the Company as to the use of the Relocation
Bonus.
(e) Outplacement Assistance. On the Effective Date, the
-----------------------
Company shall provide the Executive's spouse with outplacement services
in an amount not exceeding $10,000, for the purposes of assisting the
Executive's spouse in locating suitable employment in the Atlanta,
Georgia area. All outplacement services shall be provided by an
outplacement agency approved in advance by the Company.
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. Expenses. The Executive shall be reimbursed for all ordinary and
--------
necessary business expenses incurred by her in connection with her 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 her 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 her 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 her 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 her employment hereunder (A) for Good Reason, (B)
if her health should become impaired to an extent that makes her
continued performance of her duties hereunder hazardous to her 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
3
<PAGE>
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 her 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 her 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 her 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 $280,000;
(iii) the relocation of the Executive's office at
which she is to perform her duties, to a location more than
fifty (50) miles from the location at which the Executive
performed her duties prior to the Change in Control, except
for required travel on the Company's business to an extent
substantially consistent with her 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 her position with the Company or terminate her 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 her 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 her 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 her employment for other than Good Reason within
twelve (12) months from the Effective Date, the Executive shall be
obligated to refund the amounts that were received under Sections 6(c)
and 6(d) 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
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) 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 her or entrusted to her during the
course of her 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 her
duties hereunder as a result of incapacity due to physical or mental
illness ("Disability Period"), the Executive shall continue to receive
her base salary at the rate then in effect for such period until her
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 her 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 she 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 her death, the Company shall continue to pay to her estate her
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 her 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 her employment for Good Reason, then
(i) the Company shall pay the Executive her 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 her 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 her right to exercise her rights
under Section 12(d) hereof with respect to any act or failure
to act which constitutes Good Reason.
(e) If the Executive terminates her 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 her 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 her 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
her 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 her employment under
clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the
Executive her 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 she is not
a party to any agreement or instrument which would prevent her from
entering into or performing her duties in any way under this Agreement.
The Executive agrees and covenants that she 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 her 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
her 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 her devisee, legatee or other designee or,
if there is no such designee, to her estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that she will not
at any time during or at any time after the end of the Term, directly
or indirectly, use for her 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 her 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
her 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 her 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 her 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 she 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, she 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: Ann E. Weiser
1310 North Ritchie Court
Number 3DA
Chicago, Illinois 60610
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 law 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.
[Signatures appear on the following page]
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/ Ann Weiser
16
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 66,593
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<RECEIVABLES> 471,641
<ALLOWANCES> 71,193
<INVENTORY> 27,752
<CURRENT-ASSETS> 599,291
<PP&E> 717,232
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<TOTAL-ASSETS> 1,788,365
<CURRENT-LIABILITIES> 323,374
<BONDS> 1,286,876
0
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<COMMON> 411
<OTHER-SE> 62,182
<TOTAL-LIABILITY-AND-EQUITY> 1,788,365
<SALES> 421,606
<TOTAL-REVENUES> 421,606
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<TOTAL-COSTS> 475,129
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<INTEREST-EXPENSE> 19,328
<INCOME-PRETAX> (72,851)
<INCOME-TAX> (17,699)
<INCOME-CONTINUING> (55,324)
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