<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1998
REGISTRATION NO. 333-43663
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PARAGON HEALTH NETWORK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8051 74-2012902
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION)
ONE RAVINIA DRIVE
SUITE 1500
ATLANTA, GEORGIA 30346
(770) 393-0199
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SUSAN THOMAS WHITTLE
SENIOR VICE PRESIDENT
GENERAL COUNSEL AND SECRETARY
ONE RAVINIA DRIVE
SUITE 1500
ATLANTA, GEORGIA 30346
(770) 393-0199
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH A COPY TO:
RICHARD H. MILLER, ESQ.
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
191 PEACHTREE STREET N.E.
ATLANTA, GEORGIA 30303
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
---------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G. check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER UNIT(1)(2) OFFERING PRICE(1) FEE(2)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9 1/2% Senior Subordi-
nated Notes Due 2007,
Series B............. $275,000,000 100% $275,000,000 $81,125
- ------------------------------------------------------------------------------------
10 1/2% Senior Subordi-
nated Discount Notes
Due 2007, Series B... $294,000,000 59.557% $175,097,580 $51,654
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(f) solely for the purposes of calculating
the registration fee.
(2) Previously paid in connection with the initial filing of this Registration
Statement on January 2, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 29, 1998
PROSPECTUS
PARAGON HEALTH NETWORK, INC.
OFFER FOR OUTSTANDING 9 1/2% SENIOR SUBORDINATED NOTES DUE 2007
AND 10 1/2% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007
IN EXCHANGE FOR, RESPECTIVELY,
9 1/2% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007 SERIES B, AND
10 1/2% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007 SERIES B,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 6, 1998, UNLESS EXTENDED
------------
Paragon Health Network, Inc., a Delaware corporation (the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and subject to the conditions set
forth herein and in a related Letter of Transmittal, to exchange up to $275.0
million aggregate principal amount of the 9 1/2% Senior Subordinated Notes Due
2007, Series B, registered under the Securities Act of 1933, as amended (the
"Securities Act"), of the Company (the "Exchange Senior Subordinated Notes"),
for a like amount of the privately placed 9 1/2% Senior Subordinated Notes Due
2007 of the Company issued on November 4, 1997 (the "Existing Senior
Subordinated Notes"), from the holders thereof and to exchange up to $294.0
million aggregate principal amount at maturity of 10 1/2% Senior Subordinated
Discount Notes Due 2007, Series B, registered under the Securities Act, of the
Company (the "Exchange Senior Subordinated Discount Notes"), for a like amount
at maturity, of the privately placed 10 1/2% Senior Subordinated Discount Notes
Due 2007 of the Company issued on November 4, 1997 (the "Existing Senior
Subordinated Discount Notes"), from the holders thereof. The Existing Senior
Subordinated Notes and the Existing Senior Subordinated Discount Notes are
referred to collectively herein as the "Existing Notes" and the Exchange Senior
Subordinated Discount Notes and the Existing Senior Subordinated Discount Notes
are referred to collectively herein as the "Exchange Notes."
(Continued on inside cover)
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE EXCHANGE
NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<PAGE>
Interest on the Exchange Senior Subordinated Notes is payable semi-annually
on May 1 and November 1 of each year, commencing May 1, 1998. The Exchange
Senior Subordinated Discount Notes are being issued at a substantial discount
from their principal amount at maturity. The Exchange Senior Subordinated
Discount Notes will accrete until November 1, 2002 at a rate of 10.57% per
annum, compounded semi-annually. Thereafter, cash interest on the Exchange
Senior Subordinated Discount Notes will accrue at a rate of 10 1/2% per annum
and will be payable semi-annually on May 1 and November 1 of each year,
commencing May 1, 2003. The Exchange Notes will mature on November 1, 2007.
Except as described below, the Company may not redeem the Exchange Notes prior
to November 1, 2002. On and after such date, the Company may redeem the
Exchange Notes, in whole or in part, at any time at the redemption prices set
forth herein, together with accrued and unpaid interest, if any, to the date
of redemption. At any time and from time to time prior to November 1, 2000,
the Company may, subject to certain requirements, redeem up to 33 1/3% of the
original aggregate principal amount of the Exchange Senior Subordinated Notes
and the Exchange Senior Subordinated Discount Notes with the net proceeds
received from one or more Equity Offerings (as defined) at a redemption price
equal to 109.5% of the principal amount and 110.5% of the Accreted Value (as
defined), respectively, to be redeemed, together with accrued and unpaid
interest, if any, to the date of redemption. The Exchange Notes will not be
subject to any sinking fund requirement. Upon the occurrence of a Change of
Control (as defined), each holder of Exchange Notes may require the Company to
repurchase all or a portion of such holder's Exchange Notes at a price equal
to 101% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of repurchase (or at 101% of the Accreted Value
thereof at such date, as applicable). See "Description of Exchange Notes."
The Exchange Notes will be unsecured and subordinated to all existing and
future Senior Indebtedness (as defined) of the Company. The Exchange Notes
will rank pari passu with any future Senior Subordinated Indebtedness (as
defined) of the Company and will rank senior to all other subordinated
indebtedness of the Company. The Indenture permits the Company to incur
additional indebtedness, including Senior Indebtedness, subject to certain
limitations. As of September 30, 1997, on a pro forma basis after giving
effect to the Transactions (as defined) and the application of the proceeds
therefrom: (i) the aggregate principal amount of the Company's outstanding
Senior Indebtedness would have been approximately $831.6 million (excluding
unused commitments); (ii) the amount of indebtedness of the Company's
subsidiaries would have been $91.6 million (excluding subsidiary guarantees
under the Senior Credit Facility), to which the Exchange Notes would be
effectively subordinated; and (iii) the Company would have had no Senior
Subordinated Indebtedness outstanding other than the Exchange Notes. See
"Description of Exchange Notes."
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Exchange and Registration Rights
Agreement, dated as of November 4, 1997 (the "Registration Rights Agreement"),
among the Company and Chase Securities Inc., Smith Barney Inc. and Credit
Suisse First Boston Corporation, as the initial purchasers (the "Initial
Purchasers") of the Existing Notes. The Exchange Offer is designed to provide
to the holders of Existing Notes an opportunity to acquire Exchange Notes
which, unlike the Existing Notes, are expected to be freely transferable at
all times, subject to state "blue sky" law restrictions, provided that the
holder is not an "affiliate" of the Company within the meaning of the
Securities Act and represents that the Exchange Notes are being acquired in
the ordinary course of such holder's business and the holder is not engaged
in, and does not intend to engage in, a distribution of the Exchange Notes.
With the exception of the freely transferable nature of the Exchange Notes,
the Exchange Senior Subordinated Notes and the Exchange Senior Subordinated
Discount Notes are identical in all other material respects to the Existing
Senior Subordinated Notes and the Existing Senior Subordinated Discount Notes,
respectively. See "The Exchange Offer--Purpose of the Exchange Offer."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all of the expenses incident to the Exchange Offer. Tenders
of Existing Notes pursuant to the Exchange Offer may be withdrawn at any time
prior to the Expiration Date (as defined) of the Exchange Offer. The Company
expressly reserves the right to terminate or amend the Exchange Offer and not
to accept for exchange any Existing Notes not theretofore accepted for
exchange upon the occurrence of any of the events specified under "The
Exchange Offer--Conditions to the Exchange Offer." If any such event occurs,
the Company will notify the Exchange
(ii)
<PAGE>
Agent and will either issue a press release or give oral or written notice to
the holders of the Existing Notes as promptly as practicable. The Exchange
Offer will expire at 5:00 p.m. New York City Time, on March 6, 1998, unless
the Company, in its sole discretion, has extended the period of time for which
the Exchange Offer is open. In the event the Company terminates the Exchange
Offer and does not accept for exchange any Existing Notes with respect to the
Exchange Offer, the Company will promptly return such Existing Notes to the
holders thereof. See "The Exchange Offer."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivery of a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Existing Notes where
such Existing Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. For a period of 90 days after
the consummation of the Exchange Offer, the Company will make this Prospectus,
as amended or supplemented, available to any broker-dealer for use in
connection with any resale. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the
Existing Notes. Holders of Existing Notes whose Existing Notes are not
tendered and accepted in the Exchange Offer will continue to hold the Existing
Notes. Following consummation of the Exchange Offer, the holders of the
Existing Notes will continue to be subject to the existing restrictions upon
transfer thereof and, except as provided herein, the Company will have no
further obligation to such holders to provide for registration under the
Securities Act of the Existing Notes held by them. To the extent Existing
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Existing Notes may be adversely
affected.
THE COMPANY DOES NOT CURRENTLY INTEND TO LIST THE EXCHANGE NOTES ON ANY
SECURITIES EXCHANGE OR TO SEEK APPROVAL FOR QUOTATION OF THE EXCHANGE NOTES
THROUGH ANY AUTOMATED QUOTATION SYSTEM. THERE CAN BE NO ASSURANCE THAT AN
ACTIVE PUBLIC MARKET FOR THE EXCHANGE NOTES WILL DEVELOP.
The Exchange Offer is not conditioned upon any minimum principal amount of
Existing Notes being tendered for exchange pursuant to the Exchange Offer.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and
Exchange Commission (the "Commission") relating to its business, financial
position, results of operations and other matters. Such reports, proxy
statements and other information can be inspected and copied at the Public
Records Section maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its regional offices located at
The Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and 7 World Trade Center, New York, New York 10048. Copies of such
material can also be obtained at the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Company's common stock is listed on the New York Stock Exchange.
Such reports, proxy statements and other materials can also be inspected at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005. Such reports, proxy statements and other information can be
reviewed through the Commission's Electronic Data Gathering Analysis and
Retrieval System, which is publicly available through the Commission's Web
Site (http://www.sec.gov).
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Exchange Notes offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the Rules and Regulations of the
(iii)
<PAGE>
Commission. Reference is made to the Registration Statement and to the
exhibits relating thereto for further information with respect to the Company
and the Exchange Notes offered hereby.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company pursuant to
the Exchange Act are incorporated by reference in this Prospectus:
1. The Annual Report on Form 10-K for the fiscal year ended September 30,
1997 (File No. 1-10968).
2. The GranCare, Inc. Audited Consolidated Balance Sheets as of December
31, 1996 and 1995, Consolidated Statements of Income, Shareholders' Equity
and Cash Flows for the years ended December 31, 1996, 1995 and 1994, and
Schedule II--Valuation and Qualifying Accounts, together with the notes
thereto and the Reports of Ernst & Young LLP thereon, and the report of
KPMG Peat Marwick LLP with respect to the Evergreen Healthcare, Inc.
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows
for the year ended December 31, 1994 included in the Joint Proxy
Statement/Prospectus contained in the Registration Statement on Form S-4
filed by Living Centers of America, Inc. (Registration No. 333-36525).
3. The Current Report on Form 8-K dated November 12, 1997, as amended by
the Current Report on Form 8-K/A dated January 20, 1998 (File No. 1-10968).
All documents and reports filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(b) of the Exchange Act after the date of this Prospectus shall
be deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the dates of filing of such documents or reports. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
This Prospectus incorporates documents by reference relating to the Company
which are not presented herein or delivered herewith. Such documents (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference) are available, without charge to any person,
including any beneficial owner of the Existing Notes, to whom this Prospectus
is delivered, upon written or oral request to Paragon Health Network, Inc.,
One Ravinia Drive, Suite 1500, Atlanta, Georgia 30346, Attention: Secretary
(telephone (770) 393-0199). In order to ensure timely delivery of the
documents, any requests should be made by February 20, 1998.
(iv)
<PAGE>
SUMMARY
THE COMPANY
OVERVIEW
The Company, through its various operating subsidiaries, is one of the
nation's leading providers of post-acute care. The Company's continuum of post-
acute care services encompasses skilled nursing, subacute and medically complex
care as well as a variety of related ancillary services. These ancillary
services include pharmacy, rehabilitation and hospital program management. The
Company operates in 38 states with significant concentrations of facilities and
beds in its key markets. On a pro forma basis for the twelve months ended
September 30, 1997, the Company generated revenues of approximately $1.9
billion.
The Company's operations are organized into four divisions: (i) post-acute
care; (ii) pharmaceutical services; (iii) rehabilitation services; and (iv)
hospital services. The Company operates 327 skilled nursing and assisted living
facilities containing over 38,000 beds, as well as 34 institutional pharmacies
servicing more than 100,000 beds. The Company also operates over 130 outpatient
rehabilitation clinics and manages specialty medical programs in acute care
hospitals through more than 180 management contracts. In addition, the Company
provides subacute care, home health, hospice and private duty nursing services.
As a result of the Mergers, the Company increased the density of its services
in many of its markets, which management believes will result in revenue
enhancement and cost saving opportunities. Revenue enhancements are expected to
be realized by expanding the range of services offered within each market,
increasing patient acuity levels within the Company's facilities and
strengthening relationships with hospitals, physicians and third-party payors.
Cost saving opportunities include leveraging fixed overhead costs over a larger
revenue base, eliminating redundant administrative functions and realizing
purchasing synergies.
BUSINESS STRATEGY
The Company's strategy is to become the provider of choice for both patients
and payors in each of its markets through an integrated network of high
quality, cost efficient post-acute and long-term care services. In this regard,
the Company plans to (i) continue to maintain or establish leadership positions
in key markets by achieving a critical mass of skilled nursing facilities and
related specialty medical businesses to form an integrated continuum of care;
(ii) continue to attract and care for higher acuity patients by offering
specialty medical services such as enteral, intravenous and respiratory
therapies; (iii) continue to provide ancillary services to unaffiliated
facilities and become a leading third-party provider of ancillary services;
(iv) develop an industry leading infrastructure in connection with the
combination of Living Centers of America, Inc. ("LCA") and GranCare, Inc.
("GranCare") through establishing standardized informations systems and
operating procedures, implementing a "shared services" model under which the
Company's operating divisions will utilize a common financial reporting and
accounting department, expanding the internal audit process and combining and
enhancing existing compliance and ethics programs of LCA and GranCare; and (v)
continue to manage its portfolio of facilities and services in order to
increase the breadth of its facility base and range of services provided in its
target markets by increasing the breadth and density of ancillary services in
existing markets, expanding into new markets that management deems favorable,
exiting markets or existing lines of business in markets that management deems
not to be favorable and pursuing a strategy of selective acquisitions.
1
<PAGE>
THE TRANSACTIONS
THE MERGERS
On November 4, 1997, the Company engaged in two merger transactions. First,
pursuant to an agreement and plan of merger among Apollo Management, L.P.
("Apollo Management," and together with certain of its affiliates, "Apollo"),
Apollo LCA Acquisition Corp. (a corporation owned by certain Apollo affiliates
and other investors, "Apollo Sub") and LCA, Apollo Sub was capitalized with
$240 million in cash and was merged with and into LCA (the "Recapitalization
Merger"). In the Recapitalization Merger, LCA was the surviving corporation and
was renamed Paragon Health Network, Inc. ("Paragon"). Second, pursuant to an
agreement and plan of merger among LCA, GranCare, Apollo Management and LCA
Acquisition Sub, Inc. (a wholly owned subsidiary of Paragon, "LCA Sub"),
GranCare merged with LCA Sub, with GranCare surviving as a wholly owned
subsidiary of Paragon (the "GranCare Merger," and collectively with the
Recapitalization Merger, the "Mergers"). The GranCare Merger was accounted for
using purchase accounting.
THE FINANCINGS
The consummation of the Mergers required aggregate proceeds of approximately
$1.4 billion. The funds required for the Mergers and related transaction fees
and expenses were provided primarily by: (i) proceeds of approximately $449
million from the offering of the Existing Notes (the "Offering"); (ii)
borrowings by the Company of approximately $740 million under a new senior bank
facility providing for aggregate commitments of up to $890 million (the "Senior
Credit Facility"); and (iii) the Apollo Investors' equity investment of
approximately $240 million (the "Apollo Investment"). The Offering, the
borrowings under the Senior Credit Facility and the Apollo Investment are
collectively referred to herein as the "Financings." The Mergers, the
Financings and the payment of related transaction fees and expenses are
collectively referred to herein as the "Transactions." See "Description of
Senior Credit Facility" and "Use of Proceeds." LCA and Paragon are the same
legal entity. References to the "Company" herein refer to LCA and its operating
subsidiaries prior to the consummation of the Transactions and to Paragon and
its operating subsidiaries following consummation of the Transactions.
The following table sets forth the sources and uses of funds for the
Transactions.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
SOURCES:
Term Loans(1)....................................... $ 740,000
Existing Senior Subordinated Notes.................. 273,774
Existing Senior Subordinated Discount Notes......... 175,098
Common Equity Investment by the Apollo Invest-
ors(2)............................................. 240,000
Existing Cash....................................... 8,615
----------
Total Sources..................................... $1,437,487
==========
USES:
Cash Paid to LCA Stockholders in the Recapitaliza-
tion Merger(3)..................................... $ 735,223
Retirement of LCA Debt.............................. 288,000
Retirement of GranCare Debt......................... 285,097
Security Deposit to Lessor(4)....................... 15,000
Costs Related to Transactions(5).................... 114,167
----------
Total Uses........................................ $1,437,487
==========
</TABLE>
2
<PAGE>
- --------
(1) The Term Loans, which constitute part of the Senior Credit Facility,
consist of: (i) a 6 1/2-year term loan facility in an aggregate principal
amount of $240 million; (ii) a 7 1/2-year term loan facility in an
aggregate principal amount of $250 million; and (iii) an 8 1/2-year term
loan facility in an aggregate principal amount of $250 million
(collectively, the "Term Loans"). The revolving credit facility, which
constitutes the remainder of the Senior Credit Facility, provides for
borrowings of up to $150 million (the "Revolving Credit Facility"). On a
pro forma basis, as of September 30, 1997, the Company would have had $130
million available under the Revolving Credit Facility after giving effect
to approximately $20 million in letters of credit. See "Description of
Senior Credit Facility."
(2) As part of the Transactions, Apollo paid approximately $240 million for
approximately 44.0% of the Company Common Stock.
(3) Repurchase of approximately 90.5% of the LCA common stock, par value $0.01
per share ("LCA Common Stock").
(4) Represents a cash collateral deposit in favor of Health and Retirement
Properties Trust ("HRPT").
(5) Includes financing fees, advisory fees, legal expenses, severance costs,
termination fees, lease restructuring payment, and other expenses related
to the Transactions.
3
<PAGE>
THE EXCHANGE OFFER
Securities Offered.......... Up to $275,000,000 aggregate principal amount of
Exchange Senior Subordinated Notes and up to
$294,000,000 aggregate principal amount at
maturity of Exchange Senior Subordinated Discount
Notes.
The Exchange Offer.......... The Exchange Senior Subordinated Notes are being
offered in exchange for a like principal amount
of Existing Senior Subordinated Notes, and the
Exchange Senior Subordinated Discount Notes are
being offered in exchange for a like principal
amount of Existing Senior Subordinated Discount
Notes. Existing Notes may be exchanged only in
integral multiples of $1,000. The issuance of the
Exchange Notes is intended to satisfy obligations
of the Company under the Registration Rights
Agreement.
Expiration Date.............
The Exchange Offer will expire at 5:00 p.m., New
York City Time, on March 6, 1998 (the "Expiration
Date") or such other date and time to which it is
extended by the Company. Tenders of Existing
Notes pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration
Date. Any Existing Notes not accepted for
exchange for any reason will be returned without
expense to the tendering holder thereof as
promptly as practicable after the expiration or
termination of the Exchange Offer.
Conditions to the Exchange The Exchange Offer is subject to certain
Offer....................... customary conditions, which may be waived by the
Company. The Company currently expects that each
of the conditions will be satisfied and that no
waivers will be necessary. See "The Exchange
Offer--Conditions to the Exchange Offer."
Procedures for Tendering
Existing Notes..............
Each holder of Existing Notes wishing to accept
the Exchange Offer must complete, sign and date a
letter of transmittal, or a facsimile thereof
which will be mailed to record holders of
Existing Notes by the Company (a "Letter of
Transmittal"), in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with
such Existing Notes and any other required
documentation, to the Exchange Agent (as defined)
at the address set forth herein. See "The
Exchange Offer--Procedures for Tendering Existing
Notes."
Use of Proceeds............. The Company will not receive any proceeds from
the exchange of Existing Notes pursuant to the
Exchange Offer.
Certain Federal Income Tax
Considerations..............
The exchange pursuant to the Exchange Offer
should not be a taxable event for federal income
tax purposes. See "Certain Federal Income Tax
Considerations."
Exchange Agent.............. IBJ Schroder Bank & Trust Company is serving as
the exchange agent (the "Exchange Agent") in
connection with the Exchange Offer.
4
<PAGE>
CONSEQUENCES OF EXCHANGING EXISTING NOTES
PURSUANT TO THE EXCHANGE OFFER
Based on certain interpretive letters issued by the staff of the Securities
and Exchange Commission (the "Commission") to third parties in unrelated
transactions, the Company believes that Exchange Notes issued pursuant to the
Exchange Offer may be offered for resale, resold or otherwise transferred by
holders thereof (other than any holder who is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of the
holders' business and such holders have no arrangement or understanding with
any person to participate in a distribution of such Exchange Notes and are not
participating in, and do not intend to participate in, the distribution of such
Exchange Notes. By tendering, each holder will represent to the Company in the
Letter of Transmittal, that, among other things, the Exchange Notes acquired
pursuant to the Exchange Offer are being acquired in the ordinary course of
business of the person receiving such Exchange Notes, whether or not such
person is the holder, that neither the holder nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes, that neither the holder nor any such other person is
participating in or intends to participate in the distribution of such Exchange
Notes and that neither the holder nor any such other person is an "affiliate,"
as defined in Rule 405 under the Securities Act, of the Company, or that if it
is an affiliate, that it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent practicable. Each
broker-dealer that receives Exchange Notes for its own account in an exchange
for Existing Notes must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the Exchange Notes for
offer or sale under the securities or "blue sky" laws of such jurisdiction as
any holder of the Exchange Notes reasonably requests in writing. If a holder of
Existing Notes does not exchange such Existing Notes for Exchange Notes
pursuant to the Exchange Offer, such Existing Notes will continue to be subject
to the restrictions on transfer contained in the legend thereon. In general,
the Existing Notes may not be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. See "The
Exchange Offer--Consequences of Failing to Exchange; Resales of Exchange
Notes."
The Existing Notes are currently eligible for trading in the Private
Offerings, Resales and Trading through Automatic Linkages ("PORTAL") market.
Following the commencement of the Exchange Offer but prior to its consummation,
the Existing Notes may continue to be traded in the PORTAL market. Following
the consummation of the Exchange Offer, the Existing Notes will not be eligible
for PORTAL trading.
COMPARISON OF EXCHANGE NOTES WITH EXISTING NOTES
Transferability............. Generally, the Exchange Notes will be freely
transferable under the Securities Act by holders
thereof other than any holder that is an
affiliate of the Company. The Exchange Senior
Subordinated Notes otherwise will be
substantially identical in all material respects
(including interest rate and maturity) to the
Existing Senior Subordinated Notes, and the
Exchange Senior Subordinated Discount Notes will
be substantially identical in all material
respects (including interest rate and maturity)
to the Existing Senior Subordinated Discount
Notes. See "The Exchange Offer."
5
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Registration Rights......... The holders of Existing Notes currently are
entitled to registration rights pursuant to the
Registration Rights Agreement. However, upon
consummation of the Exchange Offer, subject to
certain exceptions, holders of Existing Notes who
do not exchange their Existing Notes for Exchange
Notes in the Exchange Offer will no longer be
entitled to registration rights and will not be
able to offer or sell their Existing Notes,
unless such Existing Notes are subsequently
registered under the Securities Act (which,
subject to certain limited exceptions, the
Company will have no obligation to do), except
pursuant to an exemption from, or in a
transaction not subject to, the Securities Act
and applicable state securities laws. See "Risk
Factors--Adverse Consequences of Failure to
Adhere to Exchange Offer Procedures."
Absence of a Public Market
for the Exchange Notes......
The Exchange Notes are new securities and there
is currently no established market for the
Exchange Notes. Accordingly, there can be no
assurance as to the development or liquidity of
any market for the Exchange Notes. The Company
does not intend to apply for listing of the
Exchange Notes on any securities exchange or for
quotation of the Exchange Notes through any
automated quotation system.
THE EXCHANGE NOTES
Except as otherwise indicated, the following description relates both to the
Existing Notes and to the Exchange Notes and assumes the exchange of all
Existing Notes for Exchange Notes in the Exchange Offer. To the extent Existing
Notes remain outstanding after the consummation of the Exchange Offer,
references to the Exchange Notes and the holders thereof will collectively
refer to the Exchange Notes, the Existing Notes and the holders thereof. The
Exchange Notes will be obligations of the Company evidencing the same
indebtedness as the Existing Notes and will be entitled to the benefits of the
same Indenture. The form and terms of the Exchange Senior Subordinated Notes
and the Exchange Senior Subordinated Discount Notes are the same as the form
and terms of the Existing Senior Subordinated Notes and the Existing Senior
Subordinated Discount Notes, respectively, except that the Exchange Notes have
been registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof.
Issuer...................... Paragon Health Network, Inc.
Securities Offered..........
$275 million aggregate principal amount of 9 1/2%
Exchange Senior Subordinated Notes due 2007,
Series B, and $294 million principal amount at
maturity of 10 1/2% Exchange Senior Subordinated
Discount Notes due 2007, Series B, issued at a
discount which generated gross proceeds to the
Company of approximately $175 million.
Maturity.................... November 1, 2007.
Interest Payment Dates...... Interest will accrue on the Exchange Senior
Subordinated Notes from the Issue Date at an
annual rate of 9 1/2% and will be payable
semiannually in arrears on May 1 and November 1
of each year, commencing May 1, 1998.
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The Exchange Senior Subordinated Discount Notes
will be issued at a substantial discount to their
aggregate principal amount. See "Certain United
States Federal Income Tax Considerations." The
Exchange Senior Subordinated Discount Notes will
accrete until November 1, 2002 at a rate of
10.57% per annum, compounded semiannually. Cash
interest will not accrue on the Exchange Senior
Subordinated Discount Notes prior to November 1,
2002. Thereafter, cash interest will accrue at
the rate of 10 1/2% per annum and will be payable
semiannually in arrears on May 1 and November 1
of each year, commencing May 1, 2003.
Sinking Fund................ None.
Optional Redemption......... Except as described below, the Company may not
redeem the Exchange Notes prior to November 1,
2002. On and after such date, the Company may
redeem the Exchange Notes, in whole or in part,
at the redemption prices set forth herein,
together with accrued and unpaid interest, if
any, to the date of redemption.
At any time and from time to time on or prior to
November 1, 2000, the Company may redeem up to 33
1/3% of the original aggregate principal amount
of the Exchange Senior Subordinated Notes with
the net proceeds of one or more Equity Offerings
by the Company at a redemption price equal to
109.5% of the principal amount to be redeemed,
together with accrued and unpaid interest, if
any, to the date of redemption, provided that at
least 50% of the original principal amount of the
Exchange Senior Subordinated Notes remains
outstanding after each such redemption and that
such redemption occurs within 90 days following
the closing of any such Equity Offering. See
"Description of Exchange Notes--Optional
Redemption."
In addition, at any time and from time to time
prior to November 1, 2000, the Company may redeem
up to 33 1/3% of the originally issued principal
amount at maturity of Exchange Senior
Subordinated Discount Notes with the proceeds of
one or more Equity Offerings by the Company at a
redemption price equal to 110.5% of the Accreted
Value at the redemption date of the Exchange
Senior Subordinated Discount Notes so redeemed,
provided that at least 50% of the originally
issued principal amount at maturity of Exchange
Senior Subordinated Discount Notes remain
outstanding after each such redemption and that
such redemption offers within 90 days following
the closing of any such Equity Offering. See
"Description of Exchange Notes--Optional
Redemption."
Change of Control........... Upon the occurrence of a Change of Control (as
defined), each holder of Exchange Notes may
require the Company to make an offer to
repurchase all or a portion of such holder's
Exchange Notes at a price equal to 101% of the
principal amount thereof, together with accrued
and unpaid interest, if any, to the date of
repurchase
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(or at 101% of the Accreted Value at such date,
as applicable). See "Description of Exchange
Notes--Change of Control."
Ranking.....................
The Exchange Notes will be unsecured and will be
subordinated in right of payment to all existing
and future Senior Indebtedness of the Company.
The Exchange Notes will rank pari passu with any
future Senior Subordinated Indebtedness of the
Company and will rank senior to all other
subordinated indebtedness of the Company. As of
September 30, 1997, on a pro forma basis after
giving effect to the Transactions and the
application of the proceeds therefrom: (i) the
aggregate principal amount of the Company's
outstanding Senior Indebtedness would have been
$831.6 million (excluding unused commitments);
(ii) the amount of indebtedness of the Company's
subsidiaries would have been $91.6 million
(excluding subsidiary guarantees under the Senior
Credit Facility), to which the Exchange Notes
would be effectively subordinated; and (iii) the
Company would have had no Senior Subordinated
Indebtedness outstanding other than the Exchange
Notes. See "Description of Exchange Notes--
Ranking."
Restrictive Covenants....... The indenture under which the Exchange Notes will
be issued (the "Indenture") contains covenants
relating to, among other things: (i) the
incurrence of additional indebtedness by the
Company and its Restricted Subsidiaries (as
defined); (ii) the payment of dividends on, and
redemption of, capital stock of the Company and
its Restricted Subsidiaries and the redemption of
certain subordinated obligations of the Company
and its Restricted Subsidiaries;
(iii) investments; (iv) sales of assets and
Restricted Subsidiary stock; (v) transactions
with affiliates; and (vi) consolidations, mergers
and transfers of all or substantially all of the
Company's assets. The Indenture also prohibits
certain restrictions on distributions from
Restricted Subsidiaries. However, all of these
limitations and prohibitions are subject to a
number of important qualifications and
exceptions. See "Description of Exchange Notes--
Certain Covenants."
Transferability; Absence of
a Public Market for the
Notes.......................
The Exchange Notes have been registered under the
Securities Act and will generally be freely
transferable (subject to the restrictions
discussed elsewhere herein) but will be new
securities for which there will not initially be
a market. In general, the Existing Notes may not
be offered or sold unless registered under the
Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the
Securities Act and applicable state securities
laws. The Existing Notes have been designated for
trading in the PORTAL market. Following the
commencement of the Exchange Offer but prior to
its consummation, the Existing Notes may continue
to be traded in the PORTAL market. Following the
consummation of the Exchange Offer, however, the
Existing Notes will not be eligible for PORTAL
trading. The Company does not
8
<PAGE>
intend to apply for a listing of the Exchange
Notes on any securities exchange or on any
automated dealer quotation system. Accordingly,
there can be no assurance as to the development
or liquidity of any market for the Exchange
Notes.
RISK FACTORS
Holders of Existing Notes and prospective purchasers of Exchange Notes should
carefully consider all the information set forth in this Prospectus and, in
particular, should evaluate the specific factors set forth under "Risk Factors"
beginning on page 10 in evaluating the Exchange Offer.
FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts are
"forward-looking" statements (as such term is defined in the U.S. Private
Securities Litigation Reform Act of 1995), which can be identified by the use
of forward-looking terminology such as "believes," "expects," "may," "will,"
"should" or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. In addition, from time to time the Company or its
representatives have made or may make forward-looking statements orally or in
writing. Furthermore, such forward-looking statements may be included in, but
are not limited to, press releases or oral statements made by or with the
approval of an authorized executive officer of the Company.
Management wishes to caution the reader that these forward-looking
statements, such as the statements regarding the Company's ability to develop
and expand its business in its regional markets, the opportunities to develop
its physician and hospital relationships, its ability to increase the level of
specialty care services it provides, the effects of government regulation and
health care reform, litigation, its anticipated future revenues, capital
spending and financial resources and other statements contained in this
Prospectus or incorporated herein regarding matters that are not historical
facts involve predictions. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
among others, the following: (i) effects of limitations on liquidity, which
could adversely affect the Company's planned strategies; (ii) expected cost
savings from the Mergers may not be fully realized; (iii) competitive pressure
in the Company's industry and markets could increase significantly; (iv) costs
or difficulties related to the integration of the businesses of the Company and
GranCare could be greater than expected; (v) governmental funding for health
care programs, which is subject to statutory and regulatory changes, could
materially decrease or the government could materially decrease program
reimbursement to health care facilities and programs; (vi) increased scrutiny
by governmental authorities of health care providers who participate in the
Medicare/Medicaid reimbursement programs could result in increased costs to
maintain compliance; and (vii) general economic conditions may be less
favorable than expected. Further information on such factors and other factors
which could affect the financial results of the Company after the issuance of
the Exchange Notes and such forward-looking statements is included in the
section herein entitled "Risk Factors."
9
<PAGE>
RISK FACTORS
In addition to the other information in the Prospectus, the following
factors should be considered carefully in evaluating an exchange of Existing
Notes or an investment in the Exchange Notes. Holders of Existing Notes and
prospective purchasers of Exchange Notes should carefully consider these risk
factors, as well as the other information set forth elsewhere in this
Prospectus, in making any decision in connection with the Exchange Offer or to
otherwise acquire Exchange Notes. References to the Exchange Notes also apply
to the Existing Notes.
LEVERAGE AND LIQUIDITY
As a result of the Transactions, the Company is highly leveraged and has
indebtedness that is substantial in relation to its stockholders' equity. As
of September 30, 1997, on a pro forma basis after giving effect to the
Transactions as if such Transactions had occurred on such date, the Company
and its consolidated subsidiaries would have had an aggregate of $1.3 billion
of outstanding indebtedness (excluding unused commitments). Annual interest
expense is expected to approximate $123.5 million. The Indenture permits the
Company and its subsidiaries to incur additional indebtedness, including
Senior Indebtedness under the Senior Credit Facility, subject to certain
limitations. The Company has additional borrowing capacity on a revolving
credit basis under the Senior Credit Facility. See "Description of Senior
Credit Facility."
A substantial portion of the indebtedness incurred by the Company bears
interest at variable rates. While the Company has entered into interest rate
protection agreements to limit its exposure to increases in such interest
rates, such agreements do not entirely eliminate such exposure. Any increase
in the interest rates on the Company's indebtedness will reduce funds
available to the Company for its operations and future business opportunities
and will exacerbate the consequences of the Company's leveraged capital
structure.
The increased indebtedness and higher debt-to-equity ratio of the Company in
comparison to that of either LCA or GranCare on a historical basis will reduce
the flexibility of the Company and may have important consequences including
the following: (i) the ability of the Company to obtain additional financing
for acquisitions, working capital, capital expenditures or other purposes may
be impaired or such financing may not be on terms favorable to the Company;
(ii) a substantial portion of the Company's cash flow will be used to pay the
Company's interest expense, which will reduce the funds otherwise available to
the Company for its operations and future business opportunities; (iii) a
substantial decrease in operating cash flow or an increase in expenses of the
Company could make it difficult for the Company to meet its debt service
requirements and force it to modify its operations; (iv) the Company's high
level of debt and resulting interest expense may place it at a competitive
disadvantage with respect to certain competitors with lower amounts of
indebtedness; and (v) the Company's high degree of leverage may make it more
vulnerable to a downturn in its business or the economy generally.
The Company's ability to make scheduled payments with respect to
indebtedness will depend on its financial and operating performance, which, in
turn, is subject to prevailing economic conditions and certain financial,
business and other factors beyond its control. There can be no assurance that
the Company's cash flow and capital resources will be sufficient for payment
of its indebtedness in the future. If the Company's cash flow and capital
resources are insufficient to fund its debt service obligations, the Company
could face substantial liquidity problems and might be required to dispose of
material assets or operations, reduce or delay capital expenditures, obtain
additional equity capital or restructure its debt to meet its obligations, and
there can be no assurance as to the timing of such sales or that the proceeds
which the Company could realize therefrom would be sufficient to meet such
obligations. The Company will be required to make scheduled principal payments
under the Senior Credit Facility commencing in the first fiscal quarter of
1999. See "Description of Senior Credit Facility."
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<PAGE>
The Company's ability to service its indebtedness also depends upon its
ability to manage its cash flows and working capital. In this regard, both LCA
and GranCare experienced significant increases in their respective accounts
receivable during 1997, partially unrelated to increases in revenue, and both
GranCare and LCA increased their allowances for doubtful accounts. In
connection with conforming the accounting policies of LCA and GranCare,
management is continuing to monitor trends in the Company's accounts
receivable and is reviewing the Company's collection procedures (including the
timing of filing claims for reimbursement) and allowance policy, which could
result in a historical adjustment to GranCare's allowance for bad debts and in
future changes to the Company's bad debt expense.
Any inability of the Company to service its indebtedness or obtain
additional financing, as needed, or to comply with the financial covenants
contained in the Indenture and the Senior Credit Agreement, could have a
material adverse effect on the Company and the market value of the Exchange
Notes.
SUBORDINATION OF THE EXCHANGE NOTES
The payment of principal and interest on, and any premium or other amounts
owing in respect of, the Exchange Notes is subordinated to the prior payment
in full of all existing and future Senior Indebtedness of the Company,
including all amounts owing under the Senior Credit Facility. Consequently, in
the event of a bankruptcy, liquidation, dissolution, reorganization or similar
proceeding with respect to the Company, assets of the Company will be
available to pay obligations on the Exchange Notes only after Senior
Indebtedness has been paid in full, and there can be no assurance that there
will be sufficient assets to pay amounts due on all or any of the Exchange
Notes. In addition, under certain circumstances, no payments may be made with
respect to the Exchange Notes if a default exists with respect to the Senior
Indebtedness. As of September 30, 1997, on a pro forma basis after giving
effect to the anticipated borrowings under the Senior Credit Facility and the
other Transactions, the aggregate amount of Senior Indebtedness of the Company
would have been approximately $831.6 million (excluding unused commitments).
Additional Senior Indebtedness may be incurred by the Company from time to
time, subject to certain restrictions.
The Indenture permits the Company and Restricted Subsidiaries to incur
certain secured indebtedness, including indebtedness under the Senior Credit
Facility, which is secured by a lien on substantially all of the assets of the
Company and the Restricted Subsidiaries. The Exchange Notes are unsecured and
therefore do not have the benefit of such collateral. Accordingly, if an event
of default occurs under the Senior Credit Facility, the lenders under the
Senior Credit Facility will have a prior right to the assets of the Company
and the Restricted Subsidiaries, and may foreclose upon such collateral to the
exclusion of the holders of the Exchange Notes, notwithstanding the existence
of an event of default with respect thereto. In such event, such assets would
first be used to repay in full amounts outstanding under the Senior Credit
Facility, resulting in all or a portion of the Company's assets being
unavailable to satisfy the claims of the holders of Exchange Notes and other
unsecured indebtedness.
The Exchange Notes also are effectively subordinated to the obligations of
the Company's subsidiaries. At September 30, 1997, on a pro forma basis giving
effect to the Transactions, including the Offering, and the application of the
net proceeds therefrom as if they had occurred on such date, debt of the
Company's subsidiaries totaled approximately $91.6 million (excluding
subsidiary guarantees under the Senior Credit Facility). In the event of an
insolvency, liquidation or other reorganization of any of the subsidiaries of
the Company, the creditors of the Company (including the holders of the
Exchange Notes), as well as stockholders of the Company, may have the right to
proceed against the assets of such subsidiaries or to cause the liquidation or
bankruptcy of such subsidiaries under applicable bankruptcy laws. Creditors of
such subsidiaries would be entitled to payment in full from such assets before
the Company would be entitled to receive any distribution therefrom. Except to
the extent that the Company may itself be a creditor with recognized claims
against such subsidiaries, claims of creditors of such subsidiaries will have
priority with respect to the assets and earnings of such subsidiaries over the
claims of creditors of the Company, including claims under the Notes. See
"Description of Exchange Notes--Ranking and Subordination."
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HOLDING COMPANY STRUCTURE
The Company is a holding company, and the Company's cash flow and,
consequently, its ability to service debt, including the Exchange Notes, is
dependent upon the earnings of its subsidiaries and the payment of funds by
those subsidiaries to the Company in the form of loans, dividends or
otherwise. The Company's subsidiaries are obligors with respect to substantial
indebtedness, including in their capacity as guarantors under the Senior
Credit Facility. The capital stock of such subsidiaries is pledged to secure
amounts borrowed under the Senior Credit Facility. The Company's subsidiaries
are separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the Exchange Notes or to make
funds available therefor, whether in the form of loans, dividends or
otherwise. Moreover, the payment of dividends and the making of loan advances
to the Company by its subsidiaries are subject to restrictive covenants in
agreements entered into by certain of such subsidiaries and may be restricted
upon an event of default thereunder.
LIMITATIONS ON REPURCHASE UPON A CHANGE OF CONTROL
In the event of a Change of Control, each holder of the Exchange Notes will
have the right, at such holder's option, to require the Company to repurchase
all or a portion of such holder's Exchange Notes at a purchase price equal to
101% of the principal amount (or Accreted Value, as the case may be) thereof
plus accrued interest to the date of purchase. The ability of the Company to
repurchase the Exchange Notes upon a Change of Control will be dependent on
the availability of sufficient funds and compliance with applicable securities
laws and the subordination provisions of the Exchange Notes. A Change of
Control may cause an acceleration of the Senior Credit Facility and other
Senior Indebtedness, if any, of the Company, in which case such indebtedness
would be required to be repaid in full before redemption or repurchase of the
Exchange Notes. Accordingly, there can be no assurance that the Company will
be able to repurchase the Exchange Notes upon the occurrence of such events. A
Change of Control may not include other events that might adversely affect the
financial condition of the Company or result in a downgrade of the credit
rating (if any) of the Exchange Notes, nor would the requirement that the
Company offer to repurchase the Exchange Notes necessarily afford holders of
the Exchange Notes protection in the event of a highly leveraged
reorganization, merger or similar transaction involving the Company. See
"Description of Exchange Notes--Change of Control" and "Description of Senior
Credit Facility."
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The Senior Credit Facility contains a number of negative covenants
including, among others, certain restrictions on the ability of the Company
and certain of its subsidiaries to do the following: (i) incur indebtedness or
create liens, incur guaranty obligations, engage in acquisitions, mergers or
consolidations, sell or otherwise dispose of assets, pay dividends and make
other payments in respect of capital stock, make capital expenditures or make
investments, loans and advances; (ii) make optional payments or modify
subordinated debt instruments; or (iii) engage in transactions with affiliates
or sale and leaseback transactions. All of the foregoing covenants are subject
to customary exceptions. Financial covenants will require the maintenance of a
minimum net worth, a minimum interest coverage ratio, a minimum fixed charge
coverage ratio and a maximum leverage ratio.
The Company is currently in compliance with the covenants and restrictions
contained in the Senior Credit Facility. However, its ability to continue to
comply may be affected by events beyond its control, including prevailing
economic, financial and industry conditions. The breach of any of such
covenants or restrictions could result in an event of default under the Senior
Credit Facility, which would permit the senior lenders to declare all amounts
borrowed thereunder to be due and payable, together with accrued and unpaid
interest, and the commitments of the senior lenders to make further extensions
of credit under the Senior Credit Facility could be terminated. If the Company
were unable to repay its indebtedness to its senior lenders, such lenders
could proceed against the collateral securing such indebtedness as described
under "Description of Senior Credit Facility." If the indebtedness under the
Senior Credit Facility were accelerated, there could be no assurance that the
assets of the Company would be sufficient to repay in full the principal and
interest on such indebtedness or any other indebtedness of the Company,
including the Exchange Notes.
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FRAUDULENT TRANSFER CONSIDERATIONS
In the event the Company is the subject of a bankruptcy filing, the
incurrence of indebtedness (such as the Exchange Notes) in connection with the
Transactions may be subject to review under federal or state fraudulent
transfer laws. Under such laws, if a court in a lawsuit by a creditor or a
representative of creditors of the Company, such as a trustee in bankruptcy of
the Company as debtor-in-possession, were to find that at the time of, or
after giving effect to, the Transactions, the Company (i) was insolvent or
rendered insolvent thereby, (ii) was engaged in a business or transaction for
which its remaining assets constituted an unreasonably small amount of
capital, (iii) intended to incur, or believed that it would incur, debts
beyond its ability to pay as they matured or (iv) intended to hinder, delay or
defraud creditors and, in the case of clauses (i), (ii) and (iii), that the
Company did not receive reasonably equivalent value or fair consideration in
the Transactions, such court could void the Company's obligations under the
Exchange Notes, subordinate the Exchange Notes to other indebtedness of the
Company or take other action detrimental to the holders of the Exchange Notes.
Some courts have held that an obligor's purchase of its own capital stock does
not constitute reasonably equivalent value or fair consideration for
indebtedness incurred to finance that purchase. In addition, if a court were
to find that the Company came within any of clauses (i) through (iv) above,
the Company or its creditors or the trustee in bankruptcy could seek to void
the grant of security interests to the lenders under the Senior Credit
Facility. This would result in an event of default with respect to
indebtedness incurred under such facilities which, under the terms of such
indebtedness (subject to applicable law), would allow the lenders to terminate
their obligations thereunder and to accelerate repayment of such indebtedness.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction being applied. Generally, however, a company
would be considered insolvent for purposes of the foregoing if: (i) the sum of
such company's debts including contingent liabilities is greater than all such
company's assets at a fair valuation; (ii) the present fair saleable value of
such company's assets is less than the amount that will be required to pay its
probable liability on its existing debts as they become absolute and matured;
or (iii) the company has incurred obligations beyond its ability to pay as
such obligations become due. As a condition to consummation of the
Recapitalization Merger, LCA received a solvency opinion issued by Valuation
Research Corporation. Such solvency opinion would not be binding on a court,
however, and there can be no assurance that a court would not determine that
the Company was insolvent at the time of or after giving effect to the
Transactions.
CHALLENGES OF BUSINESS INTEGRATION
The Company faces significant challenges in the integration of GranCare's
and LCA's administrative, finance, sales and marketing organizations, the
coordination of each company's sales efforts and the implementation of
appropriate operations, financial and management systems and controls. This
integration requires substantial attention from the Company's management,
which includes a new chief executive officer and other officers who have not
had prior involvement in the operations of either LCA or GranCare. Although
the management team of the Company has experience in integrating acquisitions,
none of the prior acquisitions has been of a magnitude comparable to the
Transactions. The diversion of management attention, as well as any other
difficulties which may be encountered in the transition and integration
process, could have an adverse impact on the revenue and operating results of
the Company. There can be no assurance that the Company will be able to
integrate the operations of LCA and GranCare successfully or that anticipated
synergies between the companies will be realized or, if realized, the timing
thereof.
RISKS RELATED TO GROWTH STRATEGY
The Company's growth strategy will in part be to acquire long-term
healthcare facilities and related businesses in its existing markets and in
other targeted geographic areas in which regulatory and reimbursement policies
are favorable and where opportunities exist to improve operational
efficiencies. The implementation of this growth strategy will subject the
Company to the uncertainties and risks associated with any expanding business
such as the continuing need of capital to fund acquisitions, the need to
successfully integrate the
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operations of acquired businesses in order to realize economies of scale, the
need to obtain synergies from the disparate operations and the need to hire
and incentivize competent, growth-oriented management. The Company's expected
growth may place significant demands on the Company's financial resources and
management. In addition, there can be no assurance that the Company will be
successful in its efforts to make such acquisitions since certain competitors,
some of which possess greater financial resources than the Company, will
likely be pursuing the same available opportunities as the Company.
GOVERNMENT REGULATION
The federal government and all states in which the Company operates regulate
various aspects of the skilled nursing facility business. In particular, the
operation of long-term care facilities and the provision of specialty medical
services are subject to federal, state and local laws relating to the adequacy
of medical care, resident rights, equipment, personnel, operating policies,
fire prevention, rate-setting and compliance with building codes and
environmental and other laws. The facilities operated by the Company are
subject to periodic inspection by governmental and other regulatory
authorities to assure continued compliance with various standards and to
provide for their continued licensing under state law and certification under
the Medicare and Medicaid programs. In the past, from time to time, such
facilities have received statements of deficiencies from regulatory agencies.
Should the Company receive such statements of deficiency in the future, the
Company may implement plans of correction with respect to any such statement
to address any alleged deficiencies. While the Company will endeavor to comply
with federal, state and local regulator requirements for the maintenance and
operation of its facilities, there can be no assurance that all facilities
will always be operated in full compliance. The failure to obtain or renew any
required regulatory approvals or licenses or failure to maintain certification
under the Medicare and Medicaid programs could have a materially adverse
effect on the Company's operations.
The Company is also subject to federal and state laws that govern financial
and other arrangements between healthcare providers. These laws prohibit
certain direct and indirect payments or fee-splitting arrangements between
healthcare providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products and services. Such laws include the anti-kickback provisions of the
federal Medicare and Medicaid Patient and Program Protection Act of 1987 and
the physician self-referral provision of the Omnibus Budget Reconciliation Act
as expanded in 1993 (commonly referred to as "Stark II"). The anti-kickback
provisions prohibit, among other things, the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare and
Medicaid patients. Stark II prohibits, in part, physicians from making any
Medicare or Medicaid referrals for certain designated "health services" to any
entity with which the physician has a "financial relationship." In addition to
these anti-kickback and self-referral prohibitions, there are various federal
and state laws prohibiting other types of fraud by healthcare providers,
including criminal provisions which prohibit filing false claims or making
false statements to receive payment or certification under Medicare or
Medicaid, or failing to refund overpayments or improper payments. Violation of
this statute is a felony punishable by up to five years imprisonment and/or
$25,000 fines. Civil provisions prohibit the knowing filing of a false claim
or the knowing use of false statements to obtain payment. The penalties for
such a violation are fines of not less than $5,000 nor more than $10,000, plus
treble damages, for each claim filed. State and federal governments are
devoting increasing attention and resources to anti-fraud initiatives against
healthcare providers. The Health Insurance Portability and Accountability Act
of 1996 (the "Accountability Act") and the Balanced Budget Act of 1997 (the
"Balanced Budget Act") expand the penalties for healthcare fraud, including
broader provisions for the exclusion of providers from the Medicare and
Medicaid program. While the Company believes that its billing practices are
consistent with Medicare and Medicaid criteria, those criteria are often vague
and subject to interpretation. There can be no assurance that aggressive anti-
fraud enforcement actions will not adversely affect the business of the
Company. The Accountability Act significantly expanded the scope of the
federal fraud and abuse provisions, broadening the anti-kickback provisions to
include all federal healthcare programs, in addition to Medicare and Medicaid.
The Accountability Act also expanded the scope of the sanctions for fraud and
abuse violations by increasing the size of the civil monetary penalty
provisions and broadening the mandatory exclusion provisions such that any
individual convicted of any felony in connection with the delivery of a
healthcare item or service under a federal, state or
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local healthcare program is mandatorily excluded from Medicare/Medicaid
participation. The Balanced Budget Act further expanded certain of these fraud
and abuse provisions, including establishing civil money penalties for
violations of the anti-kickback provisions. In addition, many states have
similar fraud and abuse provisions and other laws that prohibit business
corporations from providing, or holding themselves out as providers of,
medical care. These laws vary from state to state and have seldom been
interpreted by the courts or regulatory agencies. While the Company has no
reason to believe that it is in violation or has violated such statutes, the
federal government has been actively investigating healthcare providers for
potential abuses.
The Company has received inquiries, and has been a party to litigation,
alleging violations of fraud and abuse laws. There can be no assurance that
substantial amounts will not be expended in connection with the investigation
or defense of any such matters. If the Company, its predecessor or its
subsidiaries are found to be, or have been, in violation of these laws, the
Company could be materially adversely affected.
UNCERTAINTY ASSOCIATED WITH HEALTHCARE LEGISLATION
In addition to extensive government healthcare regulations, there are
numerous initiatives on federal and state levels for comprehensive reforms
affecting the payment for and availability of healthcare services. The
recently-enacted Balanced Budget Act seeks to achieve a balanced federal
budget by, among other things, reducing federal spending on the Medicare and
Medicaid programs. The law contains numerous changes in the methodology of
Medicare payments to skilled nursing facilities, home health agencies, therapy
providers and hospices, and, among other things, repeals the federal payment
standard for Medicaid nursing facilities and hospitals. There can be no
assurance that these changes will not adversely affect the Company. See "--
Risk Involved with Reimbursement by Third-Party Payors." In addition, there
can be no assurance that currently proposed or future healthcare legislation
or other changes in the administration or interpretation of governmental
healthcare programs will not have an adverse effect on the Company.
RISK INVOLVED WITH REIMBURSEMENT BY THIRD-PARTY PAYORS
For the twelve months ended September 30, 1997, the Company, on a pro forma
basis after giving effect to the Mergers, derived approximately 34% and 38% of
its net patient revenues from Medicare and Medicaid, respectively. The Company
expects to continue to derive a significant portion of its revenue from such
federal and state reimbursement programs. There can be no assurance that the
Company will achieve or improve this payor revenue mix in the future. Both
governmental and private payor sources have instituted cost containment
measures designed to limit payments made to healthcare providers. Most
recently, the Balanced Budget Act requires the establishment of a prospective
payment system ("PPS") for Medicare skilled nursing facilities under which
facilities will be paid a federal per diem rate for virtually all covered
nursing facility services in lieu of the current cost-based reimbursement
rate. This change will reward efficient providers and penalize those that are
inefficient. A similar PPS is required to be established for home health
services. The law contains numerous other changes that will adversely affect
payments to Medicare and Medicaid providers. In addition, prior to the
enactment of the Balanced Budget Act, federal law 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. The Balanced Budget Act repealed this payment standard,
effective for services provided on or after October 1, 1997, thereby granting
states greater flexibility in establishing payment rates. There can be no
assurance that budget constraints or other factors will not cause states to
reduce Medicaid reimbursement to nursing facilities or that payments to
nursing facilities will be made on a timely basis. Any such efforts to reduce
Medicaid payment rates or failure of states to meet their Medicaid obligations
on a timely basis would have a material adverse effect on the Company.
Furthermore, government reimbursement programs are subject to additional
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings and government funding restrictions, all of which could materially
decrease the rates paid to the Company for its future services or the services
for which the Company will be able to seek reimbursement. Management cannot
predict whether any of these additional proposals will be adopted or, if
adopted and implemented, what effect such proposals would have on the Company.
There can be no assurance that payments under state or federal governmental
programs will remain at levels comparable to present levels or will be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to such
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programs, particularly with respect to individual, state-administered Medicaid
programs, which generally provide lower reimbursement rates than the Medicare
program. In addition, there can be no assurance that the facilities operated
by the Company and the services and supplies provided by the Company will meet
or continue to meet the requirements for participation in such programs.
In addition, several states are considering various healthcare reforms,
including reforms through Medicaid managed care demonstration projects.
Several states in which the Company operates have applied for, or received,
approval from the U.S. Department of Health and Human Services for waivers
from certain Medicaid requirements that were generally required for managed
care projects. Although these demonstration projects generally exempt
institutional care, including long-term care facilities, no assurance can be
given that these waiver projects ultimately will not change the reimbursement
system for long-term care from fee for service to managed care negotiated or
capitated rates. Furthermore, the Balanced Budget Act now allows states to
mandate enrollment in managed care systems without going through the federal
waiver process as long as certain standards are met. It is not possible to
predict which reforms of state healthcare systems will be adopted and the
effect, if any, that the reforms will have on the Company's business. The
business prospects of the Company will be significantly affected by general
economic factors affecting the California, Colorado, Illinois, Michigan, North
Carolina, South Carolina, Texas and Wisconsin healthcare industries and by the
laws and regulatory environment in these states, including Medicaid
reimbursement rates.
Providers of long-term care are reimbursed under the Medicare and Medicaid
programs by filing cost reports with fiscal intermediaries who then review the
billings of the provider. Often, a portion of the billings are disallowed by
the fiscal intermediary. Prior to the Mergers, certain fiscal intermediaries
delivered notice that they intended to disallow, and did disallow, certain
costs for which LCA and GranCare requested reimbursement and management
believes that the Company will receive such disallowance notices in the
future. Depending on the amount of the disallowances, if the Company does not
prevail on such matters, these disallowances or future disallowances could
have a material adverse effect on the Company.
COMPETITION
The long-term care industry is highly competitive. The Company competes with
other providers on the basis of the breadth and quality of its services, the
quality of its facilities and, to a limited extent, price. The Company also
competes with other providers for the acquisition and development of
additional facilities. The Company's long-term care competitors include
national, regional and local operators of long-term care facilities, acute
care hospitals and their affiliates, providers of rehabilitation services,
extended care centers, retirement centers, home health agencies and similar
institutions and pharmaceutical businesses, some of which may have
significantly greater financial and other resources than the Company. In
addition, the Company competes with a number of tax-exempt nonprofit
organizations which can finance acquisitions and capital expenditures on a
tax-exempt basis or receive charitable contributions unavailable to the
Company. There can be no assurance that the Company will not encounter
increased competition which could adversely affect its business, results of
operations or financial condition.
CONTROL BY APOLLO
Approximately 43% of the outstanding shares of the Company's Common Stock
are beneficially owned by the Apollo Investors. Pursuant to a Proxy and Voting
Agreement entered into by the Apollo Investors, voting control of all such
shares is held by Apollo. In addition, the Company has entered into a
Stockholders Agreement with the Apollo Investors which provides, among other
things, that Apollo is entitled to designate six of the 11 members of the
Company's Board of Directors, provided that no more than four of such nominees
may be Apollo affiliates. Accordingly, Apollo has significant influence and
may be able to direct the management and policies of the Company, other than
with respect to certain matters which require a super-majority vote of the
Company's Board. Apollo may, however, be able to prevent certain actions from
being taken that require such a super-majority vote. In light of the
significant ownership of the Common Stock by the Apollo Investors, it is
unlikely that a change of control transaction could be effected without
Apollo's consent.
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ABSENCE OF PUBLIC MARKET; ADVERSE EFFECT ON MARKET FOR EXISTING NOTES
There is no public market for the Existing Notes, although the Existing
Notes are eligible for trading in PORTAL by "Qualified Institutional Buyers"
as defined in Rule 144A under the Securities Act ("QIBs"). The Initial
Purchasers have acted as market makers for the Existing Notes and have advised
the Company that they currently intend to make a market in the Exchange Notes.
However, the Initial Purchasers are not obligated to do so and any market
making may be discontinued at any time without notice. In addition, such
market making activity may be limited during the pendency of the Exchange
Offer or the effectiveness of a shelf registration statement in lieu thereof.
The Company does not intend to apply for listing of the Exchange Notes on any
securities exchange or for quotation of the Exchange Notes through any
automated quotation system. Accordingly, there can be no assurance that an
active public market for the Exchange Notes will develop or as to the
liquidity of any market that may develop, the ability of holders of Exchange
Notes to sell their Exchange Notes or the price at which such holders would be
able to sell their Exchange Notes. In addition, to the extent that Existing
Notes are tendered and accepted in the Exchange Offer, the trading market for
the untendered and tendered but unaccepted Existing Notes could be adversely
affected. The liquidity of, and trading market for, the Exchange Notes or the
Existing Notes also may be adversely affected by general declines in the
market or by declines in the market for similar securities. Such declines may
adversely affect such liquidity and trading markets independent of the
financial performance of, and prospects for, the Company. See "The Exchange
Offer."
ADVERSE CONSEQUENCES OF FAILURE TO ADHERE TO EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Existing Notes pursuant to
the Exchange Offer will be made only after a timely receipt by the Exchange
Agent of such Existing Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of Existing
Notes desiring to tender such Existing Notes in exchange for Exchange Notes
should allow sufficient time to ensure timely delivery. Neither the Company
nor the Exchange Agent is under any duty to give notification of defects or
irregularities with respect to the tender of Existing Notes for exchange.
Existing Notes that are not tendered or are tendered but not accepted will,
following the consummation of the Exchange Offer, continue to be subject to
the existing restrictions upon transfer thereof and, upon consummation of the
Exchange Offer, certain registration rights under the Registration Rights
Agreement will terminate.
RECEIPT OF RESTRICTED SECURITIES UNDER CERTAIN CIRCUMSTANCES
Any holder of Existing Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes may be deemed
to have received restricted securities and, if so, will be required to comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale transaction. See "The Exchange Offer--
Consequences of Failure to Exchange; Resales of Exchange Notes."
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The net
proceeds to the Company from the sale of the Existing Notes in the Offering
was approximately $449 million, after deducting the Initial Purchasers'
Discount and expenses of the Offering. The Company used the net proceeds of
the Offering, approximately $740 million in borrowings under the Senior Credit
Facility and the Apollo Investment to pay the cost of the Mergers, refinance a
portion of LCA's and GranCare's then existing indebtedness and pay fees and
expenses relating to the Transactions.
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THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $275.0 million
aggregate principal amount of Exchange Senior Subordinated Notes for a like
aggregate principal amount of Existing Senior Subordinated Notes and up to
$294.0 million aggregate principal amount at maturity of Exchange Senior
Subordinated Discount Notes for a like aggregate principal amount at maturity
of Existing Senior Subordinated Discount Notes properly tendered on or prior
to the Expiration Date and not withdrawn as permitted pursuant to the
procedures described below. The Exchange Offer is being made with respect to
all of the Existing Notes; the total aggregate principal amount of Existing
Notes and Exchange Notes will in no event exceed $569.0 million.
The Existing Notes were issued in the Offering on November 4, 1997. As of
the date of this Prospectus, $275.0 million aggregate principal amount of the
Existing Senior Subordinated Notes and $294.0 million aggregate principal
amount at maturity of the Existing Senior Subordinated Discount Notes were
outstanding. This Prospectus, together with the Letter of Transmittal, is
first being sent on or about February 4, 1998 to all holders of Existing Notes
known to the Company. The Company's obligation to accept Existing Notes for
exchange pursuant to the Exchange Offer is subject to certain conditions as
set forth under "--Conditions to the Exchange Offer" below.
PURPOSE OF THE EXCHANGE OFFER
The Existing Notes were issued and sold by the Company to the Initial
Purchasers on November 4, 1997 (the "Issue Date"). The Initial Purchasers
subsequently sold the Existing Notes to qualified institutional buyers
("QIBs") in reliance on Rule 144A under the Securities Act and in offshore
transactions to persons other than "U.S. persons," as defined in Regulation S
under the Securities Act ("Non-U.S. Persons") in reliance on Regulation S.
Following the initial offering of the Existing Notes, the Existing Notes were
eligible for resale to QIBs pursuant to Rule 144A, to Non-U.S. Persons in
reliance on Regulation S and pursuant to other exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act, as described under "Transfer Restrictions," including sales to a limited
number of institutional "accredited investors" as defined in Rule 501(a)(1),
(2), (3) or (7) under the Securities Act. Because the Existing Notes are
subject to certain transfer restrictions, as an inducement to the Initial
Purchasers to purchase the Existing Notes, the Company entered into the
Registration Rights Agreement with the Initial Purchasers, pursuant to which
the Company agreed (i) to use its commercially reasonable efforts to file with
the Commission the Registration Statement of which this Prospectus is a part
within 60 days after the Issue Date and (ii) to use its commercially
reasonable efforts to cause the Registration Statement to become effective
under the Securities Act within 150 days after the Issue Date. Pursuant to the
Registration Rights Agreement, the Company also agreed to (x) make the
Exchange Offer and keep it open for at least 30 business days (or longer if
required by applicable law) after the date that notice of the Exchange Offer
is mailed to the holders of the Existing Notes and (y) to use its commercially
reasonable efforts to consummate the Exchange Offer on or prior to the 180th
day following the Issue Date. The Exchange Offer is being made to satisfy
these obligations under the Registration Rights Agreement.
If (i) the Registration Statement is not filed with the Commission on or
prior to 60 days after the Issue Date; (ii) the Registration Statement is not
declared effective within 150 days after the Issue Date; or (iii) the Exchange
Offer is not consummated on or prior to 180 days after the Issue Date (each
such event a "Registration Default"), the Company will be required to pay
liquidated damages to each holder of Transfer Restricted Securities (as
defined), during the period of one or more such Registration Defaults, in an
amount equal to $0.192 per week per $1,000 principal amount (or Accreted
Value, as the case may be) of the Existing Notes constituting Transfer
Restricted Securities held by such holder until the Registration Statement is
filed or declared effective or the Exchange Offer is consummated, as the case
may be. All accrued liquidated damages shall be paid to holders in the same
manner as interest payments on the Existing Notes on semi-annual payment dates
which
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correspond to interest payment dates for the Existing Notes. The accrual of
liquidated damages will cease on the day on which all Registration Defaults
are cured. For purposes of the foregoing, "Transfer Restricted Securities"
means each Existing Note until (i) the date on which it has been exchanged for
a freely transferable Exchange Note in the Exchange Offer; (ii) the date on
which it has been effectively registered under the Securities Act and disposes
of in accordance with the Shelf Registration Statement (as defined); or (iii)
the date on which it is distributed to the public in accordance with Rule 144
under the Securities Act or is salable pursuant to Rule 144(k) under the
Securities Act.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 p.m., New York City time, on March 6,
1998, unless the Company, in its sole discretion, has extended the period of
time for which the Exchange Offer is open (such date, as it may be extended,
is referred to herein as the "Expiration Date"). The Company expressly
reserves the right, at any time or from time to time, to extend the period of
time during which the Exchange Offer is open and thereby delay acceptance for
exchange of any Existing Notes, by giving oral notice (promptly confirmed in
writing) or written notice to the Exchange Agent and by giving written notice
of such extension to the holders thereof no later than 9:00 a.m. New York City
time, on the next business day after the previously scheduled Expiration Date.
During any such extension, all Existing Notes previously tendered will remain
subject to the Exchange Offer unless properly withdrawn.
In addition, the Company expressly reserves the right to terminate or amend
the Exchange Offer and not to accept for exchange any Existing Notes not
theretofore accepted for exchange upon the occurrence of any of the events
specified below under "--Conditions to the Exchange Offer." If any such
termination or amendment occurs, the Company will notify the Exchange Agent
and will either issue a press release or give oral or written notice to the
holders of the Existing Notes as promptly as practicable.
For purposes of the Exchange Offer, a "business day" means any day other
than Saturday, Sunday or a date on which banking institutions are required or
authorized by New York State law to be closed, and consists of the time period
from 12:01 a.m. through 12:00 midnight, New York City time.
PROCEDURES FOR TENDERING EXISTING NOTES
The tender to the Company of Existing Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of Existing Notes may tender the same by (i) properly completing
and signing the Letter of Transmittal or a facsimile thereof (all references
in this Prospectus to the Letter of Transmittal shall be deemed to include a
facsimile thereof) and delivering the same, together with the certificate or
certificates representing the Existing Notes being tendered and any required
signature guarantees, to the Exchange Agent at its address set forth below on
or prior to the Expiration Date (or complying with the procedure for book-
entry transfer described below) or (ii) complying with the guaranteed delivery
procedures described below.
THE METHOD OF DELIVERY OF EXISTING NOTES, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO INSURE TIMELY DELIVERY. NO EXISTING NOTES OR LETTERS OF
TRANSMITTAL SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Existing Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Existing Notes
who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery
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Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a clearing agency, an insured
credit union, a savings association or a commercial bank or trust company
having an office or correspondent in the United States (collectively,
"Eligible Institutions"). If Existing Notes are registered in the name of a
person other than a signer of the Letter of Transmittal, the Existing Notes
surrendered for exchange must be endorsed by, or be accompanied by a written
instrument or instruments of transfer or exchange, in satisfactory form as
determined by the Company in its sole discretion, duly executed by the
registered holder with the signature thereon guaranteed by an Eligible
Institution.
The Exchange Agent will make a request promptly after the date of receipt of
this Prospectus to establish accounts with respect to the Existing Notes at
the book-entry transfer facility, The Depository Trust Company, for the
purpose of facilitating the Exchange Offer, and subject to the establishment
thereof, any financial institution that is a participant in the book-entry
transfer facility's system may make book-entry delivery of Existing Notes by
causing such book-entry transfer facility to transfer such Existing Notes into
the Exchange Agent's account with respect to the Existing Notes in accordance
with the book-entry transfer facility's procedure for such transfer. Although
delivery of Existing Notes may be effected through book-entry transfer into
the Exchange Agent's account at the book-entry transfer facility, an
appropriate Letter of Transmittal with any required signature guarantee and
all other required documents must in each case be transmitted to and received
or confirmed by the Exchange Agent at its address set forth below on or prior
to the Expiration Date, or, if the guaranteed delivery procedures described
below are complied with, within the time period provided under such
procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Existing Note to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed
on a timely basis, a tender may be effected if the Exchange Agent has received
at its address set forth below on or prior to the Expiration Date a letter,
telegram or facsimile transmission from an Eligible Institution setting forth
the name and address of the tendering holder, the names in which the Existing
Notes are registered and, if possible, the certificate numbers of the Existing
Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three business days after the Expiration Date the
Existing Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Existing Notes into the Exchange Agent's account at the book-
entry transfer facility), will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal and
any other required documents. Unless Existing Notes being tendered by the
above-described method are deposited with the Exchange Agent within the time
period set forth above (accompanied or preceded by a properly completed Letter
of Transmittal and any other required documents), the Company may, at its
option, reject the tender. Copies of a Notice of Guaranteed Delivery which may
be used by Eligible Institutions for the purposes described in this paragraph
are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the holder's Existing Notes (or a confirmation of book-entry
transfer of such Existing Notes into the Exchange Agent's account at the book-
entry transfer facility) is received by the Exchange Agent, or (ii) a Notice
of Guaranteed Delivery or letter, telegram or facsimile transmission to
similar effect (as provided above) from an Eligible Institution is received by
the Exchange Agent. Issuances of Exchange Notes in exchange for Existing Notes
tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram or
facsimile transmission to similar effect (as provided above) by an Eligible
Institution will be made only against deposit of the Letter of Transmittal
(and any other required documents) and the tendered Existing Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Existing Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and
all tenders of any particular Existing
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Notes not properly tendered or to not accept any particular Existing Notes
which acceptance might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to any particular
Existing Notes either before or after the Expiration Date (including the right
to waive the ineligibility of any holder who seeks to tender Existing Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer as to any particular Existing Notes either before or after the
Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Existing
Notes for exchange must be cured within such reasonable period of time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Existing Notes for exchange, nor
shall any of them incur any liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Existing Notes, such Existing Notes must be
endorsed or accompanied by appropriate powers of attorney, in either case
signed exactly as the name or names of the registered holder or holders appear
on the Existing Notes.
If the Letter of Transmittal or any Existing Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company in the Letter of
Transmittal that, among other things, the Exchange Notes acquired pursuant to
the Exchange Offer are being acquired in the ordinary course of business of
the person receiving such Exchange Notes, whether or not such person is the
holder, that neither the holder nor any such person has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes, that neither the holder nor any such other person is
participating in or intends to participate in the distribution of such
Exchange Notes and that neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Existing Notes, where such Existing Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
WITHDRAWAL RIGHTS
Tenders of Existing Notes may be withdrawn at any time prior to the
Expiration Date. For a withdrawal to be effective, a written notice of
withdrawal sent by telegram, facsimile transmission (receipt confirmed by
telephone) or letter must be received by the Exchange Agent prior to the
Expiration Date at its address set forth below. Any such notice of withdrawal
must (i) specify the name of the person having tendered the Existing Notes to
be withdrawn (the "Depositor"), (ii) identify the Existing Notes to be
withdrawn (including the certificate number or numbers and principal amount of
such Existing Notes), (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Existing Notes
were tendered or as otherwise described above (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee under the Indenture register the transfer of such Existing
Notes into the name of the person withdrawing the tender and (iv) specify the
name in which any such Existing Notes are to be registered, if different from
that of the Depositor. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company
in its sole discretion, which determination will be final and binding on all
parties. Any Existing Notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offer. Any Existing
Notes which have been tendered for exchange and which are properly withdrawn
will be returned to the holder thereof without cost to such holder as soon as
practicable after such withdrawal. Properly withdrawn Existing Notes may be
retendered by following
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one of the procedures described under "--Procedures for Tendering Existing
Notes" above at any time on or prior to the Expiration Date.
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Existing
Notes properly tendered and will issue the Exchange Notes promptly after
acceptance of the Existing Notes. See "--Conditions to the Exchange Offer"
below. For purposes of the Exchange Offer, the Company shall be deemed to have
accepted properly tendered Existing Notes for exchange when, as and if the
Company has given oral and written notice thereof to the Exchange Agent.
For each Existing Note accepted for exchange, the holder of such Existing
Note will receive an Exchange Note having a principal amount equal to that of
the surrendered Existing Note.
In all cases, issuance of Exchange Notes for Existing Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Existing Notes
or a timely confirmation of book-entry transfer of such Existing Notes into
the Exchange Agent's account at the book-entry transfer facility, a properly
completed and duly executed Letter of Transmittal and all other required
documents. If any tendered Existing Notes are not accepted for any reason set
forth in the terms and conditions of the Exchange Offer or if Existing Notes
are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged Existing Notes will be returned
without expense to the tendering holder thereof (or, in the case of Existing
Notes tendered by book-entry transfer into the Exchange Agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such non-exchanged Existing Notes will be credited to an
account maintained with such book-entry transfer facility) as promptly as
practicable after the expiration of the Exchange Offer.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue Exchange Notes in exchange
for, any Existing Notes and may terminate or amend the Exchange Offer if at
any time before the acceptance of such Existing Notes for exchange or the
exchange of the Exchange Notes for such Existing Notes any of the following
events shall occur:
(i) any injunction, order or decree shall have been issued by any court
or any governmental agency that would prohibit, prevent or otherwise
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(ii) the Exchange Offer shall violate any applicable law or any
applicable interpretation of the staff of the Commission.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
or from time to time in its sole discretion. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may
be asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Existing Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Existing Notes, if at such time any stop order shall be threatened or in
effect with respect to the Registration Statement of which this Prospectus
constitutes a part or the qualification of the indenture under the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). In any such
event the Company is required to use every reasonable effort to obtain the
withdrawal of any stop order at the earliest possible time.
The Exchange Offer is not conditioned upon any minimum principal amount of
Existing Notes being tendered for exchange.
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EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or
of the Letter of Transmittal and requests for Notices of Guaranteed Delivery
should be directed to the Exchange Agent addressed as follows:
By Mail: By Hand or Overnight Courier:
IBJ Schroder Bank & Trust Company
IBJ Schroder Bank & Trust Company
P.O. Box 84
New York, New York 10274-0084 One State Street
New York, New York 10004
Attention: Reorganization Department
Attention: Securities Processing
Window
Subcellar One (SC-1)
DELIVERY OF THE EXISTING NOTES, LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The solicitation will be made
principally by mail. Additional solicitations may be made in person or by
telephone by officers or employees of the Company.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company. Such expenses will include fees and expenses of the
Exchange Agent and the Trustee, registration fees, accounting and legal fees
and printing costs and expenses.
TRANSFER TAXES
Holders who tender their Existing Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith except that holders who
instruct the Company to register Exchange Notes in the name of, or request
that Existing Notes not tendered or not accepted in the Exchange Offer be
returned to, a person other than the registered tendering holder will be
responsible for the payment of any applicable transfer tax therefor.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Existing
Notes as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company upon the exchange of Exchange Notes for Existing
Notes. Expenses incurred in connection with the issuance of the Exchange Notes
will be amortized over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF EXCHANGE NOTES
Holders of Existing Notes who do not exchange their Existing Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Existing Notes as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws.
Existing Notes not exchanged pursuant to the Exchange Offer will continue to
remain outstanding in accordance with their terms. In general, the Existing
Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Existing Notes under the
Securities Act. However, if (i) because of any change in law or applicable
interpretations thereof by the staff of the Commission, the Company is not
permitted to effect the Exchange Offer; (ii) any Existing Notes validly
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tendered pursuant to the Exchange Offer are not exchanged for Exchange Notes
within 180 days after the Issue Date; (iii) any Initial Purchaser so requests
with respect to Existing Notes not eligible to be exchanged for Exchange Notes
in the Exchange Offer; (iv) any applicable laws or interpretations do not
permit any holder of Existing Notes to participate in the Exchange Offer; (v)
any holder of Existing Notes that participates in the Exchange Offer does not
receive duly transferable Exchange Notes in exchange for tendered Existing
Notes; or (vi) the Company so elects, then the Company will file with the
Commission a shelf registration statement (the "Shelf Registration Statement")
to cover resales of Transfer Restricted Securities by such holders who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. If (i) the Shelf Registration Statement is
not filed with the Commission on or prior to 60 days after the Issue Date,
(ii) the Shelf Registration Statement is not declared effective within 150
days after the Issue Date, or (iii) the Shelf Registration Statement is filed
and declared effective within 150 days after the Issue Date but thereafter
ceases to be effective (at any time that the Company is obligated to maintain
the effectiveness thereof) without being succeeded within 45 days by an
additional Registration Statement filed and declared effective, the Company
will be obligated to pay liquidated damages to each holder of Transfer
Restricted Securities in the amounts and for the period specified above under
"--Purpose of the Exchange Offer."
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer may be offered for resale, resold
or otherwise transferred by holders thereof (other than any such holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holders' business and such holders
have no agreement or understanding with any person to participate in the
distribution of such Exchange Notes and are not participating in, and do not
intend to participate in, the distribution of such Exchange Notes. If any
holder has any arrangement or understanding with respect to the distribution
of the Exchange Notes to be acquired pursuant to the Exchange Offer, such
holder (i) cannot rely on the applicable interpretations of the staff of the
Commission for resale of Exchange Notes and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. A broker-dealer who holders Existing
Notes that were acquired for its own account as a result of market-making or
other trading activities may be deemed to be an "underwriter" within the
meaning of the Securities Act and must, therefore, deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale
of Exchange Notes. Each such broker-dealer that receives Exchange Notes for
its own account in exchange for Existing Notes, where such Existing Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge in the Letter of Transmittal that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered or sold unless they have
been registered or qualified for sale in such jurisdiction or an exemption
from registration or qualification is available and is complied with. The
Company has agreed, pursuant to the Registration Rights Agreement and subject
to certain specified limitations therein, to register or qualify the Exchange
Notes for offer or sale under the securities or blue sky laws of such
jurisdictions as any holder of Existing Notes reasonably requests in writing.
Participation in the Exchange Offer is voluntary, and holders of Existing
Notes should carefully consider whether or not to participate. Holders of
Existing Notes are urged to consult their financial and tax advisors in making
their own decision on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Existing Notes pursuant to the terms of, the Exchange Offer,
the Company will have fulfilled certain obligations under the Registration
Rights Agreement. Holders of Existing Notes who do not tender their Existing
Notes in the Exchange Offer will continue to hold such Existing Notes and will
be entitled to all of the rights and limitations applicable thereto under the
Indenture, except for any such rights under the Registration Rights Agreement
that by their terms terminate or cease to have further effectiveness as a
result of the making of the Exchange Offer.
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See "Description of Exchange Notes." All untendered Existing Notes will
continue to be subject to the restrictions on transfer as set forth in the
Indenture. To the extent that Existing Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered Existing Notes could be
adversely affected.
The Company may in the future seek to acquire untendered Existing Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plan to acquire any Existing
Notes which are not tendered in the Exchange Offer.
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THE TRANSACTIONS
THE MERGERS
The Company was formed through two merger transactions. On November 4, 1997,
pursuant to an agreement and plan of merger among Apollo, Apollo LCA
Acquisition Corp. ("Apollo Sub") and LCA dated as of May 7, 1997 as amended
and restated as of September 17, 1997, Apollo Sub was merged with and into LCA
(the "Recapitalization Merger"), with LCA as the surviving corporation and
renamed Paragon Health Network, Inc. In the Recapitalization Merger: (i) each
issued and outstanding share of Apollo Sub common stock (which shares in the
aggregate were purchased for approximately $240 million in cash by the Apollo
Investors, at a price of $40.50 per share) was converted into one share of
Company Common Stock; and (ii) each share of LCA Common Stock issued and
outstanding prior to the Recapitalization Merger either (x) remained an issued
and outstanding share of Company Common Stock or (y) was converted into the
right to receive $40.50 in cash from LCA. In the aggregate, as a result of the
Recapitalization Merger, approximately 9.5% of the outstanding shares of LCA
Common Stock remained outstanding as Company Common Stock and approximately
90.5% of the outstanding shares of LCA Common Stock were converted into the
right to receive $40.50 per share in cash. In addition, on November 4, 1997,
pursuant to an agreement and plan of merger among LCA, GranCare, Apollo and
LCA Sub dated as of May 7, 1997 as amended and restated as of September 17,
1997, GranCare: (i) merged with LCA Sub, a wholly owned subsidiary of LCA,
with GranCare being the surviving corporation in the merger; and (ii) all of
the shares of issued and outstanding GranCare common stock, par value $.001
per share ("GranCare Common Stock"), were cancelled and converted into the
right to receive 0.2346 of a share of Company Common Stock for each share of
GranCare Common Stock. Immediately following the effective times of the
Mergers, the Apollo Investors owned approximately 44.0%, existing GranCare
stockholders owned approximately 41.9% and existing LCA stockholders retained
approximately 14.1% of the outstanding shares of Company Common Stock.
THE FINANCING
The consummation of the Mergers required aggregate proceeds of approximately
$1.4 billion. The funds required for the Mergers and related transaction fees
and expenses were provided primarily by: (i) proceeds from the Offering of
approximately $449 million; (ii) borrowings by the Company of approximately
$740 million under a new senior bank facility providing for aggregate
commitments of up to $890 million (the "Senior Credit Facility"); and (iii)
the Apollo Investors' equity investment of approximately $240 million (the
"Apollo Investment"). See "Description of Senior Credit Facility" and "Use of
Proceeds."
DESCRIPTION OF SENIOR CREDIT FACILITY
The Senior Credit Facility consists of four components: a 6 1/2-year term
loan facility in an aggregate principal amount equal to $240 million (the
"Tranche A Term Loan Facility"); a 7 1/2 -year term loan facility in an
aggregate principal amount equal to $250 million (the "Tranche B Term Loan
Facility"); an 8 1/2-year term loan facility in an aggregate principal amount
equal to $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 sometimes collectively referred to herein as "Term Loans." Advances under
the Revolving Credit Facility are sometimes referred to as "Revolving Loans."
The obligations of the Company under the Senior Credit Facility and any
related interest rate protection agreements are guaranteed by substantially
all of the subsidiaries of the Company (including, without limitation,
GranCare and substantially all of its subsidiaries) other than (i) any
subsidiaries party to any financing arrangements which prohibit guarantees of
parent company obligations, (ii) insurance subsidiaries prohibited by law from
entering into such guarantees and pledges, and (iii) certain inactive
subsidiaries (collectively, the "Excluded Subsidiaries"). The Company's
obligations in connection with the Senior Credit Facility and the
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obligations of the subsidiary guarantors are secured by liens on substantially
all of their respective tangible and intangible assets to the maximum extent
possible, including, but not limited to mortgages on unencumbered, owned real
property, blanket security interests in personal property and pledges of the
capital stock of substantially all of the Company's subsidiaries, other than
the Excluded Subsidiaries. Furthermore, the obligations of the Company under
the Senior Credit Facility are cross-collateralized with those under the
Synthetic Lease described below under "Description of Other Indebtedness."
The Term Loans were drawn in full on the closing date of the Senior Credit
Facility to finance a portion of the cost of the Mergers, to refinance certain
existing LCA and GranCare indebtedness and to pay related fees and expenses
incurred in connection with the consummation of the Mergers. Subject to
compliance with customary conditions precedent, the Revolving Credit Facility
(that includes sub-limits for the issuances of letters of credit and swing
line loans) will be available to be drawn from time to time by the Company for
working capital and general corporate purposes (including permitted
acquisitions).
The Term Loans will be amortized in quarterly installments totalling
approximately $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 full in April 2005.
Interest on outstanding borrowings will accrue, at the option of the
Company, at the customary Alternate Base Rate (the "ABR") of The Chase
Manhattan Bank ("Chase") or at a reserve adjusted Eurodollar Rate (the
"Eurodollar Rate") plus, in each case, the Applicable Margin (as hereinafter
defined). The term "Applicable Margin" means a percentage that varies based
upon operating performance. Until the date on which the first quarterly
financial statements are delivered by the Company pursuant to the Senior
Credit Facility (the "Initial Adjustment Date"), 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"). Thereafter, the Applicable Margins for Revolving Loans
and Tranche A Term Loans will vary in accordance with a pricing matrix, based
on the Company's leverage ratio. The pricing matrix provides for Applicable
Margins ranging from a high of 1.25% to a low of 0% for ABR Loans, and from a
high of 2.25% to a low of 0.75% for Eurodollar Loans. The highest Applicable
Margins apply when the Company's leverage ratio is greater than or equal to
5.25 to 1, and the lowest Applicable Margins apply when the Company's leverage
ratio is less than 2.75 to 1. The Applicable Margins for Tranche B Term Loans
are 1.50% in the case of ABR Loans and 2.50% in the case of Eurodollar Loans,
and for Tranche C Term Loans are 1.75% in the case of ABR Loans and 2.75% in
the case of Eurodollar Loans, in each instance decreasing by 0.25% during any
period when the leverage ratio reported in the Company's most recent quarterly
or annual financial statements is equal to or less than 4.50 to 1. The highest
Applicable Margins will be in effect during the continuation of any event of
default under the Senior Credit Facility.
In addition to paying interest on outstanding principal under the Senior
Credit Facility, the Company is required to pay a commitment fee to the
lenders in the Revolving Credit Facility at a rate equal to a percentage that
varies in accordance with a pricing matrix based upon operating performance
targets and step-downs set forth in the pricing matrix. The pricing matrix
sets commitment fees at a rate between .50% and .25%, with the highest
commitment fees applying when the Company's leverage ratio is greater than or
equal to 5.25 to 1, and the lowest commitment fees applying when the Company's
leverage ratio is less than 2.75 to 1. Until the Initial Adjustment Date, the
commitment fee rate is 0.50%. The Company will also pay letter of credit
commissions on the outstanding stated amount of all letters of credit issued
under the Revolving Credit Facility at a rate equal to the Applicable Margin
for Eurodollar Loans under the Revolving Credit Facility (subject to
adjustments based on the pricing matrix), plus a fronting fee to the bank
issuing such letters of credit at a rate (not to exceed 25 basis points) to be
negotiated between the Company and the issuing bank, and the customary
administrative, issuance, drawing, payment, negotiation and amendment charges
of the issuing bank.
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
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Company (subject to certain exceptions for stock issued as part of the
purchase price for Acquisitions, stock issued to officers, directors and
employees of the Company as part of their compensation and additional
contributions by any Permitted Investor to the common equity of the Company);
(ii) 100% of the net cash proceeds of the incurrence of certain indebtedness
after the closing date of the Senior Credit Facility by the Company or any of
its subsidiaries; (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 also has 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.
Subject to customary exceptions, covenants include (but are not limited to)
certain restrictions on indebtedness; liens; guarantee obligations;
acquisitions; mergers, consolidations, liquidations and dissolutions; sales of
assets; leases; dividends and other payments in respect of capital stock;
capital expenditures; investments, loans and advances; optional payments and
modifications of subordinated debt instruments; transactions with affiliates;
sale-leasebacks; negative pledge clauses and clauses restricting subsidiary
distributions; and changes in lines of business. Financial covenants include
minimum net worth, a minimum interest coverage ratio, a minimum fixed charge
coverage ratio and a maximum leverage ratio.
Events of default include nonpayment of principal when due; nonpayment of
interest, fees or other amounts after a five-day grace period; material
inaccuracy of representations and warranties; violation of covenants (subject,
in certain cases, to a 30-day notice and cure period); cross-default;
bankruptcy events; certain ERISA events; material judgments; invalidity of any
guarantee, security interest or subordination provision; and a change of
control.
DESCRIPTION OF OTHER OBLIGATIONS
A portion of the proceeds of the Senior Credit Facility was used by the
Company to refinance substantially all of the indebtedness of LCA and GranCare
existing prior to the Mergers, except for (i) certain indebtedness owed by
GranCare or its subsidiaries to various real estate investment trusts
("REITs") (including Health and Retirement Properties Trust ("HRPT") and Omega
Healthcare Investors, Inc. ("Omega")), outstanding in the approximate
aggregate principal amount of $71.2 million at September 30, 1997, and (ii)
certain other existing indebtedness which was either not subject to prepayment
or redemption under the terms of the applicable financing or which senior
management of the Company deemed to be economically undesirable to refinance
(the "Other Non-Refinanced Indebtedness"), outstanding in the aggregate
principal amount of approximately $24.8 million at September 30, 1997.
HRPT Obligations. HRPT is the holder of a mortgage loan to AMS Properties,
Inc. ("AMS Properties"), a wholly owned subsidiary of GranCare, 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. The
HRPT Loan was incurred in connection with the acquisition and lease by AMS
Properties of several nursing facilities in Wisconsin, California, Colorado
and Illinois pursuant to an Acquisition Agreement, Agreement to Lease and
Mortgage Loan Agreement dated as of December 28, 1990 (the "HRPT Acquisition
Agreement"). The remaining balance under the HRPT Loan is due
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December 31, 2010 and may be prepaid upon the payment of certain prepayment
penalties, which are essentially in the nature of "make whole" provisions
providing that HRPT will receive the future value of the amounts owed. HRPT
has also leased 7 nursing facilities located in Arizona, California and South
Dakota to GCI Health Care Centers, Inc. ("GCIHCC") under a master lease
agreement dated as of June 30, 1992 (the "GCIHCC Lease"). GCIHCC and AMS
Properties have guaranteed each others' obligations to HRPT. GranCare has also
guaranteed the obligations of its subsidiaries to HRPT.
In connection with the transactions effected in February 1997, whereby Old
GranCare effectively transferred its institutional pharmacy business
(generally operating under the TeamCare name) to Vitalink on a tax-advantaged
basis (the "GranCare Morris Trust Transactions"), and as a condition to
granting its consent to the GranCare Morris Trust Transactions and releasing
Old GranCare and certain of Old GranCare's subsidiaries (which became
subsidiaries of Vitalink) from all obligations to HRPT, 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 GranCare
Morris Trust Transactions 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
remain outstanding. GranCare, AMS Properties and GCIHCC retained primary
liability for the HRPT Obligations and retained sole liability under the HRPT
Acquisition Agreement. To support Vitalink's limited guaranty of the foregoing
obligations, GranCare caused First Union to issue an irrevocable letter of
credit under the Existing GranCare Credit Facility in the amount of $15
million payable to Vitalink in the event Vitalink makes any payments under the
limited guaranty (the "HRPT Letter of Credit").
Pursuant to the HRPT Acquisition Agreement, the consent of HRPT was also
required in order to permit the GranCare Merger. On September 26, 1997,
GranCare and HRPT executed a non-binding letter agreement setting forth the
material terms and conditions pursuant to which HRPT would restructure its
relationship with GranCare (the "HRPT/GranCare Restructuring"). As a part of
the HRPT/GranCare Restructuring, HRPT consented to the consummation of the
GranCare Merger and the transactions related thereto as more fully described
below. 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 GranCare, the Company and all subsidiaries of GranCare and 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 the Cash Collateral Deposit of $15 million, the earned interest on
which will be retained by HRPT. The performance by the Tenant Entities of
their respective obligations to HRPT continue 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. 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 the 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. Prior to 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.
As a part of the HRPT/GranCare Restructuring, HRPT (i) waived its rights of
first refusal with respect to any purchase, sale, lease, sale/leaseback or
other financing transaction by GranCare or any of its affiliates with any real
estate investment trust ("First Refusal Rights") and (ii) released GranCare
from the obligation under the HRPT Acquisition Agreement to provide HRPT with
$25 million of new financing transactions or, in the event such financing
transactions are not provided to HRPT, to make certain annual payments to HRPT
until such new transactions have been completed ("New Financings"). HRPT also
agreed to an omnibus amendment
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to its relationship with GranCare whereby the Company, or any of its
affiliates or successors other than the Tenant Entity, may enter into mergers,
acquisitions, sales, recapitalizations, restructurings or other significant
agreements that may constitute a change of control without any additional
consent or approval of HRPT (the "Omnibus Consents"); provided that HRPT's
consent will be required if, (i) as a result of any such transaction, a lien
on any collateral held by HRPT is granted to, or imposed by, any other party
(except for any junior liens and security interests in the personal property
and capital stock of the Tenant Entities to be granted in connection with the
implementation of the Senior Credit Facility) or (ii) such transaction results
in any action or condition that constitutes an event of default under the
restructured HRPT/GranCare financing arrangements or any of the leases between
HRPT and such Tenant Entity, or any other agreement then in effect between
HRPT and the Company and its subsidiaries. Finally, HRPT consented to the
creation of junior liens and security interests in the personal property and
capital stock of the Tenant Entities as collateral for the Senior Credit
Facility and the execution by the Tenant Entities of guarantees of the
obligation of the Company and its affiliates arising pursuant to the Notes or
the Standby Senior Subordinated Credit Facility, subject in each case to the
terms and conditions of an intercreditor agreement that is substantially
similar to the extent applicable to the Intercreditor Agreement between HRPT
and First Union dated as of February 12, 1997.
In consideration of the HRPT/GranCare Restructuring, GranCare 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.
Omega Obligations. A wholly owned subsidiary of GranCare, 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 September 30, 1997. Proceeds of the Omega loan (the "Omega Loan") were used
by PHCMI to acquire 17 skilled nursing facilities in the State of Michigan
(the "PHCMI Facilities"). With the exception of four PHCMI Facilities since
divested, PHCMI owns the PHCMI Facilities and leases them to various of its
wholly owned subsidiaries under separate lease agreements. The Omega Loan is
secured by a mortgage and security agreement executed by PHCMI with respect to
the PHCMI Facilities and cash collateral of approximately $5.3 million (the
"Cash Deposit"). PHCMI has assigned its interest in the aforementioned
subsidiary leases to Omega as additional security for the Omega Loan. In
addition, in February 1997, in connection with the Vitalink Merger consummated
in February 1997, the PHCMI subsidiaries executed and delivered guarantees of
the Omega Loan and pledged their personal property assets to Omega as security
for such guarantees.
The Omega Loan bears interest at a rate which is adjusted annually based on
either (i) changes in the Consumer Price Index or (ii) a percentage of the
change in gross revenues of PHCMI and its subsidiaries from year to year,
divided by 58.8 million, whichever is higher, but in any event subject to a
maximum rate not to exceed 105% of the interest rate in effect for the Omega
Loan for the prior calendar year. The current interest rate is 14.5% per
annum. The Omega Loan currently requires monthly, interest-only payments.
Additional interest accrues on the outstanding principal of the Omega Loan at
the rate of 1% per annum. Such interest is compounded annually and is due and
payable on a pro rata basis at the time of each principal payment or
prepayment. Beginning October 1, 2002, quarterly amortizing installments of
principal in the amount of approximately $1.5 million will also become due and
payable on the first day of each calendar quarter. The entire outstanding
principal amount of the Omega Loan is due and payable on August 13, 2007. The
Omega Loan may be prepaid without penalty during the first 100 days following
August 14, 2002. Payment of the Omega Loan after acceleration upon the
occurrence of an event of default will result in a prepayment penalty in the
nature of a "make whole" premium.
In addition to the interest on the Omega Loan described in the preceding
paragraph, and as a condition to obtaining Omega's consent to the Vitalink
Merger, GranCare's prior credit facility and other transactions related
thereto, PHCMI agreed to pay additional interest to Omega in the amount of
$20,500 per month, through and including July 1, 2002. If the principal
balance of the Omega Loan for any reason becomes due and payable prior to that
date, there will be added to the indebtedness owned by PHCMI: (i) the sum of
$1.0 million, plus;
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(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 First Union to issue its letter of credit in favor of Omega
in the amount of $9.0 million pursuant to the Existing GranCare Credit
Facility (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. In connection with the
refinancing of the Existing GranCare Credit Facility, Chase issued a back-up
Letter of Credit under the Senior Credit Facility for the benefit of First
Union (the "Back-Up Omega Letter of Credit"). Consequently, any amounts drawn
against First Union under the Omega Letter of Credit will be reimbursed to
First Union by a corresponding draw under the Back-Up Omega Letter of Credit,
giving rise to reimbursement obligations that will constitute Indebtedness
under the Senior Credit Facility.
The Omega Loan Agreement obligates PHCMI, among other things, to maintain a
minimum tangible net worth of at least $10 million, increased or decreased by
25% of PHCMI's net income (but in no event less than $10 million). GranCare
has agreed to 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.
Synthetic Lease. 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 "Synthetic Lease"). This leasing program allows the Company
to complete these projects without committing significant financing resources.
The Synthetic Lease is a 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 properties and also has an option to
purchase the properties at any time prior to the maturity date at a price
sufficient to pay the entire amount financed, accrued interest and certain
expenses. At September 30, 1997, approximately $28.9 million of this leasing
arrangement was utilized. The leasing program is accounted for as an operating
lease.
DESCRIPTION OF EXCHANGE NOTES
GENERAL
Except as otherwise indicated, the following description relates both to the
Existing Notes issued in the Offering and the Exchange Notes to be issued in
exchange for Existing Notes in connection with the Exchange Offer. The form
and terms of the Exchange Senior Subordinated Notes and the Exchange Senior
Subordinated Discount Notes are the same as the form and terms of the Existing
Senior Subordinated Notes and the Existing Senior Subordinated Discount Notes,
respectively, except that the Exchange Notes have been registered under the
Securities Act and therefore will not bear legends restricting the transfer
thereof. The description of the Exchange Notes contained herein assumes that
all Existing Notes will be exchanged for Exchange Notes in the Exchange Offer.
To the extent that Existing Notes remain outstanding after the consummation of
the Exchange Offer, references to the Exchange Notes and the holders thereof
will apply collectively to the Exchange Notes, the Existing Notes and the
holders thereof.
The Exchange Notes will be obligations of the Company evidencing the same
indebtedness as the Existing Notes, and will be entitled to the benefits of
the same Indenture, dated as of November 1, 1997, among the Company and IBJ
Schroder Bank & Trust Company, as trustee (the "Trustee"). The terms of the
Exchange Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust
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Indenture Act as in effect on the date of the Indenture. The Exchange Notes
are subject to all such terms, and holders of the Exchange Notes are referred
to the Indenture and the Trust Indenture Act for a statement of them.
The following is a summary of the material terms and provisions of the
Exchange Notes. This summary does not purport to be a complete description of
the Exchange Notes and is subject to the detailed provisions of, and qualified
in its entirety by reference to, the Exchange Notes and the Indenture
(including the definitions contained therein). A copy of the Indenture has
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The definitions of certain capitalized terms are set
forth under "--Certain Definitions" and throughout this description.
Capitalized terms that are used but not otherwise defined herein have meanings
assigned to them in the Indenture and such definitions are incorporated herein
by reference. For purposes of this Section, references to the Company include
only the Company and not its Subsidiaries. Additionally, for purposes of this
Section, any reference to a "Holder" means a Holder of the Existing or
Exchange Senior Subordinated Notes or the Existing or Exchange Senior
Subordinated Discount Notes, as the context may require.
MATURITY, INTEREST AND PRINCIPAL
The Exchange Senior Subordinated Notes are limited to $275,000,000 aggregate
principal amount and will mature on November 1, 2007. Each Exchange Senior
Subordinated Note bears interest at a rate per annum shown on the front cover
of this Prospectus from the Issue Date or from the most recent date to which
interest has been paid or provided for, payable semiannually in cash and in
arrears to Holders of record at the close of business on the April 15 or
October 15 immediately preceding the interest payment date on May 1 and
November 1 of each year, commencing May 1, 1998.
The Exchange Senior Subordinated Discount Notes were issued at a discount to
their aggregate principal amount at maturity to generate gross proceeds to the
Company on the Issue Date of approximately $175,097,580 and will mature on
November 1, 2007. The Exchange Senior Subordinated Discount Notes will accrete
until November 1, 2002 at a rate of 10.57% per annum, compounded semiannually.
Cash interest will not accrue on the Exchange Senior Subordinated Discount
Notes prior to November 1, 2002. Thereafter, interest will accrue at the rate
of 10 1/2% per annum and will be payable semiannually in cash and in arrears
to the Holders of record on each April 15 or October 15 immediately preceding
the interest payment date on May 1 and November 1 of each year, commencing May
1, 2003. Cash interest on the Exchange Senior Subordinated Discount Notes will
accrue from the most recent interest payment date to which interest has been
paid or, if no interest has been paid, from November 1, 2002. All references
to the principal amount of the Exchange Senior Subordinated Discount Notes
herein are references to the principal amount at final maturity.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Principal of, premium, if any, and interest on the Exchange
Notes will be payable, and the Exchange Notes may be exchanged or transferred,
at the office or agency of the Company in the Borough of Manhattan, The City
of New York (which initially shall be the principal corporate trust office of
the Trustee, at 1 State Street, 11th Floor, New York, New York), except that,
at the option of the Company, payment of interest may be made by check mailed
to the addresses of the Holders of the Exchange Notes as such addresses appear
in the Note Register.
The Exchange Notes may be issued only in fully registered form, without
coupons, in denominations of $1,000 and integral multiples thereof. No service
charge will be made for any registration of transfer or exchange of Exchange
Notes, but the Company may require payment of a sum sufficient to cover any
transfer tax or other similar governmental charge payable in connection
therewith.
OPTIONAL REDEMPTION
Exchange Senior Subordinated Notes. The Exchange Senior Subordinated Notes
are redeemable, at the Company's option, in whole or in part, at any time and
from time to time on and after November 1, 2002 and prior to maturity, upon
not less than 30 nor more than 90 days' prior notice mailed by first-class
mail to each Holder's registered address, at the following redemption prices
(expressed as a percentage of principal amount),
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plus accrued interest, if any, to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the 12-month period
commencing on November 1 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2002............................................................. 104.750%
2003............................................................. 103.167%
2004............................................................. 101.583%
2005 and thereafter.............................................. 100.000%
</TABLE>
In addition, at any time and from time to time prior to November 1, 2000,
the Company may redeem in the aggregate up to 33 1/3% of the original
aggregate principal amount of the Exchange Senior Subordinated Notes with the
proceeds of one or more Equity Offerings by the Company at a redemption price
(expressed as a percentage of principal amount thereof) of 109.5% plus accrued
interest, if any, to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date); provided, however, that at least 50% of the original
aggregate principal amount of the Exchange Senior Subordinated Notes must
remain outstanding after each such redemption and that any such redemption
occurs within 90 days following the closing of any such Equity Offering.
Exchange Senior Subordinated Discount Notes. The Exchange Senior
Subordinated Discount Notes are redeemable, at the Company's option, in whole
or in part, at any time and from time to time on and after November 1, 2002
and prior to maturity, upon not less than 30 nor more than 90 days' prior
notice mailed by first class mail to each Holder's registered address, at the
following redemption prices (expressed as a percentage of the Accreted Value
thereof), plus accrued and unpaid interest, if any, to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date), if redeemed
during the 12 month period beginning on November 1 of the years indicated
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002............................................................. 105.250%
2003............................................................. 103.500%
2004............................................................. 101.750%
2005 and thereafter.............................................. 100.000%
</TABLE>
In addition at any time and from time to time prior to November 1, 2000, the
Company may redeem up to 33 1/3% of the originally issued principal amount at
maturity of Exchange Senior Subordinated Discount Notes at a redemption price
equal to 110.5% of the Accreted Value at the redemption date of the Exchange
Senior Subordinated Discount Notes so redeemed with the net proceeds of one or
more Equity Offerings by the Company; provided, however, that at least 50% of
the originally issued principal amount at maturity of Exchange Senior
Subordinated Discount Notes must remain outstanding immediately after each
such redemption and that any such redemption occurs within 90 days following
the closing of any such Equity Offering.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Exchange Senior Subordinated Notes or
the Exchange Senior Subordinated Discount Notes are to be redeemed at any time
pursuant to an optional redemption, selection of such Exchange Notes for
redemption will be made by the applicable Trustee on a pro rata basis, by lot
or by such method as the applicable Trustee shall deem fair and appropriate;
provided that no Exchange Notes of a principal amount or principal amount at
maturity, as the case may be, of $1,000 or less shall be redeemed in part.
Notice of redemption shall be mailed by first-class mail at least 30 but not
more than 90 days before the redemption date to each Holder of Exchange Senior
Subordinated Notes or Exchange Senior Subordinated Discount Notes, as the case
may be, to be redeemed at its registered address. If any Exchange Note is to
be redeemed in part only, the notice of redemption that relates to such
Exchange Note shall state the portion of the
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principal amount or principal amount at maturity, as the case may be, thereof
to be redeemed. A new Exchange Senior Subordinated Note or Exchange Senior
Subordinated Discount Note, as the case may be, in a principal amount or
principal amount at maturity, as the case may be, equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Exchange Note. On and after the redemption date,
interest will cease to accrue on Exchange Notes or portions thereof called for
redemption as long as the Company has deposited with the paying agent for the
Exchange Notes funds in satisfaction of the applicable redemption price
pursuant to the Indenture.
RANKING
The indebtedness evidenced by the Exchange Notes is unsecured Senior
Subordinated Indebtedness of the Company, is subordinated in right of payment,
as set forth in the Indenture, to the payment when due of all existing and
future Senior Indebtedness of the Company, including the Company's Obligations
under the Senior Credit Facility, ranks pari passu in right of payment with
all existing and future Senior Subordinated Indebtedness of the Company and is
senior in right of payment to all existing and future Subordinated Obligations
of the Company. The Exchange Notes are also effectively subordinated to any
Secured Indebtedness of the Company and its Subsidiaries to the extent of the
value of the assets securing such Indebtedness. However, payment from the
money or the proceeds of U.S. Government Obligations held in any defeasance
trust described under "--Defeasance" below is not subordinated to any Senior
Indebtedness or subject to the restrictions described herein.
At September 30, 1997, after giving effect to the Transactions and the
application of the proceeds therefrom as described herein under "Use of
Proceeds," the outstanding Senior Indebtedness of the Company would have been
approximately $831.6 million (exclusive of unused commitments). Although the
Indenture contains limitations on the amount of additional Indebtedness which
the Company may Incur, under certain circumstances the amount of such
Indebtedness could be substantial and, in any case, such Indebtedness may be
Senior Indebtedness. See "--Certain Covenants--Limitation on Indebtedness"
below.
Only Indebtedness of the Company that is Senior Indebtedness ranks senior to
the Exchange Notes in accordance with the provisions of the Indenture. The
Exchange Notes in all respects rank pari passu with all other Senior
Subordinated Indebtedness of the Company. The Company has agreed in the
Indenture that it will not Incur, directly or indirectly, any Indebtedness
that is subordinate or junior in ranking in any respect to Senior Indebtedness
unless such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness.
Unsecured Indebtedness is not deemed to be subordinate or junior to Secured
Indebtedness merely because it is unsecured.
The Company may not pay principal of, premium (if any) or interest on, the
Exchange Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not otherwise purchase, redeem or otherwise retire
any Exchange Notes (collectively, "pay the Exchange Notes") if (i) any Senior
Indebtedness is not paid when due in cash or Cash Equivalents or (ii) any
other default on Senior Indebtedness occurs and the maturity of such Senior
Indebtedness is accelerated in accordance with its terms unless, in either
case, (x) the default has been cured or waived and any such acceleration has
been rescinded in writing or (y) such Senior Indebtedness has been paid in
full in cash or Cash Equivalents. However, the Company may pay the Exchange
Notes without regard to the foregoing if the Company and the Trustee receive
written notice approving such payment from the Representative of the
Designated Senior Indebtedness with respect to which either of the events set
forth in clause (i) or (ii) of the immediately preceding sentence has occurred
and is continuing.
In addition, during the continuance of any default (other than a default
described in clause (i) or (ii) of the first sentence of the immediately
preceding paragraph) with respect to any Designated Senior Indebtedness
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, the Company
may not pay the Exchange Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by the Trustee (with a copy to the Company) of
written notice (a "Blockage Notice") of such default from the
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<PAGE>
Representative of the Designated Senior Indebtedness specifying an election to
effect a Payment Blockage Period and ending on the date 179 days thereafter
(or earlier if such Payment Blockage Period is terminated (i) by written
notice to the Trustee and the Company from the Person or Persons who gave such
Blockage Notice, (ii) because such Designated Senior Indebtedness has been
discharged or repaid in full (or such payment has been duly provided for in a
manner acceptable to the holders of such Designated Senior Indebtedness) or
(iii) because the default giving rise to such Blockage Notice is no longer
continuing). Notwithstanding the provisions described in the immediately
preceding sentence (but subject to the provisions contained in the first
sentence of the immediately preceding paragraph), unless the holders of such
Designated Senior Indebtedness or the Representative of such holders have
accelerated the maturity of such Designated Senior Indebtedness, the Company
may resume payments on the Exchange Notes after the end of such Payment
Blockage Period. Not more than one Blockage Notice may be given in any
consecutive 360-day period, irrespective of the number of defaults with
respect to Designated Senior Indebtedness during such period. However, if any
Blockage Notice within such 360-day period is given by or on behalf of any
holders of Designated Senior Indebtedness other than Bank Indebtedness, a
Representative of Bank Indebtedness may give one additional Blockage Notice
within such period. In no event, however, may the total number of days during
which any Payment Blockage Period or Periods is in effect exceed 179 days in
the aggregate during any 360 consecutive day period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar
proceeding relating to the Company or its property, or in a bankruptcy,
insolvency, receivership or similar proceeding relating to the Company or its
property, the holders of Senior Indebtedness will be entitled to receive
payment in full of the Senior Indebtedness before the Holders are entitled to
receive any payment and until the Senior Indebtedness is paid in full (or such
payment has been duly provided for in a manner acceptable to the holders of
such Senior Indebtedness), any payment or distribution to which Holders would
be entitled but for the subordination provisions of the Indenture will be made
to holders of the Senior Indebtedness as their interests may appear. If a
distribution is made to Holders that due to the subordination provisions
should not have been made to them, such Holders are required to hold it in
trust for the holders of Senior Indebtedness and pay it over to them as their
interests may appear.
If payment of the Exchange Notes is accelerated because of an Event of
Default, the Company or the Trustee shall promptly notify the holders of the
Designated Senior Indebtedness or the Representative of such holders of the
acceleration. The Company may not pay the Exchange Notes until five Business
Days after such holders or the Representative of the Designated Senior
Indebtedness receive notice of such acceleration and, thereafter, may pay the
Exchange Notes only if the subordination provisions of the Indenture otherwise
permits payment at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the Holders.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined below), each Holder
will have the right to require the Company to repurchase all or any part of
such Holder's Exchange Notes at a purchase price in cash equal to 101% of the
principal amount (or Accreted Value, as the case may be) thereof, plus accrued
and unpaid interest, if any, to the date of repurchase (subject to the right
of Holders of record on the relevant record date to receive interest due on
the relevant interest payment date); provided, however, that notwithstanding
the occurrence of a Change of Control, the Company shall not be obligated to
purchase the Exchange Notes pursuant to this covenant in the event that it has
exercised its right to redeem all of the Exchange Notes as described under "--
Optional Redemption". "Change of Control" means (i) any "Person" (as such term
is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or
more Permitted Holders, is or becomes the beneficial owner (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act) directly or indirectly, of more
than 50% of the Voting Stock of the Company or a Successor Company (as defined
below) (including, without limitation, through a merger or consolidation or
purchase of Voting Stock of the Company); provided that the Permitted Holders
do not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the
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<PAGE>
Board of Directors; (ii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the Company
was approved by (A) Apollo in accordance with the Apollo Stockholders
Agreement or (B) a vote of a majority of the directors of the Company then
still in office who were either directors at the beginning of such period or
whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors then in
office; (iii) the sale, lease, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Subsidiaries taken as a whole to any Person or group of related Persons (a
"Group") (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act) other than a Permitted Holder; or (iv) the adoption of a plan relating to
the liquidation or dissolution of the Company.
Unless the Company has exercised its right to redeem all the Exchange Notes
as described under "Optional Redemption," the Company shall within 30 days
following any Change of Control (or at the Company's option, prior to such
Change of Control but after the public announcement thereof) mail a notice to
each Holder with a copy to the Trustee stating: (1) that a Change of Control
has occurred or will occur and that such Holder has (or upon such occurrence
will have) the right to require the Company to purchase such Holder's Exchange
Notes at a purchase price in cash equal to (i) 101% of the principal amount
thereof, in the case of Exchange Senior Subordinated Notes, plus accrued and
unpaid interest, if any, to the date of purchase (subject to the right of
Holders of record on a record date to receive interest on the relevant
interest payment date) and (ii) prior to November 1, 2002, 101% of the
Accreted Value on the purchase date, in the case of the Exchange Senior
Subordinated Discount Notes, and thereafter, 101% of the principal amount,
plus accrued and unpaid interest, if any, thereon, to the purchase date; (2)
the circumstances and relevant facts and financial information regarding such
Change of Control; (3) the date of purchase (which shall be no earlier than 30
days nor later than 90 days from the date such notice is mailed); (4) the
instructions determined by the Company, consistent with this covenant, that a
Holder must follow in order to have its Exchange Notes purchased; and (5)
that, if such offer is made prior to such Change of Control, payment is
conditioned on the occurrence of such Change of Control.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Exchange Notes pursuant to this covenant.
To the extent that the provisions of any securities laws or regulations
conflict with provisions of this covenant, the Company will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. The Company has no present plans to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit
ratings.
The occurrence of a Change of Control would constitute a default under the
Senior Credit Agreement. Future Senior Indebtedness of the Company may contain
prohibitions of certain events which would constitute a Change of Control or
require such Senior Indebtedness to be repurchased upon a change of control
(as defined therein). Moreover, the exercise by the Holders of their right to
require the Company to repurchase the Exchange Notes could cause a default
under such Senior Indebtedness, even if the Change of Control itself does not,
due to the financial effect of such repurchase on the Company. Finally, the
Company's ability to pay cash to the Holders upon a repurchase may be limited
by the Company's then existing financial resources. There can be no assurance
that sufficient funds will be available when necessary to make any required
repurchases.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving the Company by increasing
the capital required to effect such transactions. The
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<PAGE>
definition of "Change of Control" includes a disposition of all or
substantially all of the property and assets of the Company and its
Subsidiaries. With respect to the disposition of property or assets, the
phrase "all or substantially all" as used in the Indenture varies according to
the facts and circumstances of the subject transaction, has no clearly
established meaning under New York law and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the property or assets of a
Person, and therefore it may be unclear as to whether a Change of Control has
occurred and whether the Company is required to make an offer to repurchase
the Exchange Notes as described above.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company shall not, and shall not permit
any Restricted Subsidiary to, Incur any Indebtedness; provided, however, that
the Company or any Restricted Subsidiary may Incur Indebtedness if on the date
of the Incurrence of such Indebtedness the Consolidated Coverage Ratio would
be greater than (i) 1.75 to 1.00, if such Indebtedness is Incurred on or prior
to the second anniversary of the Issue Date and (ii) 2.00 to 1.00 if such
Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness
Incurred pursuant to the Senior Credit Facility (or any refinancing thereof)
in a maximum principal amount not to exceed at any time (A) an aggregate
principal amount of $740.0 million under the Term Loan Facility, plus (in the
case of any refinancing thereof) the aggregate amount of fees, underwriting
discounts, premiums and other costs and expenses incurred in connection with
such refinancing, less (1) the aggregate amount of all scheduled repayments of
principal applied to permanently reduce the Indebtedness outstanding under the
Term Loan Facility and (2) the excess of (a) the aggregate amount of all
mandatory prepayments of principal with Net Available Cash from Asset
Dispositions applied to permanently reduce the Indebtedness outstanding under
the Term Loan Facility over (b) $75 million and (B) an aggregate principal
amount outstanding at any time under the Revolving Credit Facility (or any
refinancing thereof) not to exceed $175 million; (ii) Indebtedness (A) of the
Company to any Restricted Subsidiary and (B) of any Wholly Owned Subsidiary to
the Company or any Restricted Subsidiary; provided, however, that any
subsequent issuance or transfer of any Capital Stock or any other event that
results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any other subsequent transfer of any such Indebtedness (except
to the Company or a Wholly Owned Subsidiary) will be deemed, in each case, an
Incurrence of Indebtedness by the Company or such Restricted Subsidiary, as
the case may be, in the amount that remains outstanding following such
issuance or transfer of such securities; (iii) Indebtedness represented by the
Exchange Notes, any Indebtedness (other than the Indebtedness described in
clauses (i) or (ii) above) outstanding on the date of the Indenture and any
Refinancing Indebtedness Incurred in respect of any Indebtedness described in
this clause (iii) or paragraph (a); (iv) Indebtedness of the Company or any
Restricted Subsidiary in the form of Capitalized Lease Obligations, Purchase
Money Obligations or Attributable Debt, and any Refinancing Indebtedness with
respect thereto, in an aggregate amount not in excess of 7.5% of Consolidated
Tangible Assets at any one time outstanding; (v) Indebtedness represented by
Guarantees of Indebtedness Incurred pursuant to this covenant "Limitation on
Indebtedness"; (vi) Indebtedness under Hedging Obligations; provided, however,
that such Hedging Obligations are entered into for bona fide hedging purposes
of the Company or any Restricted Subsidiary and are in the ordinary course of
business; (vii) Indebtedness evidenced by letters of credit issued in the
ordinary course of business of the Company to secure workers' compensation and
other insurance coverages; and (viii) Indebtedness (which may comprise Bank
Indebtedness) in an aggregate principal amount at any one time outstanding not
in excess of the greater of (A) $75.0 million and (B) an amount equal to 5.0%
of Consolidated Tangible Assets.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) that permits Refinancing
Indebtedness in respect of Indebtedness constituting Subordinated Obligations
if the proceeds of such Refinancing Indebtedness are used, directly or
indirectly, to Refinance such
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Subordinated Obligations, unless such Refinancing Indebtedness will be
subordinated to the Exchange Notes at least to the same extent as such
Subordinated Obligations.
(d) For purposes of determining compliance with, and the outstanding
principal amount of any particular Indebtedness Incurred pursuant to and in
compliance with, this covenant, (i) in the event that Indebtedness meets the
criteria of more than one of the types of Indebtedness described in paragraph
(b) above, the Company, in its sole discretion, shall classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses; and (ii) the amount of Indebtedness
issued at a price that is less than the principal amount thereof shall be
equal to the amount of the liability in respect thereof determined in
accordance with GAAP.
(e) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt and Guarantees of Indebtedness
Incurred in accordance with paragraphs (a) and (b) of this covenant
"Limitation on Indebtedness"; provided, however, if any such Indebtedness
ceases to be Non-Recourse Debt, such event shall be deemed to constitute an
incurrence of Indebtedness by the Company or a Restricted Subsidiary.
Limitation on Layering. The Company shall not incur any Indebtedness that is
expressly subordinate in right of payment to any Senior Indebtedness unless
such Indebtedness is Senior Subordinated Indebtedness or is contractually
subordinated in right of payment to Senior Subordinated Indebtedness.
Unsecured Indebtedness is not deemed to be subordinate or junior to Secured
Indebtedness merely because it is unsecured, and Indebtedness that is not
guaranteed by a particular person is not deemed to be subordinate or junior to
Indebtedness that is so guaranteed merely because it is not so guaranteed.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or
pay any dividend or make any distribution on or in respect of its Capital
Stock (including any payment to its stockholders in connection with any merger
or consolidation involving the Company) except (1) dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and (2)
dividends or distributions payable to the Company or any Restricted Subsidiary
(and, if such Restricted Subsidiary is not a Wholly Owned Subsidiary, to its
other shareholders on no more than a pro rata basis, measured by value), (ii)
purchase, redeem, retire or otherwise acquire for value any Capital Stock of
the Company or any Restricted Subsidiary held by Persons other than the
Company or another Restricted Subsidiary, (iii) purchase, repurchase, redeem,
defease or otherwise acquire or retire for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment, any Subordinated
Obligations (other than the purchase, repurchase, redemption or other
acquisition of Subordinated Obligations in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition) or (iv) make any Investment
(other than a Permitted Investment) in any Person (any such dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition,
retirement or Investment being herein referred to as a "Restricted Payment")
if at the time the Company or such Restricted Subsidiary makes such Restricted
Payment: (1) a Default shall have occurred and be continuing (or would result
therefrom); (2) the Company could not incur at least an additional $1.00 of
Indebtedness under paragraph (a) of the covenant described under "--Limitation
on Indebtedness"; or (3) the aggregate amount of such Restricted Payment and
all other Restricted Payments (the amount so expended, if other than in cash,
to be determined in good faith by the Company's Board of Directors, whose
determination shall be conclusive and evidenced by a resolution of the
Company's Board of Directors) declared or made subsequent to the date of the
Indenture would exceed the sum of: (A) 50% of the Consolidated Net Income
accrued during the period (treated as one accounting period) from the end of
the most recent fiscal quarter ending prior to the Issue Date to the end of
the most recent fiscal quarter ending prior to the date of such Restricted
Payment for which consolidated financial statements of the Company are
available (or, in case such Consolidated Net Income shall be a deficit, minus
100% of such deficit); (B) the aggregate Net Cash Proceeds received by the
Company from the issuance or sale of its Capital Stock (other than
Disqualified Stock) plus the principal amount of convertible securities which
have been converted into or exchanged for Capital Stock (other than
Disqualified Stock), in each case, subsequent to the Issue Date (other than an
issuance or sale to a Restricted Subsidiary of the Company, provided that in
the event such
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issuance or sale is to an employee stock ownership plan or other trust
established by the Company or any of its Subsidiaries for the benefit of their
employees, to the extent the purchase by such plan or trust is financed by
Indebtedness of such plan or trust and for which the Company is liable as
Guarantor or otherwise, such aggregate amount of Net Cash Proceeds shall be
limited to the aggregate amount of principal payments made by such plan or
trust with respect to such Indebtedness); and (C) in the case of the
disposition or repayment of any Investment constituting a Restricted Payment
(without duplication of any amount deducted in calculating the amount of
Investments at any time outstanding included in the amount of Restricted
Payments), an amount equal to the lesser of (x) the return of capital or
similar repayment with respect to such Investment and (y) the initial amount
of such Investment, in either case, less the cost of the disposition of such
Investment.
(b) The provisions of the foregoing paragraph (a) will not prohibit: (i) any
purchase, redemption, repurchase, defeasance, retirement or other acquisition
of Capital Stock of the Company or Subordinated Obligations made by exchange
(including any such exchange pursuant to the exercise of a conversion right or
privilege in connection with which cash is paid in lieu of the issuance of
fractional shares) for, or out of the proceeds of the substantially concurrent
sale of, Capital Stock of the Company (other than Disqualified Stock and other
than Capital Stock issued or sold to a Subsidiary or an employee stock
ownership plan or other trust established by the Company or any of its
Subsidiaries); provided, however, that (A) such purchase, redemption,
repurchase, defeasance, retirement or other acquisition shall be excluded in
subsequent calculations of the amount of Restricted Payments and (B) the Net
Cash Proceeds or reduction of Indebtedness from such sale shall be excluded in
calculations under clauses (B) and (C) of paragraph (a); (ii) any purchase,
redemption, repurchase, defeasance, retirement or other acquisition of
Subordinated Obligations made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Subordinated Obligations of the Company that
is permitted to be Incurred pursuant to the covenant described under "--
Limitation on Indebtedness"; provided, however, that such purchase,
redemption, repurchase, defeasance, retirement or other acquisition shall be
excluded in subsequent calculations of the amount of Restricted Payments;
(iii) any purchase, redemption, repurchase, defeasance, retirement or other
acquisition of Subordinated Obligations from Net Available Cash to the extent
permitted by the covenant described under "--Limitation on Sales of Assets";
provided, however, that such purchase, redemption, repurchase, defeasance,
retirement or other acquisition shall be excluded in subsequent calculations
of the amount of Restricted Payments; (iv) dividends paid within 60 days after
the date of declaration thereof if at such date of declaration such dividend
would have complied with paragraph (a); provided, however, that such dividend
shall be included in subsequent calculations of the amount of Restricted
Payments; (v) any purchase or redemption of any shares of Capital Stock of the
Company from employees of the Company and its Subsidiaries pursuant to the
repurchase provisions under employee stock option or stock purchase agreements
or other agreements to compensate management employees in an aggregate amount
after the date of the Indenture not in excess of $1.0 million in any fiscal
year (excluding repurchases and redemptions in connection with the Mergers),
plus any unused amounts under this clause (v) from prior fiscal years;
provided, however, that such purchases or redemptions shall be excluded in
subsequent calculations of the amount of Restricted Payments; (vi) Investments
in Permitted Business Ventures that in the aggregate do not exceed at any one
time outstanding 10% of Consolidated Tangible Assets less any amounts invested
under clause (iv) of the definition of "Additional Assets" (exclusive of those
Permitted Business Ventures in existence on the Issue Date); provided,
however, that any such Investments in Permitted Business Ventures shall be
included in subsequent calculations of the amount of Restricted Payments;
(vii) any purchase, redemption or repurchase of any shares of Capital Stock of
the Company in connection with the Mergers and as described in or contemplated
by the Offering Memorandum or Prospectus, as the case may be; provided,
however, that any such purchases or redemptions shall be excluded in
subsequent calculations of the amount of Restricted Payments; or (viii) other
Restricted Payments not to exceed $10.0 million in the aggregate.
Designation of Unrestricted Subsidiaries. The Board of Directors of the
Company may designate any Restricted Subsidiary to be an Unrestricted
Subsidiary if such designation would not cause a default. For purposes of
making such determination, all outstanding Investments by the Company and its
Restricted Subsidiaries (except to the extent repaid in cash) in the
Subsidiary so designated will be deemed to be Restricted Payments at the time
of such designation and would otherwise be permitted under the covenant
"Limitation on Restricted Payments" (including pursuant to clause (vi) thereof
relating to Permitted Business Ventures). All
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such outstanding Investments will be deemed to constitute Investments in an
amount equal to the greater of the fair market value or the book value of such
Investments at the time of such designation. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to (i) pay dividends or make any other distributions on
its Capital Stock or pay any Indebtedness or other obligations owed to the
Company, (ii) make any loans or advances to the Company or (iii) transfer any
of its property or assets to the Company, except (1) any encumbrance or
restriction pursuant to an agreement in effect at or entered into on the date
of the Indenture (including, without limitation, the Senior Credit Facility);
(2) any encumbrance or restriction with respect to a Restricted Subsidiary (x)
pursuant to an agreement relating to any Indebtedness Incurred by a Restricted
Subsidiary prior to the date on which such Restricted Subsidiary was acquired
by the Company, or of another Person that is assumed by the Company or a
Restricted Subsidiary in connection with the acquisition of assets from, or
merger or consolidation with, such Person (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company, or such acquisition of assets,
merger or consolidation) and outstanding on the date of such acquisition,
merger or consolidation or (y) pursuant to any agreement (not relating to any
Indebtedness) in existence when a Person becomes a Subsidiary of the Company
or when such agreement is acquired by the Company or any Subsidiary thereof,
that is not created in contemplation of such Person becoming such a Subsidiary
or such acquisition (for purposes of this clause (2), if another Person is the
Successor Company, any Subsidiary or agreement thereof shall be deemed
acquired or assumed, as the case may be, by the Company when such Person
becomes the Successor Company); (3) any encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement (a "Refinancing
Agreement") effecting a refinancing of Indebtedness Incurred pursuant to, or
that otherwise extends, renews, refinances or replaces, an agreement referred
to in clause (1) or (2) of this covenant or this clause (3) or contained in
any amendment to an agreement referred to in clause (1) or (2) of this
covenant or this clause (3) (an "Initial Agreement") or contained in any
amendment to an Initial Agreement; provided, however, that the encumbrances
and restrictions contained in any such Refinancing Agreement or amendment are
no less favorable to the Holders of the Exchange Notes taken as a whole than
encumbrances and restrictions contained in the Initial Agreement or Agreements
to which such Refinancing Agreement or amendment relates; (4) any encumbrance
or restriction (A) that restricts in a customary manner the subletting,
assignment or transfer of any property or asset that is subject to a lease,
license or similar contract, or the assignment or transfer of any lease,
license or other contract, (B) by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any property or assets
of the Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture, (C) contained in mortgages, pledges or other security agreements
securing Indebtedness of a Restricted Subsidiary to the extent such
encumbrance or restrictions restrict the transfer of the property subject to
such mortgages, pledges or other security agreements or (D) pursuant to
customary provisions restricting dispositions of real property interests set
forth in any reciprocal easement agreements of the Company or any Restricted
Subsidiary; (5) any restriction with respect to a Restricted Subsidiary (or
any of its property or assets) imposed pursuant to an agreement entered into
for the direct or indirect sale or disposition of all or substantially all the
Capital Stock or assets of such Restricted Subsidiary (or the property or
assets that are subject to such restriction) pending the closing of such sale
or disposition; and (6) any encumbrance or restriction on the transfer of
property or assets required by any regulatory authority having jurisdiction
over the Company or any Restricted Subsidiary or any of their businesses.
Limitation on Sales of Assets. (a) The Company will not, and will not permit
any Restricted Subsidiary to, make any Asset Disposition unless (i) at least
75% of the consideration therefor (excluding, in the case of an Asset
Disposition of assets, any consideration by way of relief from, or by any
other person assuming responsibility for, any liabilities, contingent or
otherwise, which are not Indebtedness) received by the Company or such
Restricted Subsidiary is in the form of cash and (ii) an amount equal to 100%
of the Net Available Cash
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from such Asset Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be) (A) first, to the extent the Company elects
(or is required by the terms of any Senior Indebtedness or Indebtedness (other
than Preferred Stock) of a Restricted Subsidiary), to prepay, repay or
purchase Senior Indebtedness or such Indebtedness of a Restricted Subsidiary
(in each case other than Indebtedness owed to the Company or a Restricted
Subsidiary of the Company) within 365 days after the date of such Asset
Disposition; (B) second, to the extent of the balance of Net Available Cash
after application in accordance with clause (A), to the extent the Company or
such Restricted Subsidiary elects, to reinvest in Additional Assets (including
by means of an Investment in Additional Assets by a Restricted Subsidiary with
Net Available Cash received by the Company or another Restricted Subsidiary)
within 365 days from the date of such Asset Disposition or, if such
reinvestment in Additional Assets is a project authorized by the Board of
Directors that will take longer than 365 days to complete, the period of time
necessary to complete such project; (C) third, to the extent of the balance of
such Net Available Cash after application in accordance with clauses (A) and
(B) (such balance, the "Excess Proceeds"), to make an offer to purchase
Exchange Notes at a price in cash equal to (i) in the case of the Exchange
Senior Subordinated Notes, 100% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the purchase date and (ii) in the case of the
Exchange Senior Subordinated Discount Notes, prior to November 1, 2002, 100%
of the Accreted Value thereof on the purchase date and thereafter, 100% of the
Accreted Value thereof, plus accrued and unpaid interest, if any, thereon to
the purchase date, and (to the extent required by the terms thereof) any other
Senior Subordinated Indebtedness pursuant and subject to the conditions of the
agreements governing such other Indebtedness at a purchase price of 100% of
the principal amount thereof plus accrued and unpaid interest to the purchase
date and (D) fourth, to the extent of the balance of such Excess Proceeds
after application in accordance with clauses (A), (B) and (C) above, to fund
(to the extent consistent with any other applicable provision of the
Indenture) any general corporate purpose (including the repayment of
Subordinated Obligations); provided, however, that in connection with any
prepayment, repayment or purchase of Indebtedness pursuant to clause (A) or
(C) above, the Company or such Restricted Subsidiary will retire such
Indebtedness and will cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions of this
covenant, the Company and the Restricted Subsidiaries shall not be required to
apply any Net Available Cash in accordance with this covenant except to the
extent that the aggregate Net Available Cash from all Asset Dispositions that
is not applied in accordance with this covenant exceeds $10.0 million.
To the extent that the aggregate principal amount (or Accreted Value, as the
case may be) of the Exchange Notes and other Senior Subordinated Indebtedness
tendered pursuant to an offer to purchase made in accordance with clause (C)
above exceeds the amount of Excess Proceeds, the Trustee shall select the
Exchange Notes and Senior Subordinated Indebtedness to be purchased on a pro
rata basis, based on the aggregate principal amount (or Accreted Value, as
applicable) thereof surrendered in such offer to purchase. Upon completion of
such offer to purchase, the amount of Excess Proceeds shall be reset to zero.
For the purposes of this covenant, the following are deemed to be cash: (v)
Cash Equivalents, (w) the assumption of Indebtedness of the Company (other
than Disqualified Stock of the Company) or any Restricted Subsidiary and the
release of the Company or such Restricted Subsidiary from all liability on
such Indebtedness in connection with such Asset Disposition, (x) Indebtedness
of any Restricted Subsidiary that is no longer a Restricted Subsidiary as a
result of such Asset Disposition, to the extent that the Company and each
other Restricted Subsidiary is released from any Guarantee (or is the
beneficiary of any indemnity with respect thereto which is secured by any
letter of credit or cash equivalents) of such Indebtedness in connection with
such Asset Disposition, (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash, and (z) consideration
consisting of Indebtedness of the Company or any Restricted Subsidiary.
(b) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Exchange Notes pursuant to
this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
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Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter
into or conduct any transaction or series of transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service with any Affiliate of the Company (an "Affiliate Transaction")) on
terms (i) that taken as a whole are less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that could be obtained
at the time of such transaction in arm's-length dealings with a Person who is
not such an Affiliate and (ii) that, in the event such Affiliate Transaction
involves an aggregate amount in excess of $10.0 million, are not in writing
and have not been approved by a majority of the members of the Board of
Directors having no material personal financial interest in such Affiliate
Transaction or, in the event there are no such members, as to which the
Company has not obtained a Fairness Opinion (as hereinafter defined). In
addition, any transaction involving aggregate payments or other transfers by
the Company and its Restricted Subsidiaries in excess of $20.0 million will
also require an opinion (a "Fairness Opinion") from an independent investment
banking firm or appraiser, as appropriate, of national prominence, to the
effect that the terms of such transaction are no less favorable to the Company
or such Restricted Subsidiary, as the case may be, than those that could be
obtained at the time of such transaction in arm's-length dealings with a
Person who is not an Affiliate.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment permitted by the covenant described under "--Limitation on
Restricted Payments", any Permitted Investment, or any other transaction
specifically excluded from the definition of "Restricted Payment", (ii) the
performance of the Company's or Restricted Subsidiary's obligations under any
employment contract, collective bargaining agreement, agreement for the
provision of services, employee benefit plan, related trust agreement or any
other similar arrangement heretofore or hereafter entered into in the ordinary
course of business, (iii) payment of compensation, performance of
indemnification or contribution obligations, or any issuance, grant or award
of stock, options or other securities, to employees, officers or directors in
the ordinary course of business, (iv) any transaction between the Company and
a Restricted Subsidiary or between Restricted Subsidiaries, (v) the
Transactions and the incurrence and payment of all fees and expenses payable
in connection therewith as described in or contemplated by the Offering
Memorandum or Prospectus, as the case may be, (vi) any other transaction
arising out of agreements in existence on the Issue Date, including, without
limitation, the Stockholders Agreement and the Apollo Registration Rights
Agreement (each as described under "Certain Related Transactions and
Agreements"), and (vii) transactions with suppliers or other purchasers or
sellers of goods or services, in each case in the ordinary course of business
and on terms no less favorable to the Company or the Restricted Subsidiary, as
the case may be, than those that could be obtained at such time in arm's-
length dealings with a Person which is not an Affiliate.
Limitation on the Sale or Issuance of Preferred Stock of Restricted
Subsidiaries. The Company shall not sell any shares of Preferred Stock of a
Restricted Subsidiary, and shall not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell any shares of its Preferred Stock to
any Person (other than to the Company or a Restricted Subsidiary).
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, create or permit to exist
any Lien (other than Permitted Liens) on any of its property or assets
(including Capital Stock), whether owned on the date of the Indenture or
thereafter acquired, securing any Indebtedness that is not Senior Indebtedness
(the "Initial Lien"), unless contemporaneously therewith effective provision
is made to secure the obligations due under the Indenture and the Exchange
Notes or, in respect of Liens on any Restricted Subsidiary's property or
assets, equally and ratably with such obligation for so long as such
obligation is secured by such Initial Lien. Any such Lien thereby created in
favor of the Exchange Notes will be automatically and unconditionally released
and discharged upon (i) the release and discharge of the Initial Lien to which
it relates, or (ii) any sale, exchange or transfer to any Person not an
Affiliate of the Company of the property or assets secured by such Initial
Lien, or of all of the Capital Stock held by the Company or any Restricted
Subsidiary in, or all or substantially all the assets of, any Restricted
Subsidiary creating such Lien.
Limitations on Issuances of Guarantees of Indebtedness by Restricted
Subsidiaries. The Indenture will provide that the Company will not permit any
Restricted Subsidiary, directly or indirectly, to Guarantee the
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payment of any Senior Subordinated Indebtedness (or other Indebtedness ranking
junior thereto) of the Company or any of its Restricted Subsidiaries unless
such Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for the Guarantee of the payment of the
Exchange Notes by such Restricted Subsidiary, which Guarantee shall be senior
to or pari passu with such Restricted Subsidiary's Guarantee of such
Indebtedness. Notwithstanding the foregoing, any such Guarantee by a
Restricted Subsidiary of the Exchange Notes shall provide by its terms that it
shall be automatically and unconditionally released and discharged upon a sale
or other disposition, by way of merger or otherwise, to any Person not an
Affiliate of the Company, of the Company's stock in, or the assets of, such
Restricted Subsidiary, which sale or other disposition results in such
Restricted Subsidiary ceasing to be a Restricted Subsidiary and such sale or
other disposition is made in compliance with, and the net proceeds therefrom
are applied in accordance with, the applicable provisions of the Indenture.
The foregoing provisions will not be applicable to (i) Guarantees by
Restricted Subsidiaries of the Company's Indebtedness under the Senior Credit
Agreement and with respect to Hedging Obligations related to the Senior Credit
Agreement and (ii) Guarantees of Indebtedness of a Person by its subsidiaries
in effect prior to the time such Person is merged with or into or became a
Restricted Subsidiary, provided that such Guarantees do not extend to any
other Indebtedness of such Person or any other Person.
Reporting Requirements. As long as any of the Exchange Notes is outstanding,
the Company will file with the Commission the annual reports, quarterly
reports and other documents required to be filed with the Commission pursuant
to Sections 13 and 15 of the Exchange Act, whether or not the Company is then
obligated to file reports pursuant to such sections. The Company will be
required to file with the Trustee and provide to each holder of Exchange Notes
within 15 days after filing with the Commission (or if any such filing is not
permitted under the Exchange Act, 15 days after the Company would have been
required to make such filing) copies of such reports and documents.
MERGER AND CONSOLIDATION
The Company will not, in a single transaction or a series of related
transactions, consolidate with or merge with or into, or convey, transfer or
lease all or substantially all its assets to, any Person, unless: (i) the
resulting, surviving or transferee Person (the "Successor Company") will be a
Person organized and existing under the laws of the United States of America,
any State thereof or the District of Columbia and the Successor Company (if
not the Company) will expressly assume, by an indenture supplemental to the
Indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Company under the Exchange Notes and the
Indenture; (ii) immediately before and after giving effect to such transaction
or series of transactions no Default or Event of Default exists; (iii) the
Company or the Successor Company (if the Company is not the continuing obligor
under the Indenture) will, at the time of such transaction or series of
transactions and after giving pro forma effect thereto as if such transaction
or series of transactions had occurred at the beginning of the applicable
four-quarter period, be permitted to Incur at least an additional $1.00 of
Indebtedness pursuant to paragraph (a) of "--Limitation on Indebtedness"; and
(iv) the Company will have delivered to the Trustee an Officer's Certificate
and an Opinion of Counsel, each to the effect that such consolidation, merger
or transfer and such supplemental indenture (if any) comply with the
Indenture, provided that (x) in giving such opinion such counsel may rely on
such officer's certificate as to any matters of fact (including without
limitation as to compliance with the foregoing clauses (ii) and (iii)), and
(y) no Opinion of Counsel will be required for a consolidation, merger or
transfer described in the last paragraph of this covenant.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, and
thereafter the predecessor Company shall be relieved of all obligations and
covenants under the Indenture, except that, in the case of a conveyance,
transfer or lease of all or substantially all its assets, the predecessor
Company will not be released from the obligation to pay the principal of and
interest on the Exchange Notes.
Notwithstanding the foregoing clauses (ii) and (iii), (1) any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company and (2) the Company may merge
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with an Affiliate incorporated or organized for the purpose of reincorporating
or reorganizing the Company in another jurisdiction to realize tax or other
benefits.
DEFAULTS
An Event of Default is defined under the Indenture as (i) a default in any
payment of interest on any Exchange Note when due (whether or not such payment
is prohibited by the provisions described under "--Ranking" above), continued
for 30 days, (ii) a default in the payment of principal of any Exchange Note
when due at its Stated Maturity, upon optional redemption, upon required
repurchase, upon declaration or otherwise, whether or not such payment is
prohibited by the provisions described under "--Ranking" above, (iii) the
failure by the Company to comply with its obligations under the covenant
described under "--Merger and Consolidation" above, (iv) the failure by the
Company to comply for 30 days after written notice with any of its obligations
under the covenants described under "--Change of Control" or "--Certain
Covenants" above (in each case, other than a failure to purchase Exchange
Notes), (v) the failure by the Company to comply for 60 days after notice with
its other agreements contained in the Exchange Notes or the Indentures, (vi)
the failure by the Company or any Significant Subsidiary to pay any
Indebtedness within any applicable grace period after final maturity or the
acceleration of any such Indebtedness by the holders thereof because of a
default if the total amount of such Indebtedness unpaid or accelerated exceeds
$20.0 million (the "cross acceleration provision"), (vii) certain events of
bankruptcy, insolvency or reorganization of the Company or a Significant
Subsidiary (the "bankruptcy provisions"), (viii) the rendering of any judgment
or decree for the payment of money in an amount (net of any insurance or
indemnity payments actually received in respect thereof prior to or within 90
days from the entry thereof, or to be received in respect thereof in the event
any appeal thereof shall be unsuccessful) in excess of $20.0 million against
the Company or a Significant Subsidiary that is not discharged, bonded or
insured by a third Person if (A) an enforcement proceeding thereon is
commenced or (B) such judgment or decree remains outstanding for a period of
90 days following such judgment or decree and is not discharged, waived or
stayed (the "judgment default provision") or (ix) the failure of any Guarantee
of the Exchange Notes by a Restricted Subsidiary made pursuant to the covenant
described under "Certain Covenants--Limitations on Issuances of Guarantees of
Indebtedness by Restricted Subsidiaries" to be in full force and effect
(except as contemplated by the terms thereof or of the Indenture) or the
denial or disaffirmation in writing by any such guarantor of its obligations
under the Indenture or any such Guarantee if such Default continues for 10
days.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or
governmental body.
However, a Default under clause (iv) or (v) will not constitute an Event of
Default until the Trustee or the Holders of at least 25% of the aggregate
principal amount of the outstanding applicable Exchange Notes notify the
Company of the Default and the Company does not cure such Default within the
time specified in clauses (iv) and (v) hereof after receipt of such notice.
If an Event of Default (other than a Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company) occurs and is
continuing, the Trustee by notice to the Company, or the Holders of at least a
majority in principal amount of the outstanding applicable Exchange Notes by
notice to the Company and the Trustee, may declare the principal of and
accrued but unpaid interest on all of such Exchange Notes to be due and
payable. Upon such a declaration, such principal and interest will be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Exchange Notes will
become immediately due and payable without any declaration or other act on the
part of the Trustee or any Holders. Under certain circumstances, the Holders
of a majority in principal amount of the outstanding Exchange Notes may
rescind any such acceleration with respect to the Exchange Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under
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the Indenture at the request or direction of any of the Holders unless such
Holders have offered to the Trustee reasonable indemnity or security against
any loss, liability or expense. Except to enforce the right to receive payment
of principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Exchange Notes unless (i) such
Holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) Holders of at least 25% in principal amount of the
outstanding Exchange Notes have requested the Trustee to pursue the remedy,
(iii) such Holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense, (iv) the Trustee has not complied with
such request within 60 days after the receipt of the request and the offer of
security or indemnity and (v) the Holders of a majority in principal amount of
the applicable Exchange Notes have not given the Trustee a direction
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the Holders of a majority in principal amount of the Exchange
Notes outstanding are given the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
Holder or that would involve the Trustee in personal liability. Prior to
taking any action under the Indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses
and expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of, premium (if any) or interest on any Exchange Note,
the Trustee may withhold notice if and so long as a committee of its Trust
Officers in good faith determines that withholding notice is in the interests
of the Holders. In addition, the Company is required to deliver to the
Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred
during the previous year. The Company also is required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action
the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the applicable Exchange
Notes then outstanding and any past default or compliance with any provisions
may be waived with the consent of the Holders of a majority in principal
amount of the applicable Exchange Notes then outstanding. However, without the
consent of each Holder of an outstanding Exchange Note affected, no amendment
may, among other things, (i) reduce the principal amount of Exchange Notes
whose Holders must consent to an amendment, (ii) reduce the rate of or extend
the time for payment of interest on any Exchange Note or amend the rate of
accretion on the Exchange Senior Subordinated Discount Notes or amend the
definition of Accreted Value, (iii) reduce the principal amount of or Accreted
Value of or extend the Stated Maturity of any Exchange Note, (iv) reduce the
premium payable upon the redemption of any Exchange Note or change the time at
which any Exchange Note may be redeemed as described under "--Optional
Redemption" above, (v) make any Exchange Note payable in money other than that
stated in such Exchange Note, (vi) make any change to the subordination
provisions of the Indenture that materially adversely affects the rights of
any Holder, (vii) impair the right of any Holder to receive payment of
principal of and interest on such Holder's Exchange Notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on or
with respect to such Holder's Exchange Notes, or (viii) make any change in the
amendment provisions which require each Holder's consent or in the waiver
provisions.
Without the consent of any Holder, the Company, and the Trustee may amend
the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of the obligations of
the Company under the Indenture, to provide for uncertificated Exchange Notes
in addition to or in place of certificated Exchange Notes (provided, however,
that the uncertificated Exchange Notes are issued in registered form for
purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Exchange Notes are described in Section 163(f)(2)(B) of the
Code), to add Guarantees with respect to the Exchange Notes, to secure the
Exchange Notes, to add to the covenants of the Company for the benefit of the
Holders or to
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surrender any right or power conferred upon the Company, to make any change
that does not adversely affect the rights of any Holder or to comply with any
requirement of the SEC in connection with the qualification of the Indenture
under the TIA. However, no amendment may be made to the subordination
provisions of the Indenture that adversely affects the rights of any holder of
Senior Indebtedness then outstanding unless the holders of such Senior
Indebtedness (or any group or representative thereof authorized to give a
consent) consent to such change.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment. After an amendment
under the Indenture becomes effective, the Company is required to mail to the
applicable Holders a notice briefly describing such amendment. However, the
failure to give such notice to all such Holders, or any defect therein, will
not impair or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the Exchange
Notes and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register
the transfer or exchange of the Exchange Notes, to replace mutilated,
destroyed, lost or stolen Exchange Notes and to maintain a registrar and
paying agent in respect of the Exchange Notes. The Company at any time may
terminate its obligations under the covenants described under "--Certain
Covenants", the operation of the cross acceleration provision, the bankruptcy
provisions with respect to Subsidiaries and the judgment default provision
described under "--Defaults" above and the limitations contained in clauses
(iii) and (iv) under "--Merger and Consolidation" above ("covenant
defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Exchange Notes may not be
accelerated because of an Event of Default specified in clause (iv), (vi),
(vii), (but only with respect to certain bankruptcy events of a Significant
Subsidiary), (viii) or (ix) under "--Defaults" above or because of the failure
of the Company to comply with clause (iii) or (iv) under "--Merger and
Consolidation" above.
Either defeasance option may be exercised prior to any redemption date or to
the maturity date for the Exchange Notes. In order to exercise either
defeasance option, the Company must irrevocably deposit in trust (the
"defeasance trust") with the Trustee money or U.S. Government Obligations, or
a combination thereof, for the payment of principal of, and premium (if any)
and interest on, the applicable Exchange Notes to redemption or maturity, as
the case may be, and must comply with certain other conditions, including
delivery to the Trustee of an Opinion of Counsel to the effect that Holders of
the Exchange Notes will not recognize income, gain or loss for Federal income
tax purposes as a result of such deposit and defeasance and will be subject to
Federal income tax in the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law since the date of the Indenture).
CONCERNING THE TRUSTEE
IBJ Schroder Bank & Trust Company will serve as the Trustee for the Exchange
Senior Subordinated Notes and the Exchange Senior Subordinated Discount Notes.
The Trustee has been appointed by the Company as Registrar and Paying Agent
with regard to the Exchange Notes.
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<PAGE>
GOVERNING LAW
The Indenture provides that it and the Exchange Notes will be governed by,
and construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Accreted Value" with respect to any Exchange Senior Subordinated Discount
Note means, as of the date of issuance of the Exchange Senior Subordinated
Discount Notes, 59.557% of the stated principal amount at maturity of such
Exchange Senior Subordinated Discount Note, and as of any date after such date
of issuance and prior to November 1, 2002 as of which the Accreted Value is
being calculated (the "Calculation Date"), (a) if the Calculation Date is a
May 1 or November 1 interest payment date, the percentage of the stated
principal amount of such Exchange Senior Subordinated Discount Note as of such
date as shown in the table below or (b) if the Calculation Date is not a May 1
or a November 1 interest payment date, an amount equal to the sum of (i) the
Accreted Value of such Exchange Senior Subordinated Discount Note (as shown in
the table below) as of the May 1 or November 1, as the case may be,
immediately preceding the Calculation Date plus (ii) the accrued amortization
of the original issue discount from (but excluding) such immediately preceding
May 1 or November 1 to (and including) the Calculation Date, calculated as the
product of (x) 5.285% of the Accreted Value of such Exchange Senior
Subordinated Discount Note as of such immediately preceding May 1 or November
1 and (y) a fraction, the numerator of which is the number of days from (but
excluding) such immediately preceding May 1 or November 1 to (and including)
the Calculation Date (assuming a 360-day year of twelve 30-day months), and
the denominator of which is 180. The Accreted Value of each Exchange Senior
Subordinated Discount Note as of each May 1 and November 1 prior to November
1, 2002 shall be an amount in dollars equal to a percentage of the stated
principal amount of such Exchange Senior Subordinated Discount Note as set
forth below:
<TABLE>
<CAPTION>
MAY 1 NOVEMBER 1
PAYMENT DATE PAYMENT DATE
------------ ------------
<S> <C> <C>
1998............................................... 62.740% 66.055%
1999............................................... 69.547% 73.222%
2000............................................... 77.092% 81.166%
2001............................................... 85.456% 89.972%
2002............................................... 94.727% 99.733%
</TABLE>
On and after November 1, 2002, the Accreted Value of each Exchange Senior
Subordinated Discount Note shall be equal to 100% of the stated principal
amount thereof.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) to be used by the Company or a Restricted
Subsidiary in a Related Business; (ii) the Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary; (iii) Capital Stock of
any Person that at such time is a Restricted Subsidiary, acquired from a third
party; provided, however, that, in the case of clauses (ii) and (iii), such
Restricted Subsidiary is primarily engaged in a Related Business; or (iv)
Capital Stock or Indebtedness of any Person which is primarily engaged in a
Related Business; provided, however, for purposes of the covenant described
under "--Certain Covenants--Limitation on Sales of Assets," (A) the aggregate
amount of Net Available Cash permitted to be invested pursuant to this clause
(iv) shall not exceed at any one time outstanding 5% of Consolidated Tangible
Assets and (B) the aggregate amount invested pursuant to this clause (iv) and
clause (vi) of paragraph (b) of the covenant described under "--Certain
Covenants--Limitation on Restricted Payments" shall not exceed at any one time
outstanding 10% of Consolidated Tangible Assets.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and
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the terms "controlling" and "controlled" have meanings correlative to the
foregoing. The Chase Manhattan Bank and its Affiliates shall not be deemed an
Affiliate of the Company.
"Apollo" means Apollo Management, L.P., Apollo Advisors, L.P., Lion
Advisors, L.P. or any entity controlled thereby or any of the partners and
associates thereof.
"Apollo Stockholders Agreement" means the Stockholders Agreement to be dated
as of the Issue Date among the Company and the Investors.
"Asset Disposition" means any sale, lease, transfer or other disposition of
shares of Capital Stock of a Restricted Subsidiary (other than directors'
qualifying shares), property or other assets (each referred to for the
purposes of this definition as a "disposition") by the Company or any of its
Restricted Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction) other than (i) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Restricted Subsidiary, (ii) a disposition of inventory,
equipment, obsolete assets or surplus personal property in the ordinary course
of business, (iii) the sale of Temporary Cash Investments or Cash Equivalents
in the ordinary course of business, (iv) a transaction or a series of related
transactions in which either (x) the fair market value of the assets disposed
of, in the aggregate, does not exceed 2.5% of the Consolidated Tangible Assets
of the Company or (y) the EBITDA related to such assets does not, in the
aggregate, exceed 2.5% of the Company's EBITDA, (v) the sale or discount (with
or without recourse, and on commercially reasonable terms) of accounts
receivable or notes receivable arising in the ordinary course of business, or
the conversion or exchange of accounts receivable for notes receivable, (vi)
the licensing of intellectual property in the ordinary course of business,
(vii) a Healthcare Facility Swap, (viii) for purposes of the covenant
described under "--Certain Covenants--Limitation on Sales of Assets" only, a
disposition subject to the covenant described under "--Certain Covenants--
Limitation on Restricted Payments" or (ix) a disposition of property or assets
that is governed by the provisions described under "--Merger and
Consolidation."
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as of
the time of determination, the present value (discounted at the interest rate
assumed in making calculations in accordance with FAS 13) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Indebtedness or Preferred
Stock multiplied by the amount of such payment by (ii) the sum of all such
payments.
"Bank Indebtedness" means any and all amounts, whether outstanding on the
Issue Date or thereafter incurred, payable under or in respect of the Senior
Credit Facility, including, without limitation, principal, premium (if any),
interest (including interest accruing on or after the filing of any petition
in bankruptcy or for reorganization relating to the Company or any Restricted
Subsidiary whether or not a claim for postfiling interest is allowed in such
proceedings), fees, charges, expenses, reimbursement obligations, guarantees,
other monetary obligations of any nature and all other amounts payable
thereunder or in respect thereof.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banking institutions are authorized or required by law to
close in New York City.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
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"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented
by such obligation shall be the capitalized amount of such obligation
determined in accordance with GAAP; and the Stated Maturity thereof shall be
the date of the last payment of rent or any other amount due under such lease.
"Cash Equivalents" means any of the following: (a) securities issued or
fully guaranteed or insured by the United States Government or any agency or
instrumentality thereof, (b) time deposits, certificates of deposit or
bankers' acceptances of (i) any lender under the Senior Credit Agreement or
(ii) any commercial bank having capital and surplus in excess of $500,000,000
and the commercial paper of the holding company of which is rated at least A-2
or the equivalent thereof by S&P or at least P-2 or the equivalent thereof by
Moody's (or if at such time neither is issuing ratings, then a comparable
rating of another nationally recognized rating agency), (c) commercial paper
rated at least A-1 or the equivalent thereof by S&P or at least P-1 or the
equivalent thereof by Moody's (or if at such time neither is issuing ratings,
then a comparable rating of another nationally recognized rating agency) and
(d) investments in money market funds complying with the risk limiting
conditions of Rule 2a-7 or any successor rule of the Securities and Exchange
Commission under the Investment Company Act.
"Chase" means The Chase Manhattan Bank.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means Paragon Health Network, Inc.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA of the Company and its Restricted
Subsidiaries for the period of the most recent four consecutive fiscal
quarters ending prior to the date of such determination for which consolidated
financial statements of the Company are available to (ii) Consolidated
Interest Expense for such four fiscal quarters (in each of clauses (i) and
(ii), determined, for each fiscal quarter (or portion thereof) of the four
fiscal quarters ending prior to the Issue Date, on a pro forma basis to give
effect to the Transactions as if they had occurred at the beginning of such
four-quarter period); provided, however, that: (1) if the Company or any
Restricted Subsidiary (x) has Incurred any Indebtedness since the beginning of
such period that remains outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Incurrence of Indebtedness, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving effect on a pro forma
basis to such Indebtedness as if such Indebtedness had been Incurred on the
first day of such period (except that in making such computation, the amount
of Indebtedness under any revolving credit facility outstanding on the date of
such calculation shall be computed based on (A) the average daily balance of
such Indebtedness during such four fiscal quarters or such shorter period for
which such facility was outstanding or (B) if such facility was created after
the end of such four fiscal quarters, the average daily balance of such
Indebtedness during the period from the date of creation of such facility to
the date of such calculation) and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of
such new Indebtedness as if such discharge had occurred on the first day of
such period, or (y) has repaid, repurchased, defeased or otherwise discharged
any Indebtedness since the beginning of the period that is no longer
outstanding on such date of determination, or if the transaction giving rise
to the need to calculate the Consolidated Coverage Ratio involves a discharge
of Indebtedness (in each case other than Indebtedness Incurred under any
revolving credit facility unless such Indebtedness has been permanently
repaid), EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such discharge of such
Indebtedness, including with the proceeds of such new Indebtedness, as if such
discharge had occurred on the first day of such period; (2) if since the
beginning of such period the Company or any Restricted Subsidiary shall have
made any Asset Disposition of any company or any business or any group of
assets constituting an operating unit of a business, the EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive)
directly attributable to the assets that are the subject of such Asset
Disposition for such period or increased by an amount equal to the EBITDA (if
negative) directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated
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Interest Expense directly attributable to any Indebtedness of the Company or
any Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such period (and,
if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness of
such Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness after such
sale); (3) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Person that thereby becomes a Restricted Subsidiary, or otherwise acquired any
company or any business or any group of assets constituting an operating unit
of a business, including any such acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto (including the Incurrence of any
Indebtedness and including the pro forma expenses and cost reductions
calculated on a basis consistent with Regulation S-X of the Securities Act) as
if such Investment or acquisition occurred on the first day of such period;
and (4) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company or any
Restricted Subsidiary since the beginning of such period) shall have made any
Asset Disposition or any Investment or acquisition of assets that would have
required an adjustment pursuant to clause (2) or (3) above if made by the
Company or a Restricted Subsidiary during such period, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto as if such Asset Disposition, Investment or acquisition of
assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to
an Asset Disposition, Investment or acquisition of assets, or any transaction
governed by the provisions described under "--Merger and Consolidation", or
the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred or
repaid, repurchased, defeased or otherwise discharged in connection therewith,
the pro forma calculations in respect thereof shall be as determined in good
faith by a responsible financial or accounting officer of the Company, based
on reasonable assumptions. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest expense on such
Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term as at the date of determination
in excess of 12 months). If any Indebtedness bears, at the option of the
Company or a Restricted Subsidiary, a fixed or floating rate of interest and
is being given pro forma effect, the interest expense on such Indebtedness
shall be computed by applying, at the option of the Company or such Restricted
Subsidiary, either a fixed or floating rate. If any Indebtedness which is
being given pro forma effect was Incurred under a revolving credit facility,
the interest expense on such Indebtedness shall be computed based upon the
average daily balance of such Indebtedness during the applicable period.
"Consolidated Interest Expense" means, as to any Person, for any period, the
total consolidated interest expense of such Person and its Subsidiaries
determined in accordance with GAAP, minus, to the extent included in such
interest expense, amortization or write-off of financing costs and cash
dividends paid to the Company with respect to its investment in Health and
Retirement Properties Trust, plus, to the extent incurred by such Person and
its Subsidiaries in such period but not included in such interest expense,
without duplication, (i) interest expense attributable to Capitalized Lease
Obligations and the interest component of rent expense associated with
Attributable Debt in respect of the relevant lease giving rise thereto,
determined as if such lease were a capitalized lease, in accordance with GAAP,
(ii) amortization of debt discount, (iii) interest in respect of indebtedness
of any other Person that has been Guaranteed by such Person or any Subsidiary,
but only to the extent that such interest is actually paid by such Person or
any Restricted Subsidiary, (iv) non-cash interest expense, (v) net costs
associated with Hedging Obligations, (vi) the product of (A) mandatory
Preferred Stock cash dividends in respect of all Preferred Stock of
Subsidiaries of such Person and Disqualified Stock of such Person held by
Persons other than such Person or a Subsidiary multiplied by (B) a fraction,
the numerator of which is one and the denominator of which is one minus the
then current combined federal, state and local statutory tax rate of such
Person, expressed as a decimal, in each case, determined on a consolidated
basis in accordance with GAAP; and (vii) the cash contributions to any
employee stock ownership plan or similar trust
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to the extent such contributions are used by such plan or trust to pay
interest to any Person (other than the referent Person or any Subsidiary
thereof) in connection with Indebtedness Incurred by such plan or trust;
provided, however, that as to the Company, there shall be excluded therefrom
any such interest expense of any Unrestricted Subsidiary to the extent the
related Indebtedness is not Guaranteed or paid by the Company or any
Restricted Subsidiary. For purposes of the foregoing, gross interest expense
shall be determined after giving effect to any net payments made or received
by such Person and its Subsidiaries with respect to Interest Rate Agreements.
"Consolidated Net Income" means, as to any Person, for any period, the
consolidated net income (loss) of such Person and its Subsidiaries, determined
in accordance with GAAP; provided, however, that there shall not be included
in such Consolidated Net Income: (i) any net income (loss) of any Person if
such Person is not (as to the Company) a Restricted Subsidiary and (as to any
other Person) an unconsolidated Person, except that (A) subject to the
limitations contained in clause (iv) below, the referent Person's equity in
the net income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the referent Person or a
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution to a Subsidiary, to the limitations contained
in clause (iii) below) and (B) the net loss of such Person shall be included
to the extent of the aggregate Investment of the referent Person or any of its
Subsidiaries in such Person; (ii) any net income (loss) of any Person acquired
in a pooling of interests transaction for any period prior to the date of such
acquisition; (iii) any net income (loss) of any Restricted Subsidiary (as to
the Company) or of any Subsidiary (as to any other Person) if such Subsidiary
is subject to restrictions, directly or indirectly, on the payment of
dividends or the making of distributions by such Subsidiary, directly or
indirectly, to the Company, except that (A) subject to the limitations
contained in (iv) below, such Person's equity in the net income of any such
Subsidiary for such period shall be included in Consolidated Net Income up to
the aggregate amount of cash that could have been distributed by such
Subsidiary during such period to such Person or another Subsidiary as a
dividend (subject, in the case of a dividend that could have been made to
another Restricted Subsidiary, to the limitation contained in this clause) and
(B) the net loss of such Subsidiary shall be included in determining
Consolidated Net Income; (iv) any charges for costs and expenses associated
with the Mergers; (v) any extraordinary gain or loss; (vi) the cumulative
effect of a change in accounting principles; and (vii) non-recurring items
related to (A) costs and expenses incurred in connection with acquisitions and
dispositions of assets and (B) costs related to the discharge of legal
judgments or settlement costs related to the settlement of a bona fide dispute
between the Company and a third party.
"Consolidated Tangible Assets" means, as of any date of determination, the
total assets, less goodwill and other intangibles (other than patents,
trademarks, copyrights, licenses and other intellectual property), shown on
the balance sheet of the Company and its Restricted Subsidiaries as of the
most recent date for which such a balance sheet is available, determined on a
consolidated basis in accordance with GAAP, less all write-ups (other than
write-ups in connection with acquisitions) subsequent to the date of the
Indenture in the book value of any asset (except any such intangible assets)
owned by the Company or any of its Restricted Subsidiaries.
"Consolidation" means the consolidation of the accounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP;
provided, however, that "Consolidation" will not include consolidation of the
accounts of any Unrestricted Subsidiary, but the interest of the Company in
any Unrestricted Subsidiary will be accounted for as an Investment. The term
"Consolidated" has a correlative meaning.
"Currency Agreement" means, in respect of a Person, any foreign exchange
contract, currency swap agreement or other similar agreement or arrangement
(including derivative agreements or arrangements) as to which such Person is a
party or a beneficiary.
"Default" means any event or condition that is, or after notice or passage
of time or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness which, at the date of determination, has an
aggregate principal amount of, or under which, at the date of
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determination, the holders thereof are committed to lend up to, at least $25.0
million and is specifically designated by the Company in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable or exercisable) or upon the
happening of any event (i) matures or is mandatorily redeemable pursuant to a
sinking fund obligation or otherwise, (ii) is convertible or exchangeable for
Indebtedness or Disqualified Stock or (iii) is redeemable at the option of the
holder thereof, in whole or in part, in each case on or prior to the 91st day
after the Stated Maturity of the Exchange Notes.
"EBITDA" means, as to any Person, for any period, the Consolidated Net
Income for such period, plus the following to the extent included in
calculating such Consolidated Net Income: (i) income tax expense,
(ii) Consolidated Interest Expense, (iii) depreciation expense, (iv)
amortization of intangibles, (v) other non-cash charges or non-cash losses and
(vi) the rent expense associated with Sale/Leaseback Transactions to the
extent not included in Consolidated Interest Expense and minus any gain (but
not loss) realized upon the sale or other disposition of any asset of the
Company or its Restricted Subsidiaries (including pursuant to any
Sale/Leaseback Transaction) that is not sold or otherwise disposed of in the
ordinary course of business.
"Equity Offering" means a primary public or private offering or sale of
common stock of the Company, the proceeds of which shall be at least $25.0
million.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect on the Issue Date (for purposes of the definitions of
the terms "Consolidated Coverage Ratio," "Consolidated Interest Expense,"
"Consolidated Net Income" and "EBITDA," all defined terms in the Indenture to
the extent used in or relating to any of the foregoing definitions, and all
ratios and computations based on any of the foregoing definitions) and as in
effect from time to time (for all other purposes of the Indenture), including
those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or
in such other statements by such other entity as approved by a significant
segment of the accounting profession. All ratios and computations based on
GAAP contained in the Indenture shall be computed in conformity with GAAP.
"GranCare Merger" means the merger of LCA Acquisition Sub, Inc. with and
into GranCare, Inc.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other nonfinancial
obligation of any other Person, including any such obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or
such other obligation of such other Person (whether arising by virtue of
partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection, or deposits made,
in the ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Healthcare Facility" means (i) a hospital, outpatient clinic, nursing
center, assisted or independent living community, long-term care facility or
any other facility that is used or useful in the provision of healthcare or
custodial care services, (ii) any healthcare business affiliated or associated
with a Healthcare Facility described in clause (i) of this definition or (iii)
any business related or ancillary to the provision of healthcare services or
the
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operation of a Healthcare Facility, including, but not limited to, contract
therapy services such as rehabilitation, pharmacy, respiratory, speech and
occupational therapy services, as well as hospice and home care services.
"Healthcare Facility Swap" means an exchange of assets (including Capital
Stock of a Subsidiary or the Company) by the Company or a Restricted
Subsidiary for one or more Healthcare Facilities or for Capital Stock,
Indebtedness or other securities (including cash, provided, however, that any
cash received must be applied in accordance with the covenant described under
"--Certain Covenants--Limitation on Sale of Assets" as if such cash were Net
Available Cash) of any Person owning or operating one or more Healthcare
Facilities and primarily engaged in a Related Business.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name an Exchange Note is
registered in the Register.
"HRPT Agreements" means collectively, (i) the Restructure and Asset Exchange
Agreement to be dated on or about November 4, 1997 among Health and Retirement
Properties Trust ("HRPT"), GranCare, Inc., AMS Properties, Inc. and GCI Health
Care Centers, Inc., (ii) the Master Lease Document General Terms and
Conditions dated as of December 28, 1990, and related facility leases, as
amended, between HRPT and AMS Properties, Inc., (iii) the Master Lease
Document General Terms and Conditions dated as of June 30, 1992, and the
related facility leases, as amended, between HRPT and GCI Health Care Centers,
Inc., and (iv) all documents and agreements contemplated therein and executed
in connection therewith.
"Incur" means issue, assume, enter into any Guarantee of, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital Stock
of a Person existing at the time such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be
Incurred by such Subsidiary at the time it becomes a Subsidiary. Any
Indebtedness issued at a discount (including Indebtedness on which interest is
payable through the issuance of additional Indebtedness) shall be deemed
incurred at the time of original issuance of the Indebtedness at the initial
accreted amount thereof.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication): (i) the principal of indebtedness of such
Person for borrowed money, (ii) the principal of obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments, (iii) all
reimbursement obligations of such Person (including reimbursement obligations)
in respect of letters of credit or other similar instruments (the amount of
such obligations being equal at any time to the aggregate then undrawn and
unexpired amount of such letters of credit or other instruments plus the
aggregate amount of drawings thereunder that have not then been reimbursed),
(iv) all obligations of such Person to pay the deferred and unpaid purchase
price of property or services (except Trade Payables), which purchase price is
due more than one year after the date of placing such property in final
service or taking final delivery and title thereto or the completion of such
services, (v) all Capitalized Lease Obligations and Attributable Debt of such
Person, (vi) the redemption, repayment or other repurchase amount of such
Person with respect to any Disqualified Stock or (if such Person is a
Subsidiary of the Company) any Preferred Stock of such Subsidiary, but
excluding, in each case, any accrued dividends (the amount of such obligation
to be equal at any time to the maximum fixed involuntary redemption, repayment
or repurchase price for such Capital Stock, or if such Capital Stock has no
fixed price, to the involuntary redemption, repayment or repurchase price
therefor calculated in accordance with the terms thereof as if then redeemed,
repaid or repurchased, and if such price is based upon or measured by the fair
market value of such Capital Stock, such fair market value shall be as
determined in good faith by the Board of Directors or the board of directors
of the issuer of such Capital Stock), (vii) all Indebtedness of other Persons
secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided, however, that the amount of
Indebtedness of such Person shall be the lesser of (A) the fair market value
of such asset at such date of determination and (B) the amount of such
Indebtedness of such other Persons, (viii) all Indebtedness of other Persons
to the extent Guaranteed by such Person, and (ix) to the extent not otherwise
included in this definition,
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net Hedging Obligations of such Person (such obligations to be equal at any
time to the termination value of such agreement or arrangement giving rise to
such Hedging Obligation that would be payable by such Person at such time).
Notwithstanding the preceding sentence, obligations arising under (i) the
Master Lease Agreement dated October 10, 1996 between FBTC Leasing Corp. and
Living Centers Holding Company and the related agreements (as amended) and
(ii) the HRPT Agreements, in each case without giving effect to any amendment
or other modification thereto relating to the total amount of such
obligations, shall not be deemed Indebtedness for the purposes of the
Indenture.
The amount of Indebtedness of any Person at any date shall be determined as
set forth above or otherwise provided in the Indenture, or otherwise in
accordance with GAAP.
"Interest Rate Agreement" means, with respect to any Person, any interest
rate protection agreement, interest rate future agreement, interest rate
option agreement, interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate hedge agreement or other similar
agreement or arrangement (including derivative agreements or arrangements) as
to which such Person is party or a beneficiary; provided, however, any such
agreements entered into in connection with the Notes shall not be included.
"Investment" in any Person by any other Person means any direct or indirect
advance, loan or other extension of credit (other than to customers,
directors, officers or employees of any Person in the ordinary course of
business) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by, such Person. If the
Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Capital Stock of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such entity is no longer a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Capital Stock of such Subsidiary not
sold or disposed of.
"Investors" means Apollo, Chase Venture Partners L.P., Healthcare Equity
Partners L.P., Healthcare Equity QP Partners L.P., Walnut Growth Partners,
L.P., Keith B. Pitts, Key Capital Corporation and Key Equity Partners 97.
"Issue Date" means November 4, 1997, the date on which the Existing Notes
were originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Mergers" means the Recapitalization Merger and the GranCare Merger.
"Moody's" means Moody's Investors Service, Inc., and its successors.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and
when received, but excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other noncash form) therefrom, in each case net
of (i) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred (including, without limitation, fees and expenses of
legal counsel, accountants and financial advisors), and all federal, state,
provincial, foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness that is secured by any assets subject to
such Asset Disposition, in accordance with the terms of any Lien upon such
assets, or that must by its terms, or in order to obtain a necessary consent
to such Asset Disposition, or by applicable law be repaid out of the proceeds
from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition or to any other Person (other
than
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the Company or a Restricted Subsidiary) owning a beneficial interest in the
assets disposed of in such Asset Disposition and (iv) appropriate amounts to
be provided by the seller as a reserve, in accordance with GAAP, against any
liabilities associated with the assets disposed of in such Asset Disposition
and retained by the Company or any Restricted Subsidiary after such Asset
Disposition.
"Net Cash Proceeds" means, with respect to any issuance or sale of any
securities of the Company or any Subsidiary by the Company or any Subsidiary,
or any capital contribution, the cash proceeds of such issuance, sale or
contribution net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees actually incurred in connection with such issuance, sale or
contribution and net of taxes paid or payable as a result thereof.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any guarantee or credit support of
any kind (including any undertaking, guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or
indirectly liable (as a guarantor or otherwise) and (ii) no default with
respect to which (including any rights that the holders thereof may have to
take enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable prior
to its stated maturity.
"Officer" means the Chief Executive Officer, President, Chief Financial
Officer, any Vice President, Controller, Secretary or Treasurer of the
Company.
"Officer's Certificate" means a certificate signed by one Officer.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Business Venture" means a Person other than a Restricted
Subsidiary (i) that is engaged in a Related Business; (ii) no debt or equity
interest (except any director's qualifying shares) of which is or will be
directly or indirectly held by (A) an officer or director of either the
Company or any Restricted Subsidiary or (B) any other Affiliate of the
Company; and (iii) unless the Investment by the Company or a Restricted
Subsidiary is less than $5.0 million, the Company and/or any Restricted
Subsidiary has at least a 35% ownership interest in each such Person;
provided, however, that in no event shall the aggregate amount of all
Investments by the Company and all Restricted Subsidiaries in Permitted
Business Ventures wherein the ownership interest of the Company or such
Restricted Subsidiary is less than 35% exceed $20 million in the aggregate.
"Permitted Holders" means the Investors, their respective Affiliates and
successors or assigns and any Person acting in the capacity of an underwriter
in connection with a public or private offering of the Company's Capital
Stock.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in any of the following: (i) a Restricted Subsidiary, the Company
or a Person that will, upon the making of such Investment, become a Restricted
Subsidiary; (ii) another Person, if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary; (iii)
Temporary Cash Investments or Cash Equivalents; (iv) receivables owing to the
Company or any Restricted Subsidiary, if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary
deems reasonable under the circumstances; (v) securities or other Investments
received in connection with any Healthcare Facility Swaps or as consideration
in sales or other dispositions of property or assets made in compliance with
the covenant described under "Certain Covenants--Limitation on Sales of
Assets"; (vi) securities or other Investments received in settlement of debts
created in the ordinary course of business and owing to the Company or any
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Restricted Subsidiary, or as a result of foreclosure, perfection or
enforcement of any Lien, or in satisfaction of judgments, including in
connection with any bankruptcy proceeding or other reorganization of another
Person; (vii) Investments in existence or made pursuant to legally binding
written commitments in existence on the Issue Date; (viii) Currency
Agreements, Interest Rate Agreements and related Hedging Obligations, which
obligations are Incurred in compliance with the covenant described under "--
Certain Covenants--Limitation on Indebtedness"; (ix) pledges or deposits (A)
with respect to leases or utilities provided to third parties in the ordinary
course of business or (B) otherwise described in the definition of "Permitted
Liens"; (x) Investments made on commercially reasonable terms by wholly owned
insurance subsidiaries of the Company that are permitted pursuant to federal,
state or local regulations governing the investment activities of such Persons
and (xi) other Investments in an aggregate amount outstanding at any time not
to exceed $10.0 million.
"Permitted Investor" means Apollo Management, L.P. and any Person directly
or indirectly controlling, controlled by or under common control with Apollo
Management, L.P., or any other Person organized by any of the foregoing
primarily for the purpose of making debt or equity investments in one or more
companies.
"Permitted Liens" means: (i) Liens for taxes, assessments or other
governmental charges not yet delinquent or the nonpayment of which in the
aggregate would not be reasonably expected to have a material adverse effect
on the Company and its Restricted Subsidiaries, or that are being contested in
good faith and by appropriate proceedings if adequate reserves with respect
thereto are maintained on the books of the Company or such Subsidiary, as the
case may be, in accordance with GAAP; (ii) carriers', warehousemen's,
mechanics', landlords', materialmen's, repairmen's or other like Liens arising
in the ordinary course of business in respect of obligations that are not
overdue for a period of more than 60 days or that are bonded or that are being
contested in good faith and by appropriate proceedings; (iii) pledges,
deposits or liens in connection with workers' compensation, unemployment
insurance and other social security legislation and/or similar legislation or
other insurance-related obligations (including, without limitation, pledges or
deposits securing liability to insurance carriers under insurance or self-
insurance arrangements); (iv) pledges, deposits or liens to secure the
performance of bids, tenders, trade, government or other contracts (other than
for borrowed money), obligations for or under or in respect of utilities,
leases, licenses, statutory obligations, surety, judgment and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business; (v) easements (including reciprocal easement
agreements), rights-of-way, building, zoning and similar restrictions, utility
agreements, covenants, reservations, restrictions, encroachments, changes, and
other similar encumbrances or title defects incurred, or leases or subleases
granted to others, in the ordinary course of business, which do not in the
aggregate materially interfere with the ordinary conduct of the business of
the Company and its Subsidiaries, taken as a whole; (vi) Liens existing on, or
provided for under written arrangements existing on, the Issue Date, or (in
the case of any such Liens securing Indebtedness of the Company or any of its
Subsidiaries existing or arising under written arrangements existing on the
Issue Date) securing any Refinancing Indebtedness in respect of such
Indebtedness so long as the Lien securing such Refinancing Indebtedness is
limited to all or part of the same property or assets (plus improvements,
accessions, proceeds or dividends or distributions in respect thereof) that
secured (or under such written arrangements could secure) the original
Indebtedness; (vii) Liens securing Hedging Obligations Incurred in compliance
with the covenant described under "--Certain Covenants--Limitation on
Indebtedness"; (viii) Liens arising out of judgments, decrees, orders or
awards in respect of which the Company shall in good faith be prosecuting an
appeal or proceedings for review which appeal or proceedings shall not have
been finally terminated, or the period within which such appeal or proceedings
may be initiated shall not have expired; (ix) Liens securing (A) Indebtedness
incurred in compliance with clause (b)(i), (b)(iv) or (b)(v) of the covenant
described under "--Certain Covenants--Limitation on Indebtedness", or clause
(b)(iii) thereof (other than Refinancing Indebtedness Incurred in respect of
Indebtedness described in paragraph (a) thereof) or (B) Bank Indebtedness; (x)
Liens on properties or assets of the Company securing Senior Indebtedness;
(xi) Liens existing on property or assets of a Person at the time such Person
becomes a Subsidiary of the Company (or at the time the Company or a
Restricted Subsidiary acquires such property or assets); provided, however,
that such Liens are not created in connection with, or in contemplation of,
such other Person becoming such a Subsidiary (or such acquisition of such
property or assets), and that such Liens are limited to all or part of the
same property or assets (plus improvements, accessions, proceeds or dividends
or distributions
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in respect thereof) that secured (or, under the written arrangements under
which such Liens arose, could secure) the obligations to which such Liens
relate; (xii) Liens on Capital Stock of an Unrestricted Subsidiary that secure
Indebtedness or other obligations of such Unrestricted Subsidiary; (xiii)
Liens securing the Exchange Notes; and (xiv) Liens securing Refinancing
Indebtedness Incurred in respect of any Indebtedness secured by, or securing
any refinancing, refunding, extension, renewal or replacement (in whole or in
part) of any other obligation secured by, any other Permitted Liens, provided
that any such new Lien is limited to all or part of the same property or
assets (plus improvements, accessions, proceeds or dividends or distributions
in respect thereof) that secured (or, under the written arrangements under
which the original Lien arose, could secure) the obligations to which such
Liens relate.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" as applied to the Capital Stock of any corporation means
Capital Stock of any class or classes (however designated) that is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Purchase Money Obligations" means any Indebtedness of the Company or any
Restricted Subsidiary incurred to finance the acquisition, construction or
capital improvement of any property or business (including Indebtedness
incurred within 90 days following such acquisition or construction), including
Indebtedness of a Person existing at the time such Person becomes a Restricted
Subsidiary or assumed by the Company or a Restricted Subsidiary in connection
with the acquisition of assets from such Person; provided, however, that any
Lien on such Indebtedness shall not extend to any property other than the
property so acquired or constructed.
"Recapitalization Merger" means the merger of Apollo LCA Acquisition Corp.
with and into Living Centers of America, Inc. (renamed Paragon Health Network,
Inc.).
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any
defeasance or discharge mechanism) (collectively, "refinances" and
"refinanced" shall have a correlative meaning) any Indebtedness existing on
the date of the Indenture or Incurred in compliance with the Indenture
(including Indebtedness of the Company that refinances Indebtedness of any
Restricted Subsidiary (to the extent permitted in the Indenture) and
Indebtedness of any Restricted Subsidiary that refinances Indebtedness of
another Restricted Subsidiary) including Indebtedness that refinances
Refinancing Indebtedness; provided, however, that (i) the Refinancing
Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the
Indebtedness being refinanced, (ii) the Refinancing Indebtedness has an
Average Life at the time such Refinancing Indebtedness is Incurred that is
equal to or greater than the Average Life of the Indebtedness being refinanced
and (iii) such Refinancing Indebtedness is Incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or if issued
with original issue discount, the aggregate accreted value) then outstanding
of the Indebtedness being refinanced, plus fees, underwriting discounts,
premiums and other costs and expenses incurred in connection with such
Refinancing Indebtedness; provided further, however, that Refinancing
Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary
that refinances Indebtedness of the Company or (y) Indebtedness of the Company
or a Restricted Subsidiary that refinances Indebtedness of an Unrestricted
Subsidiary.
"Related Business" means those businesses in which the Company or any of its
Subsidiaries is engaged on the date of the Indenture or that are reasonably
related or incidental thereto, including any aspect of the healthcare or
assisted living industry.
"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
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"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Revolving Credit Facility" means the revolving credit facility under the
Senior Credit Facility (which may include any swing line or letter of credit
facility or subfacility thereunder).
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired by the Company or a Restricted Subsidiary whereby
the Company or such Restricted Subsidiary transfers such property to a Person
and the Company or such Restricted Subsidiary leases it from such Person,
other than leases (i) between the Company and a Restricted Subsidiary or (ii)
required to be classified and accounted for as capitalized leases for
financial reporting purposes in accordance with GAAP.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Credit Agreement" means the credit agreement dated as of November 4,
1997, among the Company, the banks and other financial institutions party
thereto from time to time, and Chase, as administrative agent, as such
agreement may be assumed by any successor in interest, and as such agreement
may be amended, supplemented, waived or otherwise modified from time to time,
or refunded, refinanced, restructured, replaced, renewed, repaid, increased or
extended from time to time (whether in whole or in part, whether with the
original agent and lenders or other agents and lenders or otherwise, and
whether provided under the original Senior Credit Agreement or otherwise).
"Senior Credit Facility" means the collective reference to the Senior Credit
Agreement, any Loan Documents (as defined therein), any notes and letters of
credit issued pursuant thereto and any guarantee and collateral agreement,
patent and trademark security agreement, mortgages, letter of credit
applications and other security agreements and collateral documents, and other
instruments and documents, executed and delivered pursuant to or in connection
with any of the foregoing, in each case as the same may be amended,
supplemented, waived or otherwise modified from time to time, or refunded,
refinanced, restructured, replaced, renewed, repaid, increased or extended
from time to time (whether in whole or in part, whether with the original
agent and lenders or other agents and lenders or otherwise, and whether
provided under the original Senior Credit Agreement or otherwise). Without
limiting the generality of the foregoing, the term "Senior Credit Facility"
shall include any agreement (i) changing the maturity of any Indebtedness
Incurred thereunder or contemplated thereby, (ii) adding Subsidiaries of the
Company as additional borrowers or guarantors thereunder, (iii) increasing the
amount of Indebtedness Incurred thereunder or available to be borrowed
thereunder or (iv) otherwise altering the terms and conditions thereof.
"Senior Indebtedness" means the following obligations, whether outstanding
on the date of the Indenture or thereafter issued, without duplication: (i)
all obligations consisting of Bank Indebtedness; and (ii) all obligations
consisting of the principal of and premium, if any, and accrued and unpaid
interest (including interest accruing on or after the filing of any petition
in bankruptcy or for reorganization relating to the Company regardless of
whether postfiling interest is allowed in such proceeding) on, and fees and
other amounts owing in respect of, all other Indebtedness of the Company,
unless, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that the obligations in respect of
such Indebtedness are not superior in right of payment to the Exchange Notes;
provided, however, that Senior Indebtedness shall not include (A) any
obligation of the Company to any Subsidiary or any other Affiliate of the
Company, or any such Affiliate's Subsidiaries, (B) any liability for federal,
state, foreign, local or other taxes owed or owing by the Company, (C) any
accounts payable or other liability to trade creditors arising in the ordinary
course of business (including Guarantees thereof or instruments evidencing
such liabilities) or other current liabilities (other than current liabilities
which constitute Bank Indebtedness or the current portion of any long-term
Indebtedness which would constitute Senior Indebtedness but for the operation
of this clause (C)), (D) any Indebtedness, Guarantee or obligation of the
Company that is expressly subordinate or junior to any other Indebtedness,
Guarantee or obligation of the Company, (E) Indebtedness which is represented
by Disqualified Stock or (F) that portion of
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any Indebtedness that is Incurred in violation of the Indentures. If any
Designated Senior Indebtedness is disallowed, avoided or subordinated pursuant
to the provisions of Section 548 of Title 11 of the United States Code or any
applicable state fraudulent conveyance law, such Designated Senior
Indebtedness nevertheless will constitute Senior Indebtedness.
"Senior Subordinated Indebtedness" means the Exchange Notes and any other
Indebtedness of the Company that (i) specifically provides that such
Indebtedness is to rank pari passu with the Exchange Notes or is otherwise
entitled Senior Subordinated Indebtedness and (ii) is not subordinated by its
terms to any Indebtedness or other obligation of the Company that is not
Senior Indebtedness.
"Significant Subsidiary" means each Restricted Subsidiary that for the most
recent fiscal year of such Restricted Subsidiary had consolidated revenues
greater than $10.0 million or as at the end of such fiscal year had assets or
liabilities greater than $10.0 million.
"S&P" means Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc., and its successors.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the date of the Indenture or thereafter Incurred) which is
subordinate or junior in right of payment to the Notes pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person or (ii) one or more
Subsidiaries of such Person.
"Successor Company" shall have the meaning assigned thereto in clause (i)
under "--Merger and Consolidation."
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations (x) of the United States of America or any agency
thereof or obligations Guaranteed by the United States of America or any
agency thereof or (y) of any foreign country recognized by the United States
of America rated at least "A" by S&P or "A-1" by Moody's, (ii) investments in
time deposit accounts, certificates of deposit and money market deposits
maturing within 180 days of the date of acquisition thereof issued by a bank
or trust company that is organized under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America having capital and surplus aggregating in excess of $250
million (or the foreign currency equivalent thereof) and whose long-term debt
is rated "A" by S&P or "A-1" by Moody's, (iii) repurchase obligations with a
term of not more than 180 days for underlying securities of the types
described in clause (i) or (ii) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) Investments in commercial
paper, maturing not more than 180 days after the date of acquisition, issued
by a corporation (other than an Affiliate of the Company) organized and in
existence under the laws of the United States of America or any foreign
country recognized by the United States of America with a rating at the time
as of which any Investment therein is made of "P-1" (or higher) according to
Moody's or "A-1" (or higher) according to S&P, (v) Investments in securities
with maturities of six months or less from the date of acquisition issued or
fully guaranteed by any state, commonwealth or territory of the United States
of America, or by any political subdivision or taxing authority thereof, and
rated at least "A" by S&P or "A" by Moody's, (vi) any
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money market deposit accounts issued or offered by a domestic commercial bank
or a commercial bank organized and located in a country recognized by the
United States of America, in each case, having capital and surplus in excess
of $250 million (or the foreign currency equivalent thereof), or investments
in money market funds complying with the risk limiting conditions of Rule 2a-7
(or any short-term successor rule) of the SEC, under the Investment Company
Act of 1940, as amended, and (vii) similar short-term investments approved by
the Board of Directors in the ordinary course of business.
"Term Loan Facility" means the term loan facilities provided under the
Senior Credit Facility.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-77bbbb)
as in effect on the date of the Indenture.
"Trade Payables" means, with respect to any Person, any accounts payable or
any Indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Transactions" means, collectively, the Mergers, the offering of the
Existing Notes, the initial borrowings under the Senior Credit Facility, and
all other transactions relating to the Mergers or the financing thereof.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness
of, or owns or holds any Lien on any property of, the Company or any other
Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so
designated; provided, however, that either (A) the Subsidiary to be so
designated has total consolidated assets of $10,000 or less or (B) if such
Subsidiary has consolidated assets greater than $10,000, then such designation
would be permitted under "--Certain Covenants--Limitation on Restricted
Payments". The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) the Company could Incur at least $1.00 of
additional Indebtedness under paragraph (a) in the covenant described under
"--Certain Covenants--Limitation on Indebtedness" and (y) no Default or Event
of Default shall have occurred and be continuing. Any such designation by the
Board of Directors shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the resolution of the Company's Board of Directors
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing provisions.
"Voting Stock" of an entity means all classes of Capital Stock of such
entity then outstanding and normally entitled to vote in the election of
directors or all interests in such entity with the ability to control the
management or actions of such entity.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned
by the Company or another Wholly Owned Subsidiary.
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BOOK-ENTRY DELIVERY AND FORM
THE GLOBAL EXCHANGE NOTES
Exchange Notes will be issued only in fully registered form, without
interest coupons, in denominations of $1,000 and integral multiples thereof.
The Exchange Notes will be represented by one or more fully-registered global
notes (collectively, the "Global Exchange Notes"). The Global Exchange Notes
will be deposited upon issuance with The Depository Trust Company ("DTC") and
registered in the name of DTC or a nominee of DTC. Except as set forth below,
a Global Exchange Note may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee.
A Holder may transfer or exchange Exchange Notes in accordance with the
Indenture. The Trustee may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and the Company may require a
Holder to pay any taxes and fees required by law or permitted by the
Indenture.
All interests in the Global Exchange Notes may be subject to the procedures
and requirements of DTC. This applies to Global Exchange Notes held directly
through DTC or indirectly through organizations (such as the Euroclear System
("Euroclear") or Cedel Bank, societe anonyme ("Cedel")), which are
participants in the DTC system. Those interests held through Euroclear or
Cedel may also be subject to the procedures and requirements of such systems.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL EXCHANGE NOTES
The descriptions of the operations and procedures of DTC, Euroclear and
Cedel set forth below are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to change by them from time to time. The
Company takes no responsibility for these operations or procedures, and
investors are urged to contact the relevant system or its participants
directly to discuss these matters.
DTC has advised the Company that it is: (i) a limited purpose trust company
organized under the laws of the State of New York; (ii) a "banking
organization" within the meaning of the New York Banking Law; (iii) a member
of the Federal Reserve System; (iv) a "clearing corporation" within the
meaning of the Uniform Commercial Code, as amended; and (v) a "clearing
agency" registered pursuant to Section 17A of the Exchange Act. DTC was
created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical
transfer and delivery of certificates. DTC's Participants include securities
brokers and dealers, banks and trust companies, clearing corporations and
certain other organizations. Indirect access to DTC's system is also available
to other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants") that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Investors who are not Participants may beneficially own securities held by or
on behalf of DTC only through Participants or Indirect Participants.
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Exchange Notes, DTC will credit the accounts of
Participants with the respective principal amount of the individual beneficial
interests represented by such Global Exchange Notes and (ii) ownership of
beneficial interests in the Global Exchange Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the interests of Participants) and the
records of Participants and the Indirect Participants (with respect to the
interests of persons other than Participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer beneficial interests in the Global
Exchange Notes to such persons may be limited. In addition, because DTC can
act only on behalf of its Participants, who in turn act on behalf of persons
who hold interests through Participants, the ability of a person having
beneficial interests in a Global Exchange Note to pledge or transfer such
interest to persons or entities that do not participate
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in DTC's system, or to otherwise take actions in respect of such interest, may
be affected by the lack of a physical definitive security in respect of such
interest.
So long as DTC or its nominee is the registered owner of a Global Exchange
Note, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Exchange Notes represented by the Global Exchange Note
for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in a Global Exchange Note will not be entitled to have
any portions of such Global Exchange Note registered in their names, will not
receive or be entitled to receive physical delivery of Certificated Exchange
Notes, and will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
direction, instruction or approval to the Trustee thereunder. Accordingly,
each holder owning a beneficial interest in a Global Exchange Note must rely
on the procedures of DTC and, if such holder is not a Participant or an
Indirect Participant, on the procedures of the Participant through which such
holder owns its interest, to exercise any rights of a holder of Exchange Notes
under the Indenture or such Global Exchange Note. The Company understands that
under existing industry practice, in the event that the Company requests any
action of holders of Exchange Notes, or a holder that is an owner of a
beneficial interest in a Global Exchange Note desires to take any action that
DTC, as the holder of such Global Exchange Note, is entitled to take, DTC
would authorize the Participants to take such action and the Participants
would authorize holders owning through such Participants to take such action
or would otherwise act upon the instruction of such holders. Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of Exchange
Notes by DTC, or for maintaining, supervising or reviewing any records of DTC
relating to such Exchange Notes.
Payments with respect to the principal of, premium, if any, Liquidated
Damages, if any, and interest on, any beneficial interests in a Global
Exchange Note registered in the name of DTC or its nominee on the applicable
record date will be payable by the Trustee to or at the direction of DTC or
its nominee in its capacity as the registered holder of the Global Exchange
Note representing such interests under the Indenture. Under the terms of the
Indenture, the Company and the Trustee may treat the persons in whose names
the Exchange Notes, including the Global Exchange Notes, are registered as the
owners thereof for the purpose of receiving payment thereon and for any and
all other purposes whatsoever. Accordingly, neither the Company nor the
Trustee has or will have any responsibility or liability for the payment of
such amounts to owners of beneficial interests in a Global Exchange Note
(including principal, premium, if any, Liquidated Damages, if any, and
interest). Payments by the Participants and the Indirect Participants to the
owners of beneficial interests in a Global Exchange Note will be governed by
standing instructions and customary industry practice and will be the
responsibility of the Participants or the Indirect Participants and DTC.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Cross-market transfers between the Participants in DTC, on the one hand, and
Euroclear or Cedel participants, on the other hand, will be effected through
DTC in accordance with DTC's rules on behalf of Euroclear or Cedel, as the
case may be, by its respective depositary; however, such cross-market
transactions will require delivery of instructions to Euroclear or Cedel, as
the case may be, by the counterparty in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or Cedel, as the case may be, will, if the transaction
meets its settlement requirements, deliver instructions to its respective
depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Exchange Notes in
DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and Cedel
participants may not deliver instructions directly to the depositaries for
Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Exchange Note from a
Participant in DTC will be credited, and any such crediting will be reported
to the relevant Euroclear or Cedel participant, during the securities
settlement processing day (which
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must be a business day for Euroclear and Cedel) immediately following the
settlement date of DTC. Cash received in Euroclear or Cedel as a result of
sales of interest in a Global Exchange Note by or through a Euroclear or Cedel
participant to a Participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or
Cedel cash account only as of the business day for Euroclear or Cedel
following DTC's settlement date.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Exchange Notes among
participants in DTC, Euroclear and Cedel, they are under no obligation to
perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC, Euroclear or Cedel or their
respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED EXCHANGE NOTES
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary is not
appointed within 90 days of such notice or cessation, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance
of Exchange Notes in definitive form under the Indenture or (iii) upon the
occurrence of certain other events as provided in the Indenture, then, upon
surrender by DTC of the Global Exchange Notes, Certificated Exchange Notes
will be issued to each person that DTC identifies as the beneficial owner of
the Exchange Notes represented by the Global Exchange Notes. Upon any such
issuance, the Trustee is required to register such Certificated Exchange Notes
in the name of such person or persons (or the nominee of any thereof) and
cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners
of the related Exchange Notes and each such person may conclusively rely on,
and shall be protected in relying on, instructions from DTC for all purposes
(including with respect to the registration and delivery, and the respective
principal amounts, of the Exchange Notes to be issued).
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a general discussion of certain material federal income tax
consequences to holders of Existing Notes of the Exchange Offer and the
purchase, ownership and disposition of the Exchange Notes. The summary is
based on the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations promulgated thereunder, and administrative
and judicial interpretations thereof, all as in effect as of the date hereof
and all of which are subject to change (possibly on a retroactive basis). The
following discussion does not purport to deal with all aspects of federal
income taxation that may be relevant to a particular investor in light of such
investor's personal investment circumstances. Nor does the discussion address
special rules applicable to certain types of investors subject to special
treatment under the Code (including, without limitation, financial
institutions, broker-dealers, regulated investment companies, life insurance
companies, tax-exempt organizations, foreign corporations and non-resident
aliens). Moreover, the description is generally limited to investors who will
hold the Exchange Notes as capital assets (generally, property held for
investment) within the meaning of Section 1221 of the Code. No consideration
of any aspects of state, local or foreign taxation is included herein.
EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT SUCH INVESTOR'S OWN TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF A PURCHASE OF NOTES IN LIGHT OF
SUCH HOLDER'S OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND
EFFECT OF THE CODE, AS WELL AS STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX
LAWS.
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THE EXCHANGE OFFER
The exchange of Existing Senior Subordinated Notes for Exchange Senior
Subordinated Notes and of Existing Senior Subordinated Discount Notes for
Exchange Senior Subordinated Discount Notes pursuant to the Exchange Offer
will not constitute a material modification of the terms of the Existing or
Exchange Senior Subordinated Notes or of the Existing or Exchange Senior
Subordinated Discount Notes and, accordingly, such exchange will not
constitute an exchange for federal income tax purposes. Accordingly, such
exchange will have no federal income tax consequences to a Holder, regardless
of whether such Holder participates in the Exchange Offer, and a Holder will
continue to be required to include interest (including, in the case of the
Existing or Exchange Senior Subordinated Discount Notes, Original Issue
Discount, or "OID") on such Existing or Exchange Note in its gross income in
accordance with such Holder's method of accounting for federal income tax
purposes and in accordance with the rules regarding the inclusion in income of
OID as discussed below. The Company intends, to the extent required, to treat
the Exchange Offer for federal income tax purposes in accordance with the
position described above.
STATED INTEREST
Stated interest paid or accrued on the Exchange Senior Subordinated Notes
will be taxable to a holder as ordinary income in accordance with the holder's
method of accounting for federal income tax purposes. The receipt of cash in
respect of the stated interest on the Exchange Senior Subordinated Discount
Notes will not be taxable to the holders but, rather, such stated interest
will be included in income as original issue discount ("OID") on a daily
economic accrual basis as described below.
ORIGINAL ISSUE DISCOUNT
General. Because the Exchange Senior Subordinated Discount Notes are being
issued at a more than de minimis discount from their stated redemption price
at maturity and no interest will be paid on the Notes prior to May 1, 2003,
the Exchange Senior Subordinated Discount Notes will be considered to have
been issued with OID for federal income tax purposes. The OID on an Exchange
Senior Subordinated Discount Note will be the excess of its "stated redemption
price at maturity" (as defined below) over its "issue price."
The stated redemption price at maturity of an Exchange Senior Subordinated
Discount Note will be equal to the sum of the stated principal amount of the
Exchange Senior Subordinated Discount Note, plus the amount of all stated
interest due and payable on such Exchange Senior Subordinated Discount Note.
The issue price of the Exchange Senior Subordinated Discount Notes will be the
first price to the public (excluding bond houses and brokers) at which a
substantial amount of the Exchange Senior Subordinated Discount Notes are
sold.
Accordingly, each Exchange Senior Subordinated Discount Note generally will
bear OID in an amount equal to the excess of (i) the sum of its principal
amount and all stated interest payments over (ii) its issue price.
A Holder (as defined) will be required to include OID in gross income on a
daily economic accrual basis over the term of an Exchange Senior Subordinated
Discount Note, regardless of such Holder's method of tax accounting and in
advance of the receipt of the cash attributable to such interest income. In
general, a Holder must include in income the sum of the daily portions of OID
with respect to an Exchange Senior Subordinated Discount Note for each day
during the taxable year on which the Holder holds the Exchange Senior
Subordinated Discount Note ("Accrued OID").
The daily portion of OID is determined by allocating to each day of any
accrual period within a taxable year a pro rata portion of an amount equal to
the adjusted issue price of an Exchange Senior Subordinated Discount Note at
the beginning of the accrual period multiplied by the yield to maturity of
such Exchange Senior Subordinated Discount Note. For purposes of computing
OID, the Company will use six-month accrual periods that end on the days in
the calendar year corresponding to the maturity date of the Exchange Senior
Subordinated Discount Notes and the date six months prior to such maturity
date, with the exception of an initial short accrual
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period. The adjusted issue price of an Exchange Senior Subordinated Discount
Note at the beginning of any accrual period is the issue price of the Exchange
Senior Subordinated Discount Note increased by the accrued OID for all prior
accrual periods (less any cash payments received on such Exchange Senior
Subordinated Discount Notes).
Under these rules, Holders will have to include in gross income increasingly
greater amounts of OID in such successive accrual period. Each payment made
under an Exchange Senior Subordinated Discount Note will be treated first as a
payment of OID which was previously includible in gross income (to the extent
of OID that has accrued as of the date of payment and has not been allocated
to prior payments) and second as a payment of principal (which generally is
not includible in income).
Optional Redemption. The Company's option to redeem the Exchange Senior
Subordinated Discount Notes at any time on or after November 1, 2002, at a
premium declining to par (after 2000) plus accrued interest will be treated as
a call option. See "Description of Exchange Notes--Optional Redemption."
Because any exercise by the Company of this option would not decrease the
yield on the Exchange Senior Subordinated Discount Notes, the Company will not
be presumed to exercise the option for purposes of the OID rules.
In addition to the optional redemption described above, the Company will
have the right to redeem up to 33 1/3% in aggregate face amount of the
outstanding Exchange Notes out of the net cash proceeds of one or more Equity
Offerings on or prior to November 1, 2000. See "Description of Exchange
Notes--Optional Redemption." Furthermore, a Holder will have the right to
tender Exchange Notes to the Company for redemption should the Company
experience a Change of Control. See "Description of Exchange Notes--Change of
Control." Such additional redemption rights should not affect, and will not be
treated by the Company as affecting, the determination of the yield or
maturity of the Exchange Senior Subordinated Discount Notes.
The tax treatment of a redemption of the Exchange Notes should be governed
by the rules for dispositions generally.
If a Holder tenders Exchange Notes for redemption as a result of a Change of
Control, the Holder may be required to include as ordinary income any amount
the Holder is entitled to receive in excess of the accreted value of an
Exchange Note on the date of the redemption. Holders should consult their own
tax advisors regarding the treatment of payments received upon any optional
redemptions.
DISPOSITION OF THE EXCHANGE NOTES
Generally, any sale or redemption of an Exchange Note will result in taxable
gain or loss equal to the difference between the amount of cash or other
property received by the Holder in exchange for such Exchange Note and the
Holder's adjusted tax basis in such Exchange Note. A Holder's adjusted tax
basis in an Exchange Note will initially equal the cost of the Exchange Note
to such Holder and will be increased by any accrued OID includible in such
Holder's gross income and decreased by the amount of any payments received by
such Holder in respect of such Exchange Note regardless of whether such
payments are denominated as principal or interest. Any gain or loss upon a
sale or other disposition of an Exchange Note will generally be capital gain
or loss, which will be long term if the Exchange Note has been held by the
Holder for more than one year.
BACKUP WITHHOLDING
A Holder may be subject, under certain circumstances, to backup withholding
at a 31 percent rate with respect to payments received with respect to
Exchange Notes. This withholding generally applies only if the Holder (i)
fails to furnish its social security or taxpayer identification number
("TIN"), (ii) furnishes an incorrect TIN, (iii) is notified by the Internal
Revenue Service that it has failed to report properly payments of interest and
dividends and the service has notified the Company that the Holder is subject
to withholding, or (iv) fails under certain circumstances, to provide a
certified statement, signed under penalty of perjury, that the TIN provided is
its correct number and that it is not subject to backup withholding. Any
amount withheld from a payment to a
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Holder under the backup withholding rules is allowable as a credit against
such Holder's federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service. Certain Holders
(including, among others, corporations and foreign individuals who comply with
certain certification requirements described below under "Foreign Holders")
are not subject to backup withholding. Holders should consult their tax
advisors as to their qualification for exemption from backup withholding and
the procedure for obtaining such an exemption.
FOREIGN HOLDERS
The following discussion is a summary of certain U.S. federal income tax
consequences to a Foreign Person that holds an Exchange Note. The term
"Foreign Person" means a nonresident alien individual or foreign corporation,
but only if such person's income or gain on the Exchange Note would not be
"effectively connected with the conduct of a trade or business within the
United States." If such person's income or gain on the Exchange Note would be
"effectively connected with the conduct of a trade or business within the
United States," then such person will generally be subject to tax on such
income or gain in essentially the same manner as a U.S. citizen or resident or
a domestic corporation, as discussed above, and in the case of a foreign
corporation, may also be subject to U.S. branch profits tax.
Under the "portfolio interest" exception to the general rules for the
withholding of tax on interest and OID paid to a Foreign Person, a Foreign
Person will not be subject to U.S. tax (or to withholding) on interest or OID
on an Exchange Note, provided that (i) the Foreign Person does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote, (ii) the Foreign Person is
not a controlled foreign corporation with respect to the United States that is
related to the Company through stock ownership, (iii) the Foreign Person is
not a bank receiving interest on a loan entered into in the ordinary course of
business, and (iv) the Company, its paying agent, or the person who would
otherwise be required to withhold tax receives either (A) a statement (an
"Owner's Statement") signed under penalties of perjury by the beneficial owner
of the Exchange Note in which the owner certifies that the owner is not a U.S.
person and which provides the owner's name and address, or (B) a statement
signed under penalties of perjury by the "Financial Institution" holding the
Exchange Note on behalf of the beneficial owner to the effect that an Owner's
Statement has been filed on behalf of the beneficial owner, together with a
copy of the Owner's Statement. The term "Financial Institution" means a
securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business
and that holds an Exchange Note on behalf of the owner of the Exchange Note. A
Foreign Person who does not qualify for the "portfolio interest" exception
would generally be subject to U.S. withholding tax at a flat rate of 30% (or a
lower applicable treaty rate) on interest payments and payments (including
redemption proceeds) attributable to OID on the Exchange Notes.
In general, gain recognized by a Foreign Person upon the redemption, sale or
exchange of an Exchange Note will not be subject to U.S. tax. However, a
Foreign Person may be subject to United States tax at a flat rate of 30%
(unless exempt by applicable treaty) on any such gain if the Foreign Person is
an individual present in the United States for 183 days or more during the
taxable year in which the Exchange Note is redeemed, sold or exchanged, and
certain other requirements are met.
An Exchange Note held by a Foreign Person will not be includible in such
person's gross estate subject to U.S. federal estate tax as a result of such
person's death provided that the individual did not actually or constructively
own 10% or more of the total combined voting power of all classes of stock of
the Company entitled to vote.
Information reporting and backup withholding will not apply to payments made
on an Exchange Note to a Foreign Person provided that the certification
described in clause (iv) of the second paragraph in this section is received,
and provided further that the payor does not have actual knowledge that the
information is false.
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REGISTRATION RIGHTS AGREEMENT
In connection with the issuance and sale of the Existing Notes, the Company
and the Initial Purchasers entered into the Registration Rights Agreement,
pursuant to which the Company agreed, for the benefit of the Holders of the
Existing Notes, that it would, at its cost, (i) within 60 days after the Issue
Date, file a registration statement (the "Exchange Offer Registration
Statement") with the Commission with respect to a registered offer to exchange
the Existing Notes for new notes with terms substantially identical in all
respects to the Existing Notes, except that the Exchange Notes would not
contain terms with respect to transfer restrictions, and (ii) within 150 days
after the Issue Date, use its commercially reasonable efforts to cause the
Exchange Offer Registration Statement to be declared effective under the
Securities Act. Upon the Exchange Offer Registration Statement being declared
effective, the Company agreed to offer the Exchange Notes in exchange for
surrender of the Existing Notes. The Registration Statement of which this
Prospectus is a part has been filed with the Commission and the Exchange Offer
is being made to satisfy the Company's obligations under the Registration
Rights Agreement. The Company is required to keep the Exchange Offer open for
not less than thirty days (or longer, if required by applicable law) after the
date on which notice of the Exchange Offer is mailed to the Holders of the
Existing Notes.
If (i) because of any change in law or applicable interpretations thereof by
the staff of the Commission, the Company is not permitted to effect the
Exchange Offer; (ii) any Existing Notes validly tendered pursuant to the
Exchange Offer are not exchanged for Exchange Notes within 180 days after the
Issue Date; (iii) any Initial Purchaser so requests with respect to Existing
Notes not eligible to be exchanged for Exchange Notes in the Exchange Offer;
(iv) any applicable law or interpretations do not permit any Holder of
Existing Notes to participate in the Exchange Offer; (v) any Holder of
Existing Notes that participates in the Exchange Offer does not receive freely
transferable Exchange Notes in exchange for tendered Existing Notes; or (vi)
the Company so elects, then the Company will file with the Commission a shelf
registration statement (the "Shelf Registration Statement") to cover resales
of Transfer Restricted Securities by such Holders who satisfy certain
conditions relating to the provision of information in connection with the
Shelf Registration Statement. For purposes of the foregoing, "Transfer
Restricted Securities" means each Existing Note until (i) the date on which
such Existing Note has been exchanged for a freely transferable Exchange Note
in the Exchange Offer; (ii) the date on which such Existing Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iii) the date on which such Existing
Note is distributed to the public pursuant to Rule 144 under the Securities
Act or is salable pursuant to Rule 144(k) under the Securities Act.
The Company will use its commercially reasonable efforts to have the
Exchange Offer Registration Statement or, if applicable, the Shelf
Registration Statement (each, a "Registration Statement") declared effective
by the Commission as promptly as practicable after the filing thereof. Unless
the Exchange Offer would not be permitted by a policy of the Commission, the
Company will commence the Exchange Offer and use its commercially reasonable
efforts to consummate the Exchange Offer as promptly as practicable, but in
any event prior to 150 days after the Issue Date. If necessary, the Company
will use its commercially reasonable efforts to keep the Shelf Registration
Statement effective for a period of two years after the Issue Date.
If (i) the applicable Registration Statement is not filed with the
Commission on or prior to 60 days after the Issue Date; (ii) the applicable
Registration Statement is not declared effective within 150 days after the
Issue Date; (iii) the Exchange Offer is not consummated on or prior to 180
days after the Issue Date; or (iv) the Shelf Registration Statement is filed
and declared effective within 150 days after the Issue Date but shall
thereafter cease to be effective (at any time that the Company is obligated to
maintain the effectiveness thereof) without being succeeded within 45 days by
an additional Registration Statement filed and declared effective (each such
event referred to in clauses (i) through (iv), a "Registration Default"), the
Company will be obligated to pay liquidated damages to each Holder of Transfer
Restricted Securities, during the period of one or more such Registration
Defaults, in an amount equal to $0.192 per week per $1,000 principal amount
(or Accreted Value, as the case may be) of the Transfer Restricted Securities
held by such Holder until the applicable Registration Statement is filed, the
Exchange Offer Registration Statement is declared effective and the Exchange
Offer is consummated or the Shelf Registration Statement is declared effective
or again becomes effective, as the case
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may be. All accrued liquidated damages shall be paid to Holders in the same
manner as interest payments on the Existing Notes on semi-annual payment dates
which correspond to interest payment dates for the Existing Notes. The accrual
of liquidated damages will cease on the day on which all Registration Defaults
are cured.
The Registration Rights Agreement also provides that the Company shall (i)
make available for a period of 90 days after the consummation of the Exchange
Offer a prospectus meeting the requirements of the Securities Act to any
broker-dealer for use in connection with any resale of any such Exchange Notes
and (ii) pay all expenses incident to the Exchange Offer (including the
expense of one counsel to the Holders of the Existing Notes) and will
indemnify certain Holders of the Existing Notes (including any broker-dealer)
against certain liabilities, including liabilities under the Securities Act. A
broker-dealer that delivers such a prospectus to purchasers in connection with
such resales will be subject to certain of the civil liability provisions
under the Securities Act and will be bound by the provisions of the
Registration Rights Agreement (including certain indemnification rights and
obligations).
Each Holder of Existing Notes who wishes to exchange such notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any Exchange Notes to be received by it
will be acquired in the ordinary course of its business; (ii) it has no
arrangement or understanding with any person to participate in the
distribution of the Exchange Notes; and (iii) it is not an "affiliate" (as
defined in Rule 405 under the Securities Act) of the Company, or if it is an
affiliate, that it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
If the Holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of
the Exchange Notes. If the Holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Existing Notes that were
acquired as a result of market-making activities or other trading activities
(an "Exchanging Dealer"), it will be required to acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
Holders of the Existing Notes will be required to deliver information to be
used in connection with the Shelf Registration Statement in order to have
their Existing Notes included in the Shelf Registration Statement and benefit
from the provisions regarding liquidated damages set forth in the preceding
paragraphs. A Holder who sells Existing Notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such a
Holder (including certain indemnification obligations).
For so long as the Existing Notes are outstanding, the Company will continue
to provide to Holders of the Existing Notes and to prospective purchasers of
the Existing Notes the information required by Rule 144A(d)(4) under the
Securities Act.
The foregoing description of the Registration Rights Agreement is a summary
only, does not purport to be complete and is qualified in its entirety by
reference to all provisions of the Registration Rights Agreement, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
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PLAN OF DISTRIBUTION
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer may be offered for resale, resold
or otherwise transferred by holders thereof (other than any holder who is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of the holders' business and such holders have
no arrangement or understanding with any person to participate in a
distribution of such Exchange Notes and are not participating in, and do not
intend to participate in, the distribution of such Exchange Notes. In
addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered or sold unless they have
been registered or qualified for sale in such jurisdiction or an exemption
from registration or qualification is available and complied with. The Company
has agreed, pursuant to the Registration Rights Agreement and subject to
certain specified limitations therein, to register or qualify the Exchange
Notes for offer or sale under the securities or blue sky laws of such
jurisdictions as any holder of the Exchange Notes reasonably requests in
writing.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Existing
Notes where such Existing Notes were acquired as a results of market-making
activities or other trading activities. The Company has agreed that, for a
period of 90 days, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly or purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commission or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 90 days after the close of the Exchange Offer, the Company
will promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer and will indemnify the holders of the
Exchange Notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
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EXPERTS
The consolidated financial statements and schedules of Paragon Health
Network, Inc. (formerly Living Centers of America, Inc.) and GranCare, Inc.
incorporated by reference in this Registration Statement have been audited by
Ernst & Young LLP, independent auditors, to the extent indicated in their
reports thereon incorporated herein by reference, which with respect to the
report pertaining to the financial statements of GranCare, Inc. for the fiscal
year ended December 31, 1994, is based in part on the report of KPMG Peat
Marwick LLP, independent auditors. Such consolidated financial statements and
schedules have been incorporated by reference in reliance upon such reports
given upon the authority of such firms as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the Exchange Notes
offered hereby have been passed upon for the Company by Powell, Goldstein,
Frazer & Murphy LLP, Atlanta, Georgia.
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NO PERSON HAS BEEN AUTHORIZED HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... iii
Incorporation of Documents by Reference.................................... iv
Summary.................................................................... 1
Risk Factors............................................................... 10
Use of Proceeds............................................................ 17
The Exchange Offer......................................................... 18
The Transactions........................................................... 36
Description of Senior Credit Facility...................................... 39
Description of Other Indebtedness.......................................... 41
Description of Exchange Notes.............................................. 44
Book-Entry Delivery and Form............................................... 73
Certain United States Federal Income Tax Considerations.................... 76
Registration Rights Agreement.............................................. 79
Plan of Distribution....................................................... 82
Independent Auditors....................................................... 83
Legal Matters.............................................................. 83
</TABLE>
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PARAGON HEALTH
NETWORK, INC.
OFFER TO EXCHANGE
ITS
9 1/2% SENIOR SUBORDINATED NOTES
DUE 2007, SERIES B, AND
10 1/2% SENIOR SUBORDINATED DISCOUNT NOTES
DUE 2007, SERIES B, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR ANY AND ALL OF ITS
OUTSTANDING 9 1/2% SENIOR SUBORDINATED
NOTES DUE 2007 AND
10 1/2% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007
---------------
PROSPECTUS
---------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant is a Delaware corporation. Reference is made to Section 145
of the Delaware General Corporation Law (the "DGCL"), which provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of such corporation, by reason of the fact that such person
is or was a director, officer, employee or agent of the corporation, or is or
was serving at its request in such capacity of another corporation or business
organization against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interest of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that such
person's conduct was unlawful. A Delaware corporation may indemnify officers
and directors in an action by or in the right of a corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses that he or she actually and
reasonably incurred.
Reference is also made to Section 102(b)(7) of the DGCL, which permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of the director's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit.
Article Seventh of the Amended and Restated Certificate of Incorporation of
the Registrant provides for the elimination of personal liability of a
director for breach of fiduciary duty as permitted by Section 102(b)(7) of the
DGCL, as it may be amended from time to time. Article Eighth of the Amended
and Restated Certificate of Incorporation provides that the Registrant shall
indemnify its directors and officers to the fullest extent permitted by
Section 145 of the DGCL, as it may be amended from time to time. In addition,
Article VII of the Amended and Restated Bylaws of the Registrant requires that
the Registrant indemnify any person who was or is an authorized representative
of the Registrant and who was, is or is threatened to be made a party to any
third party proceeding by reason of the fact that such person was or is an
authorized representative of the Registrant against expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such proceeding if the person acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interest of the Registrant and, with respect to any criminal third party
proceeding, had no reasonable cause to believe such conduct was unlawful. In a
corporate proceeding, the Registrant is required to indemnify any person who
was or is an authorized representative of the Registrant and who was, is or is
threatened to be made a party to any corporate proceeding by reason of the
fact that such person was or is an authorized representative of the Registrant
against expenses actually and reasonably incurred by such person in connection
with the defense or settlement of the proceeding if such person acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the
best interest of the Registrant, except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Registrant unless and only to the extent
that the Court of Chancery or the court in which such corporate proceeding is
brought shall determine upon application that the authorized representative is
fairly and reasonably entitled to indemnity for such expenses as the court
shall deem proper. To the extent that an authorized representative of the
Registrant has been successful on the merits or otherwise in the defense of
any third party or corporate proceeding or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses actually and
reasonably incurred by such person in connection therewith. Any
II-1
<PAGE>
indemnification shall be made by the Registrant only as authorized in the
specific case upon a determination that indemnification is proper under the
circumstances because the authorized representative has either met the
applicable standard of conduct or has been successful on the merits or
otherwise and that the amount requested has been actually and reasonably
incurred. Such determination shall be made (i) by the Board of Directors by a
majority of a quorum consisting of directors who were not parties to the
proceeding; (ii) if such a quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in
a written opinion; or (iii) by the stockholders of the Registrant. Expenses
actually and reasonably incurred by an officer or director in defending any
third party or corporate proceeding shall be paid on his or her behalf by the
Registrant in advance of the final disposition of the proceeding upon receipt
of an undertaking by or on behalf of such officer or director to repay such
amount if it is ultimately determined that he or she is not entitled to be
indemnified by the Registrant. In the case of an authorized representative
other than an officer or director, the Registrant shall advance expenses
actually and reasonably incurred in defending any third party or corporate
proceeding in advance of the final disposition of the proceeding as authorized
by the Board of Directors upon receipt of the undertaking described above.
The Registrant maintains at its expense a policy of insurance that insures
its directors and officers, subject to certain exclusions and deductions as
are usual in such insurance policies, against certain liabilities which may be
incurred in those capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following items are filed as exhibits to this Registration Statement:
EXHIBIT DESCRIPTION
NO.:
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
September 17, 1997 among Apollo Management, L.P. ("Apollo"), Apollo
LCA Acquisition Corp. ("Apollo Sub") and Living Centers of America,
Inc. ("LCA") (incorporated by reference to Annex I to the
Registration Statement on Form S-4 (Regis. No. 333-36525) filed by
LCA).
2.2 Amended and Restated Agreement and Plan of Merger, dated as of
September 17, 1997 among LCA, Apollo, GranCare, Inc. and LCA
Acquisition Sub, Inc., (incorporated by reference to Annex II to the
Registration Statement on Form S-4 (Regis. No. 333-36525) filed by
LCA).
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Annex III to the Registration
Statement on Form S-4 (Regis. No. 333-36525) filed by LCA).
3.2 Amended and Restated Bylaws of the Registrant (incorporated by
reference to Annex IV to the Registration Statement on Form S-4
(Regis. No. 333-36525) filed by LCA).
4.1 Stockholders' Agreement by and among the Registrant, Apollo and
certain other investors (incorporated by reference to Annex V to the
Registration Statement on Form S-4 (Regis. No. 333-36525) filed by
LCA).
4.2 Registration Rights Agreement dated November 4, 1997 among the
Registrant and certain investors (incorporated by reference to
Exhibit 4.7 to the Registration Statement on Form S-4 (Regis. No.
333-36525) filed by LCA).
4.3 Exchange and Registration Rights Agreement dated as of November 4,
1997 among the Registrant, Chase Securities Inc., Smith Barney Inc.
and Credit Suisse First Boston (incorporated by reference to Exhibit
4.6 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 (File No. 001-10968)).
4.4 Indenture dated as of November 4, 1997 between the Registrant and
IBJ Schroder Bank & Trust Company, as Trustee, relating to the
Existing and Exchange Notes (incorporated by reference to Exhibit
4.5 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 (File No. 001-10968)).
4.5 Form of 9 1/2% Global Exchange Senior Subordinated Note Due 2007.*
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<PAGE>
EXHIBIT DESCRIPTION
NO.:
4.6 Form of 10 1/2% Global Exchange Senior Subordinated Discount Note
Due 2007.*
4.7 10 1/2% Senior Subordinated Discount Note Due 2007 pertaining to
CUSIP No. 698940 AB 9 (incorporated by reference to Exhibit 4.8 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 (File No. 001-10968)).
4.8 10 1/2% Senior Subordinated Discount Note Due 2007 pertaining to
CUSIP No. U698979 AB 7 (incorporated by reference to Exhibit 4.9 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 (File No. 001-10968)).
4.9 10 1/2% Senior Subordinated Discount Note Due 2007 pertaining to
CUSIP No. 698940 AD 5 (incorporated by reference to Exhibit 4.10 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 (File No. 001-10968)).
4.10 9 1/2% Senior Subordinated Discount Note Due 2007 pertaining to
CUSIP No. 698940 AA 1 (incorporated by reference to Exhibit 4.11 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 (File No. 001-10968)).
4.11 9 1/2% Senior Subordinated Discount Note Due 2007 pertaining to
CUSIP No. U69879 AA 9 (incorporated by reference to Exhibit 4.12 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 (File No. 001-10968)).
4.12 9 1/2% Senior Subordinated Discount Note Due 2007 pertaining to
CUSIP No. 698940 AC 7 (incorporated by reference to Exhibit 4.13 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 (File No. 001-10968)).
4.13 Form of Common Stock certificate of the Registrant (incorporated by
reference to Exhibit 4.7 to the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1997 (File No. 001-
10968)).
5.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding the
securities being issued.*
10.1 Amendment to AMS Properties, Inc. Facility Leases dated as of
October 31, 1997 between Health and Retirement Properties Trust
("HRPT") and AMS Properties, Inc. ("AMS") (incorporated by reference
to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997 (File No. 001-10968)).
10.2 Collateral Pledge Agreement dated as of October 31, 1997 by and
between Paragon Health Network, Inc. and HRPT (incorporated by
reference to Exhibit 10.32 to the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1997 (File No. 001-
10968)).
10.3 Guaranty by GranCare, Inc. ("GranCare") dated as of October 31, 1997
by GranCare in favor of HRPT (incorporated by reference to Exhibit
10.33 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 (File No. 001-10968)).
10.4 Guaranty by Paragon Health Network, Inc. dated as of October 31,
1997 in favor of HRPT (incorporated by reference to Exhibit 10.34 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 (File No. 001-10968)).
10.5 Restructure and Asset Exchange Agreement dated as of October 31,
1997 among HRPT, GranCare, AMS and GCI Health Care Centers, Inc.
(incorporated by reference to Exhibit 10.35 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30,
1997 (File No. 001-10968)).
10.6 Subordination Agreement dated as of October 31, 1997 by and among
HRPT and the corporations listed on the signature page thereto
(incorporated by reference to Exhibit 10.36 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30,
1997 (File No. 001-10968)).
10.7 Amendment to GCI Health Care Centers, Inc. Facility Leases dated as
of October 31, 1997 (incorporated by reference to Exhibit 10.37 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 (File No. 001-10968)).
II-3
<PAGE>
EXHIBIT DESCRIPTION
NO.:
10.8 Amendment to Acquisition Agreement, Agreement to Lease and Mortgage
Loan Agreement dated as of December 29, 1993 among HRPT, GranCare,
AMS and GCI Health Care Centers, Inc. (incorporated by reference to
GranCare's Current Report on Form 8-K filed January 13, 1994 (File
No. 1-19571)).
10.9 Master Lease Document dated December 28, 1990, between HRPT and AMS
Properties, Inc. ("AMS") (incorporated by reference to GranCare's
Registration Statement on Form S-1, Registration No. 33-42595).
10.10 Form of Guaranty dated December 28, 1990, by American Medical
Services, Inc. and each of its subsidiaries in favor of HRPT
(incorporated by reference to GranCare's Registration Statement on
Form S-1, Registration No. 33-42595).
10.11 Amendment to Master Lease between HRPT and AMS dated as of December
29, 1993 (incorporated by reference to GranCare's Current Report on
Form 8-K filed January 13, 1994 (File No. 1-19571)).
10.12 Amendment to Master Lease Document and Facility Lease between GCI
Health Care Center, Inc. and HRPT dated as of October 31, 1994
(incorporated by reference to Exhibit 10.41 to GranCare's Annual
Report on Form 10-K for the year ended December 31, 1995 (File No.
1-19571)).
10.13 Amendment to Master Lease Document and Facility Lease between AMS
and HRPT dated as of October 31, 1994 (incorporated by reference to
Exhibit 10.42 to GranCare's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 1-19571)).
10.14 Promissory Note from AMS to HRPT in the principal amount of $11.5
million, dated October 1, 1994 (incorporated by reference to Exhibit
10.43 to GranCare's Annual Report on Form 10-K for the year ended
December 31, 1995 (File No. 1-19571)).
10.15 Mortgage and Security Agreement from AMS to HRPT for the Northwest
and River Hills West Health Care Centers dated as of March 31, 1995
(incorporated by reference to Exhibit 10.44 to GranCare's Annual
Report on Form 10-K for the year ended December 31, 1995 (File No.
1-19571)).
10.16 Assumption Agreement by GranCare in favor of HRPT (incorporated by
reference to Exhibit 10.56 to Amendment No. 1 to GranCare's
Registration Statement on Form S-1, Registration No. 333-19097).
10.17 Consent and Amendment to Transaction Documents dated as of December
31, 1996 (the "Consent and Amendment") among GCI Health Care
Centers, Inc., GranCare, Vitalink Pharmacy Services, Inc., HRPT and
AMS (incorporated by reference to Exhibit 10.54 to Amendment No. 1
to GranCare's Registration Statement on Form S-1, Registration No.
333-19097).
10.18 Credit Agreement for $890,000,000 dated as of November 4, 1997, by
and among Paragon Health Network, Inc., as Borrower, The Chase
Manhattan Bank, as Administrative Agent, NationsBank, N.A., as
Documentation Agent, and the several lenders from time to time
parties thereto (incorporated by reference to Exhibit 10.48 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 (File No. 001-10968)).
10.19 Guarantee and Collateral Agreement dated as of November 4, 1997, by
and among Paragon Health Network, Inc. and certain of its
subsidiaries in favor of The Chase Manhattan Bank, as Collateral
Agent (incorporated by reference to Exhibit 10.49 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 (File No. 001-10968)).
10.20 Amended and Restated Participation Agreement dated November 4, 1997,
by and amount Living Centers Holding Company, as Lessee, FBTC
Leasing Corp., as Lessor, The Chase Manhattan Bank, as Agent for the
Lenders, the Fuji Bank Limited (Houston Agency), as Co-Agent, and
the Lenders parties thereto (incorporated by reference to Exhibit
10.50 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 (File No. 001-10968)).
II-4
<PAGE>
EXHIBIT DESCRIPTION
NO.:
10.21 Amended and Restated Guaranty dated November 4, 1997, by and among
Paragon Health Network, Inc. and certain other guarantors signatory
thereto in favor of The Chase Manhattan Bank, as Administrative
Agent (incorporated by reference to Exhibit 10. 51 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 (File No. 001-10968)).
10.22 Lease dated October 10, 1996, between FBTC Leasing Corp., as Lessor,
and Living Centers Holding Company, as Lessee (incorporated by
reference to Exhibit 10.52 to the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1997 (File No. 001-
10968)).
10.23 Amendment to Lease dated as of November 4, 1997 between FBTC Leasing
Corp. and Living Centers Holding Company (incorporated by reference
to Exhibit 10.53 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997 (File No. 001-10968)).
23.1 Consent of Ernst & Young LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of Powell, Goldstein, Frazer & Murphy LLP (contained in
Exhibit 5.1)*
24.1 Power of Attorney (included in the Signature Page in Part II of the
Registration Statement)*
25.1 Statement of Eligibility of Trustee*
99.1 Form of Letter of Transmittal*
99.2 Form of Notice of Guaranteed Delivery*
- --------
* Previously filed.
ITEM 9. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the law or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE>
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's Annual Report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at the time shall be deemed to be the initial bona fide offering
thereof.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the Registration Statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, HEREUNTO DULY AUTHORIZED, IN THE CITY OF ATLANTA, STATE OF
GEORGIA, ON THIS 28TH DAY OF JANUARY, 1998.
Paragon Health Network, Inc.
/s/ Keith B. Pitts
By: ___________________________________
Keith B. Pitts
Chairman of the Board, Chief
Executive Officer and President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES ON JANUARY
28, 1998.
SIGNATURE TITLE
Chairman of the Board,
/s/ Keith B. Pitts Chief Executive Officer and
- ------------------------------------ President
KEITH B. PITTS (Principal Executive Officer)
Executive Vice President and Chief
/s/ Charles B. Carden* Financial Officer (Principal
- ------------------------------------ Financial Officer)
CHARLES B. CARDEN
/s/ Ronald W. Fleming* Vice President, Controllerand Chief
- ------------------------------------ Accounting Officer (Principal
RONALD W. FLEMING Accounting Officer)
Director
/s/ Laurence M. Berg*
- ------------------------------------
LAURENCE M. BERG
Director
/s/ Peter P. Copses*
- ------------------------------------
PETER P. COPSES
Director
/s/ John H. Kissick*
- ------------------------------------
JOHN H. KISSICK
II-7
<PAGE>
Director
/s/ William G. Petty, Jr.*
- -------------------------------------
WILLIAM G. PETTY, JR.
Director
/s/ Robert L. Rosen*
- -------------------------------------
ROBERT L. ROSEN
Director
/s/ Gene E. Burleson*
- -------------------------------------
GENE E. BURLESON
Director
/s/ Donald C. Beaver*
- -------------------------------------
DONALD C. BEAVER
Director
/s/ Joel S. Kanter*
- -------------------------------------
JOEL S. KANTER
Director
/s/ Jay M. Gellert*
- -------------------------------------
JAY M. GELLERT
Director
/s/ Baltej S. Maini, M.D.*
- -------------------------------------
BALTEJ S. MAINI, M.D.
/s/ Susan Thomas Whittle
*By: ____________________________
Susan Thomas Whittle
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of Paragon Health
Network, Inc. for the registration of its $275 million 9 1/2% Senior
Subordinated Notes, Series B, and its $294 million 10 1/2% Senior Subordinated
Discount Notes, Series B, and to the incorporation by reference therein of our
report dated December 10, 1997, with respect to the consolidated financial
statements and schedule of Paragon Health Network, Inc. included in its Annual
Report (Form 10-K) for the year ended September 30, 1997, filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
_____________________________________
ERNST & YOUNG LLP
Houston, Texas
January 26, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 25, 1997 (except for Note 13 as to which the
date is March 6, 1997) with respect to the consolidated financial statements
and schedule of GranCare, Inc. included in the Living Centers of America, Inc.
Registration Statement on Form S-4 (Registration No. 333-36525) and
incorporated by reference in this Registration Statement and related
Prospectus of Paragon Health Network, Inc. for the registration of its $275
million 9 1/2% Senior Subordinated Notes and its $294 million 10 1/2% Senior
Subordinated Discount Notes.
ERNST & YOUNG LLP
Atlanta, Georgia
December 31, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Evergreen Healthcare, Inc.:
We consent to incorporation by reference in the registration statement on
Form S-4 of Paragon Health Network, Inc. of our report dated August 17, 1995
relating to the consolidated statements of operations, stockholders' equity
and cash flows of Evergreen Healthcare, Inc., and subsidiaries for the year
ended December 31, 1994, which report appears in the Registration Statement on
Form S-4 (No. 333-36525) of Living Centers of America, Inc. (predecessor to
Paragon Health Network, Inc.) and to the reference to our firm under the
heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Indianapolis, Indiana
December 30, 1997
