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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-10968
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MARINER POST-ACUTE NETWORK, INC.
(formerly "Paragon Health Network, Inc.")
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2012902
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE RAVINIA DRIVE, SUITE 1500 30346
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive
Office)
(678) 443-7000
(Registrant's Telephone Number, Including Area Code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
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NAME OF EACH EXCHANGE ON
WHICH REGISTERED
TITLE OF EACH CLASS ------------------------
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Common Stock, Par Value $.01 Per Share................. OTCBB
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
The aggregate market value of the outstanding common stock, par value $.01
per share (the "Common Stock"), of the registrant held by non-affiliates of
the registrant as of January 12, 2000 was $9,580,431, based on a closing sale
price for the Common Stock of $.14 per share as reported on the OTCBB on said
date. For purposes of the foregoing sentence only, all directors are assumed
to be affiliates.
There were 73,758,377 shares of Common Stock of the registrant issued and
outstanding as of January 12, 2000.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subject to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_] N/A [X] Due to the recent nature of the
filings made by the registrant and its subsidiaries under Chapter 11 of the
Bankruptcy Code, no plan of reorganization has been confirmed by a bankruptcy
court.
DOCUMENTS INCORPORATED BY REFERENCE
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PART OF FORM 10-K
INCORPORATED DOCUMENT -----------------
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Proxy Statement for the 2000
Annual Meeting of Stockholders............................... Part III
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS....................................................... 2
ITEM 2. PROPERTIES..................................................... 17
ITEM 3. LEGAL PROCEEDINGS.............................................. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS........................................................ 22
ITEM 6. SELECTED FINANCIAL INFORMATION................................. 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...... 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 97
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 97
ITEM 11. EXECUTIVE COMPENSATION......................................... 99
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 99
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 99
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K............................................................ 99
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ITEM 1. BUSINESS
Mariner Post-Acute Network, Inc. (the "Company") was formed through a
series of business combinations commencing with the November 4, 1997 merger of
Living Centers of America, Inc. ("LCA") with Apollo LCA Acquisition Corp., a
Delaware corporation (the "Recapitalization Merger") and subsequent merger of
GranCare, Inc., a Delaware corporation ("GranCare") with a wholly-owned
subsidiary of LCA (the "GranCare Merger," and collectively with the
Recapitalization Merger, the "Apollo/LCA/GranCare Mergers"). On July 31, 1998,
a wholly-owned subsidiary of the Company merged with and into Mariner Health
Group, Inc., a Delaware corporation ("Mariner Health") with Mariner Health
surviving the merger and continuing as a wholly-owned subsidiary of the
Company (the "Mariner Merger"). The Company changed its name to "Paragon
Health Network, Inc." following the Recapitalization Merger and subsequently
changed its name to "Mariner Post-Acute Network, Inc." following the Mariner
Merger. All references to "Mariner" or the "Company" are intended to include
the operating subsidiaries through which the services described herein are
directly provided. The GranCare Merger and the Mariner Merger were both
accounted for under the purchase method of accounting and, accordingly, the
results of operations of GranCare and Mariner Health have only been included
in the Company's results from the respective dates of acquisition.
RECENT EVENTS
On January 18, 2000, the Company and substantially all of its subsidiaries,
including Mariner Health and its subsidiaries, filed voluntary petitions (the
"Chapter 11 Filings") in the United States Bankruptcy Court for the District
of Delaware (the "Bankruptcy Court") under Title 11 of the United States Code,
11 U.S.C. (S)(S) 101, et seq. (the "Bankruptcy Code"). While this action will
likely constitute a default under the Company's and such subsidiaries various
financing arrangements, Section 362 of the Bankruptcy Code imposes an
automatic stay that will generally preclude the creditors and other interested
parties under such arrangements from taking any remedial action in response to
any such resulting default without prior Bankruptcy Court approval. The
Company's need to seek relief afforded by the Bankruptcy Code is due, in part,
to the significant financial pressure created by the Balanced Budget Act of
1997 ("Balanced Budget Act") and its implementation, which reduced the
Company's Medicare reimbursement rate by approximately $115 per resident, per
day.
In connection with the Chapter 11 Filings, the Company obtained a
commitment for $100 million in debtor-in-possession ("DIP") financing (the
"Company DIP Financing") from a group of banks led by The Chase Manhattan
Bank. Mariner Health also obtained a commitment for $50 million in DIP
financing from a group of banks led by PNC Bank (the "Mariner Health DIP
Financing"; together with the Company DIP Financing, the "DIP Financings").
For a description of the principal terms of the DIP Financings, see
"Management's Discussion and Analysis of Operations--Liquidity and Capital
Resources."
On December 20, 1999, Apollo Management, LP and its affiliates ("Apollo")
sold substantially all the Company's common stock, par value $.01 per share
("Common Stock"), beneficially owned by Apollo. In connection with this
action, all five of the Apollo designees to the Company's Board of Directors
resigned as Directors effective January 2, 2000. The right to designate
members of the Company's Board of Directors was not assigned to the purchaser
of the Common Stock sold by Apollo.
GENERAL
The Company is one of the nation's largest providers of post-acute health
care services, primarily through the operation of its skilled-nursing
facilities. As of September 30, 1999, the Company's significant operations
consist of (i) over 400 inpatient and assisted living facilities containing
approximately 49,000 beds, (ii) 37 institutional pharmacies servicing more
than 2,000 facilities and (iii) 14 long-term acute care hospitals ("LTACs")
with approximately 700 licensed beds. In addition, the Company has limited
home health, physician management and hospital contract management operations,
the majority of which the Company plans to exit in the near future. The
Company operates in 40 states with significant concentrations of facilities
and beds in eight states and several metropolitan markets.
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Historically, the Company also (i) operated a large contract rehabilitation
therapy business that provided comprehensive therapy programs and services, on
a contractual basis, to over 1,200 inpatient healthcare facilities throughout
the United States, (ii) operated approximately 170 outpatient rehabilitation
therapy clinics in eighteen states, (iii) managed specialty medical programs
in acute-care hospitals through more than 100 hospital relationships in
nineteen states (the Company has substantially exited this line of business),
and (iv) operated more than thirty home health, hospice and private duty
nursing branches in seven states (only two of which are still operated by the
Company and is in the process of being divested). Primarily as a result of
changes in Medicare reimbursement effected under the Balanced Budget Act of
1997 (the "Balanced Budget Act"), these businesses began to generate, or were
anticipated to generate, significant operating losses and negative cash flow
and have been or are being divested or closed.
The Company derives a significant portion of its revenues from the federal
Medicare program (21% of consolidated revenues during the fiscal year ended
September 30, 1999). These changes in reimbursement result primarily from the
Medicare program's recent transition from a cost-based reimbursement system to
a prospective payment system ("PPS") for Medicare Part A services, and the
adoption of fee screen schedules that limited and capped reimbursement for
Medicare Part B therapy services. Historically, the Medicare program utilized
a cost-based retrospective reimbursement system for nursing facilities and
home health agencies for reasonable direct and indirect allowable costs
incurred in providing "routine service" (as defined by the program and subject
to certain limits), as well as for capital costs and ancillary costs,
primarily therapy and pharmacy costs. Under the historic reimbursement
methodology, the Company was reimbursed separately for pharmacy and therapy
services provided by the Company's pharmacy and therapy operations to the
Company's inpatient operations based on the cost of the services provided,
subject to certain "related party," "prudent buyer" and "salary equivalency"
adjustments.
Pursuant to the Balanced Budget Act, however, Medicare began phasing in PPS
for skilled-nursing facilities, starting with cost reporting periods beginning
on or after July 1, 1998. Under PPS, Medicare reimbursement for skilled
nursing facilities is based on an all-inclusive per diem rate, which varies
depending on the level of acuity of the patient. As a result, skilled nursing
facilities reimbursed under the Medicare program are paid a federal per diem
rate for virtually all covered services, including pharmacy and therapy
services, regardless of the actual costs incurred by the provider.
The reimbursement rates under PPS were not published until May 12, 1998,
less than two months prior to the implementation of PPS, and were
significantly lower than anticipated within the industry. In addition, in
November 1998, the federal government published certain fee screen schedules
for implementation effective January 1, 1999, that limited the amount of
reimbursement for Medicare Part B therapy services and capped the total amount
of reimbursement at $1,500 per patient, per provider. The Balanced Budget Act
has had a material adverse effect on the Company rendering the Company unable
to service its debt obligations to its senior lenders and the holders' of its
senior subordinated notes while at the same time meeting the operating
expenses of the Company's businesses. See "--Regulation" and "Management's
Discussion and Analysis of Financial Condition and Results of Operation--
Liquidity and Capital Resources." The Company hopes to use the Chapter 11
Filings to effect a comprehensive financial reorganization to better position
the Company to address the changed economics resulting from the implementation
of the Balanced Budget Act.
The Consolidated Appropriations Act (the "CAA"), enacted in November 1999,
makes a number of positive changes to the reimbursement rates for skilled
nursing facilities over the next several years. Management believes that the
reimbursement changes will not make up for revenue reductions already
experienced during the PPS transition, but will serve to partially mitigate
the further declines originally anticipated in years two through four of the
PPS transition.
One objective the Company hopes to achieve in connection with its Chapter
11 Filings is the restructuring of its capital structures such that the
Company can operate profitably under PPS. As another means of enhancing its
profitability, the Company is also actively reviewing its portfolio of
properties and intends to divest marginal and unprofitable facilities. In
order to further reduce corporate overhead, the Company recently engaged in an
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extensive review of its organizational structure, work processes, system
capabilities needs and level of spending. As a result of such review, the
Company has a plan that it believes will reduce corporate overhead by an
additional 20% or more during the period from November 1, 1999 through
September 2001. This reduction is in addition to the overhead reduction of
approximately 30% achieved during the period from April 1999 through October
1999. All overhead reductions have been and will continue to be at the
regional and corporate levels. The Company's goal is to leave operations at
the facility level intact.
The Company's principal executive offices are located at One Ravinia Drive,
Suite 1500, Atlanta, Georgia 30346, and the Company's phone number at such
address is (678) 443-7000.
OPERATIONS
The Company's services include three principal product groups, for which
the Company commenced segment reporting as of September 30, 1999. These
product groups are: (i) Mariner Inpatient Services; (ii) American
Pharmaceutical Services; and (iii) Other, which consists primarily of the
Company's LTAC operations and corporate overhead. In addition, the Company
exited/sold several businesses during the fiscal year ended September 30,
1999, the results of which are included in "Other" below. As previously
mentioned, the contract therapy business was disposed of during 1999 and is
separately disclosed. See the Consolidated Financial Statements herein and
Note 24 to the Consolidated Financial Statements for the segment reporting of
the Company's last three fiscal years.
MARINER INPATIENT SERVICES
Inpatient Services is the largest source of revenue for the Company. The
Company operates 413 inpatient facilities including 12 freestanding assisted
living facilities encompassing approximately 49,000 beds in 28 states. All of
the Company's inpatient facilities are certified by the appropriate state
agencies for participation in the Medicaid program and substantially all are
certified for participation in the Medicare program.
The Company's inpatient facilities provide care to patients requiring
access to skilled nursing care at anytime. All patients in the Company's
inpatient facilities receive assistance with activities of daily living ("ADL"
services) including feeding, bathing, dressing, eating, transportation,
toileting and related services. Inpatient care is provided by registered
nurses, licensed practical nurses and certified nurses aides under the
supervision of a Director of Nursing. Each facility also contracts with a
local licensed physician to serve as its Medical Director, and establishes
relationships with a number of independent local specialists, who are
available to care for the facility's patients. The Company's inpatient
facilities provide a broad range of case management services over the course
of treatment, including, as appropriate, ongoing medical evaluation, social
service needs, specialty equipment requirements, outcomes measurement,
discharge planning and arrangement for home care.
These basic services are supplemented, in the Company's Medicare certified
facilities, by rehabilitation services, including physical, occupational,
speech, respiratory and psychological therapies. These services were
previously provided, in a majority of the Company's facilities, on a
contractual basis between the facility and the Company's rehabilitation
services operations. In connection with the exiting by the Company of the
contract therapy business and the closure of this business line, many of the
Company's therapists became employees of the Company's facilities.
In addition, the Company operates specialized units in many of its
inpatient facilities, which provide subacute care to patients with medically
complex conditions. Within these specialty units, trained staff members offer
care for patients as an alternative to treatment in the more expensive acute
care hospital setting. In addition to basic therapy services these specialty
units offer enteral therapy, intravenous therapy, specialized wound
management, ventilator care, tracheostomy care, cancer and HIV care. These
specialized units have a higher staffing level per patient than the Company's
other inpatient facilities and compete with acute care and rehabilitation
hospitals, which management believes typically charge rates higher than those
charged by the Company's specialty units.
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The Company's assisted living facilities provide furnished rooms and suites
designed for individuals who are either able to live independently within a
sheltered community or who require minimal supervision. For assisted living
residents, the Company provides basic ADL assistance combined with easy access
to higher acuity settings should the resident's health condition dictate the
need for more intensive services.
Mariner Inpatient Services also provides services to residents with
Alzheimer's disease. Within specially designated and designed portions of
certain of its inpatient facilities, the Company operates 83 units with
approximately 2,863 beds dedicated to addressing the problems of
disorientation and perceptual confusion typically experienced by residents
with Alzheimer's disease. The Alzheimer's care units also provide education
and support to the residents' families. The Company provides specially trained
activity directors and nursing staffs to these units and employs a Director of
Alzheimer's Programming to supervise program development and staff training.
AMERICAN PHARMACEUTICAL SERVICES
The Company's pharmaceutical services product group, American
Pharmaceutical Services, Inc. ("APS"), is one of the largest providers of
institutional pharmacy services in the United States. Through 37 institutional
pharmacies in 17 states, APS provides services and products to more than 1,000
long-term care centers with more than 125,000 beds in 19 states.
APS specializes in meeting the needs of healthcare providers in subacute
care, long-term care and assisted living settings. APS' primary products are
pharmacy dispensing, intravenous (IV) and enteral therapy supplies and
orthotics. The Company provides infusion therapies, including hydration, total
parenteral nutrition, antibiotic, peritoneal dialysis and pain management
therapies. Infusion therapies are often required in treating patients with
chronic infections, digestive disorders, cancer and chronic and severe pain.
The Company also provides specialized medical equipment and supplies,
including ventilators, oxygen concentrators, diagnostic equipment and various
types of durable medical equipment. Equipment and supplies are available to
patients both in its inpatient facilities and at home.
Through contractual agreements, APS provides consultant pharmacists
specializing in long-term care drug regimen reviews and regulatory monitoring.
Additionally, the division also provides full clinical support for its
products and services through long-term care facility staff education and
quality assurance programs.
Vitalink Pharmacy Services, Inc. ("Vitalink") has the right to provide
pharmaceutical supplies and services and related consulting services to the
skilled nursing facilities that were operated by GranCare as of the effective
time of the February 1997 sale of GranCare's institutional pharmacy business
to Vitalink. These agreements expire in February 2002 and limit the ability of
other pharmacy providers (including APS) to service these facilities.
The Company has hired a new Chief Executive Officer and Chief Financial
Officer for APS and they are developing a focused plan to reduce overhead,
evaluate institutional pharmacy economies and service and retain customers to
reverse the financial performance decline experienced in 1999. In addition,
the Company is evaluating the strategic options for APS.
OTHER
"Other" is comprised of the Company's owned, leased or managed long-term
acute care hospitals ("LTACs"), therapy, home health and hospital contract
management businesses. Although therapy, home health and results of operations
are included in the Company's results of operations for the fiscal year ended
September 30, 1999, the Company substantially exited these businesses during
the year ended September 30, 1999, primarily as a result of the implementation
of the Balanced Budget Act.
LTACs. The Company owns, leases or manages 14 LTACs encompassing
approximately 700 licensed beds in four states. LTACs provide an intermediate
place to which patients can be discharged from a short-term
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acute care hospital when the patient's condition warrants more intensive care
than can be provided in a typical nursing facility. The Company's LTAC's are
generally located in areas where the Company has a significant concentration
of inpatient facilities to which the LTAC patients can be discharged as their
condition improves, thus constituting a key referral source. The Medicare
reimbursement of the Company's LTAC was not materially affected by the
Balanced Budget Act and the Company's LTAC's continue to be reimbursed on a
cost basis.
Therapy. The Company's therapy operations consisted primarily of the
operation of outpatient rehabilitation clinics and the provision of therapy
services to the Company's and third party's skilled nursing facilities. Prism
Rehab Systems provided comprehensive rehabilitation programs and services
(physical, occupational and speech therapy) to nursing facility residents
through contracts with over 1,200 inpatient facilities throughout the United
States. This product group also provided a variety of rehabilitation
management consulting services to post-acute and long-term care facilities.
Rehability Health operated the Company's outpatient rehabilitation clinics,
hospital services, network administration and worksite programs. This product
group operated 175 outpatient rehabilitation clinics in 18 states, with
geographic concentrations of clinics in six major metropolitan areas. In
addition, Rehability Health provided inpatient and outpatient rehabilitation
services under 43 contractual arrangements with acute-care hospitals.
On June 30, 1999 the Company completed a transaction which was effective
July 1, 1999. The Company sold its outpatient clinic business to HealthSouth
Corporation. On July 29, 1999, the Company sold its acute-care hospital
rehabilitation program management business to National Rehab Partners, Inc.
During the course of fiscal 1999, the Company terminated all other contractual
relationships to provide therapy services to third parties. Therapists
provided to the Company's skilled nursing facilities on a contract basis were,
in most cases, "in-housed" and employed by one of the Company's facilities.
For the year ended September 30, 1999, the Company derived approximately 7% of
its consolidated revenue from its third party therapy operations.
Home Health. The Company's home health and hospice operations consisted of
more than 30 home health, hospice and private duty branches in seven states.
Effective September 30, 1998, the Company divested itself of substantially all
of its hospice operations and, over the course of the 1999 fiscal year, the
Company divested itself of or closed substantially all of its home health and
private duty operations. Through these operations, the Company provided
skilled nursing, rehabilitation, pharmacy, infusion therapy and respiratory
services and durable medical equipment and supplies to individuals needing
such services in their homes. For the year ended September 30, 1999, the
Company derived less than 2% of its consolidated revenue from its home health
operations.
Hospital Contract Management. The Company previously managed specialty
medical programs in acute care hospitals through more than 100 hospital
relationships in 19 states and had substantially exited this business by
December 31, 1999. The service offerings for hospital program management
included developing and managing specialty geriatric programs on behalf of
acute care hospitals, including subacute skilled nursing, rehabilitation
therapy, geriatric mental health, respiratory therapy and geriatric primary
care networks. The Company was generally responsible for managing the clinical
and operational aspects of a prescribed program, including quality control.
The Company sold the gero-psych portion of this business to Psychiatric
Solution, Inc. in August 1999. For the year ended September 30, 1999, the
Company derived less than 1% of its consolidated revenue from these
operations.
Physician Management. Other also consists of the Company's physician
operations (the Company closed this business as of December 31, 1999) which
were not material to the Company's results of operations.
SOURCES OF REVENUE
The Company receives payments for services rendered to patients from the
federal government under Medicare, from the various states where the Company
operates under Medicaid and from private insurers and the patients themselves.
The implementation of PPS and fee screen schedules pursuant to the Balanced
Budget Act has had a material adverse effect on the Company's revenues.
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The sources and amounts of the Company's patient revenues are determined by
a number of factors, including licensed bed capacity of its facilities,
occupancy rate, the payor mix, the type of services rendered to the patient
and the rates of reimbursement among payor categories (private, Medicare and
Medicaid). Changes in the mix of the Company's patients among the private pay,
Medicare and Medicaid categories as well as changes in the quality mix will
significantly affect the profitability of the Company's operations.
Historically, private pay patients have been the most profitable and Medicaid
patients have been the least profitable. Also, the Company historically
derived higher revenues from providing specialized medical services than
routine inpatient care. For the year ended September 30, 1999, the Company
derived 32%, 21% and 47% of its net patient revenues from private pay,
Medicare and Medicaid services, respectively (without giving pro forma effect
to the GranCare Merger and Mariner Merger).
Although reimbursement for Medicare residents historically generated a
higher level of revenue per patient day, with margins that generally exceeded
those of Medicaid patients, profitability was not proportionally tied to the
revenue growth due to the additional costs associated with providing the
higher level of care and other services required by such residents. PPS and
fee screens for Part B Medicare therapy services have further eroded the
profitability of Medicare patients as compared to Medicaid patients.
Under PPS, each patient is evaluated and assigned to one of 44 payment
groupings, which determines the per diem reimbursement rate for that patient.
The higher the acuity level of the patient, the more services that are
required by that patient. Accordingly, a higher acuity patient that requires
more services is assigned to a higher payment grouping, resulting in a higher
per diem rate. The ability of the Company to offer the ancillary services
required by higher acuity patients in a cost effective manner will be critical
to the Company's success and will affect the profitability of the Company's
Medicare patients.
MARKETING
In marketing its services, the Company pursues a two-tiered strategy. It
markets its facilities, programs and services, first to payors and managed
care organizations at the regional level and, second, to professionals
responsible for discharging patients at local hospitals at the facility level.
At the regional level, the Company's sales personnel seek to establish
relationships with payors and managed care organizations, who are increasingly
important sources of referrals for subacute patients. The Company develops
contractual relationships with such payors and organizations on a local,
regional and national basis.
Local market sales efforts focus on establishing and maintaining
cooperative relationships and networks with physicians, acute care hospitals
and other healthcare providers, with an emphasis on specialists who treat
ailments involving long-term care and rehabilitation. Sales programs targeting
managed care payors are also being implemented at both the local and national
level. Ongoing assessment of customer satisfaction with the Company's services
allows for improvements in product and sales performance.
The Company plans to take advantage of other opportunities for increased
profitability, including arrangements with healthcare providers such as health
maintenance organizations ("HMOs"). The Company continues to establish
relationships with managed care providers, which it believes will increase its
subacute care business. Typically, patients referred by managed care
providers, including HMOs and preferred provider organizations, generate
higher revenues per patient day than Medicaid patients as a result of the
higher acuity of the enrollees. Management believes that the Company's ability
to provide subacute and specialty medical services at a lower cost than acute
care hospitals is a competitive advantage in providing services to managed
care providers.
COMPLIANCE INITIATIVES
The purpose of the compliance program is to address the Company's
compliance issues, communicate issues to the Chief Executive Officer and Board
of Directors of the Company, monitor the Company's "hotline," assure ethical
and legal conduct by the Company's management and employees, and to work with
the Human Resources, Legal and Internal Audit Departments on compliance
training issues, on quality of care issues and legal matters involving
compliance issues.
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The Company's "hotline" is prominently posted in all of the Company's
inpatient facilities and other areas where the Company has operations.
Employees, patients and family members are encouraged to call the hotline,
either in person or anonymously, to report any potential issues that they
might note. Upon receipt of a call, the compliance department investigates the
issue and, if necessary, liaisons with the appropriate corporate departments
in order to resolve the issue. Employees are assured that any calls to the
hotline will not result in any retribution by the Company. Management believes
that this program has been highly successful and will help the Company to
identify trends and potential problem areas in a timely fashion for quick
remediation.
The Company has also implemented a comprehensive background check
initiative aimed at improving the quality of the Company's workforce and
reducing employee turnover. To the best of the Company's knowledge, the design
of this program meets or exceeds all state and federal regulatory requirements
for background checks.
MANAGEMENT INFORMATION SYSTEMS
The Company has devoted substantial time and resources towards integrating
the information systems of its constituent corporations. The Company has
recently completed the installation of a new client-server based financial and
payroll/human resource software package. The Company believes that the new
software will provide more timely retrieval of financial and operating data
and enhanced analytical review capabilities, thereby increasing the utility
and functionality of the Company's information systems. The Company expects
that the standardized financial reporting, streamlined human resource
management and increased access to critical and time-sensitive information
across the Company will assist it in operating more efficiently.
REGULATION
Various aspects of the Company's business are regulated by the federal
government and by the states where the Company has operations. Regulatory
requirements affect the Company's business activities by controlling growth,
requiring licensure and certification for the Company's facilities and
healthcare services, and controlling reimbursement for services provided.
Although certain proceedings have been brought alleging that the Company has
not complied with federal regulatory requirements (see "Legal Proceedings"),
the Company believes it materially complies with applicable regulatory
requirements. However, there can be no assurance that the Company will be able
to maintain such compliance or will not be required to expend significant
amounts to do so.
Medicare and Medicaid. The Medicare program was enacted in 1965 to
provide a nationwide, federally funded health insurance program for the
elderly. The Medicaid program is a joint federal-state cooperative arrangement
established for the purpose of enabling states to furnish medical assistance
on behalf of aged, blind, or disabled individuals, or members of families with
dependent children, whose income and resources are insufficient to meet the
costs of necessary medical services. All of the Company's nursing facilities
are licensed under applicable state law and are certified or approved as
providers or suppliers under Medicare and state Medicaid programs, as
applicable.
Cost Based Reimbursement. The Medicare program historically utilized a
cost-based retrospective reimbursement system for nursing facilities and long-
term acute care ("LTAC") hospitals for reasonable direct and indirect
allowable costs incurred in providing "routine service" (as defined by the
program and subject to certain limits) as well as capital costs and ancillary
costs. Pursuant to the Balanced Budget Act discussed below, Medicare is
transitioning into PPS for skilled nursing facilities. Pursuant to the
Consolidated Appropriations Act discussed below, Medicare has been directed to
phase-in a PPS for LTAC hospitals effective for cost reporting periods
beginning on or after October 1, 2002.
Prior to the implementation of PPS, Medicare revenues and Medicaid
reimbursement rates were historically determined from annual cost reports
filed by the Company which were (and, with respect to cost periods that have
not been settled, still are) subject to audit by the respective fiscal
intermediaries and agencies administering the programs. The audits generally
focus on the reasonableness and necessity of the costs incurred by providers.
Some Medicare fiscal intermediaries have made audit adjustments to settle cost
reports for some facilities which
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reduce the amount of reimbursement that was received by the facilities and
which the Company is appealing. Significant cost adjustments are based on the
intermediaries' denials of the exception to the related organizations
principle with regard to services and supplies furnished by the Company's
pharmacy and its former rehabilitation subsidiaries to its nursing facilities,
and reductions in costs claimed for therapy services for alleged failures to
comply with prudent buyer requirements. An unrelated provider received a
favorable decision on its prudent buyer appeal based on similar facts. The
Company believes it has substantial arguments in support of its position that
the contested costs are appropriate, but there can be no assurance that the
Company will prevail on all or any appeal issues, nor that it will not be
required to expend significant amounts to complete the appeal process. All
items under appeal are fully reserved for in the Company's financial
statements until such time as there is no uncertainty as to the outcome of the
relevant appeal. Prior adjustments to the Company's cost reports historically
have had a material adverse effect on its operating results, especially with
respect to the operations of Mariner Health. Future adjustments to such cost
reports or unsuccessful appeals of current adjustments could have a material
adverse effect on the Company's operating results in the future. The Company
files routine cost limit exception requests with respect to cost reporting
periods prior to the implementation of PPS for the facilities which exceed the
limits and fit the criteria as exception candidates. The Company benefits from
these exceptions, and generally exception requests have been approved.
However, there can be no assurance that any such pending or future requests
for the routine cost limit exception will be granted. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Balanced Budget Act--Medicare. The Balanced Budget Act, enacted on August
5, 1997, made numerous changes to the Medicare and Medicaid programs that
affect the Company. With respect to the Medicare program, the new law required
the establishment of a PPS system for Medicare Part A skilled nursing facility
services, under which facilities are paid a federal per diem rate for
virtually all covered services. The PPS system was phased in over three cost
reporting periods, and started with cost reporting periods beginning on or
after July 1, 1998. The Balanced Budget Act also implemented fee screens with
respect to Medicare Part B therapy services, which were effective January 1,
1999. These rates were published in November 1998 and revise the reimbursement
methodology with respect to these services from a cost-basis to a set fee.
Subsequent legislation (see "--Consolidated Appropriations Act--Medicare"
below) will increase the per diem rate for certain higher-acuity patients. The
Balanced Budget Act also imposed a per beneficiary cap of $1,500 per provider
per therapy service provided, also effective January 1, 1999. This cap was
recently suspended by the Consolidated Appropriations Act for 2000 and 2001.
The Balanced Budget Act also instituted consolidated billing for skilled
nursing facility services, under which all payments for non-physician services
to beneficiaries are made to the facility, regardless of whether the item or
service was directly furnished by the facility or by others under arrangement.
While this provision was to be effective for items or services furnished on or
after July 1, 1998, it has been delayed for certain covered services furnished
to skilled nursing facility residents no longer eligible for Part A skilled
nursing facility care. The Company anticipates that the delayed consolidated
billing provisions may be implemented in 2000. Other provisions limited
Medicare payments for certain drugs and biologicals, durable medical equipment
and parenteral and enteral nutrients and supplies.
As of July 1, 1999, all of the Company's Medicare-certified skilled nursing
facilities were operating under PPS. PPS has resulted in more intense price
competition and lower margins for both the Company's skilled nursing and
pharmacy operations. PPS has also resulted in the decision by the Company to
divest or discontinue certain businesses formerly operated by the Company
where the revenues derived from such businesses under PPS are not sufficient
to enable the Company to operate such businesses profitably. See "Business"
above. In light of the Company's current capital and overhead structure, there
can be no assurance that the Company will be successful in reducing its
operating costs below the PPS reimbursement rates or the Medicare Part B
therapy fee screen rates. As a result, the Company commenced the Chapter 11
Filings with a view to effecting a comprehensive financial restructuring to
facilitate the Company's ability to operate profitably under PPS.
Consolidated Appropriations Act--Medicare. On November 29, 1999, President
Clinton signed into law H.R. 3194, the "Consolidated Appropriations Act" (the
"CAA") (P.L. 106-113), legislation designed to mitigate the effects of the
Balanced Budget Act. While the CAA is expected to ameliorate somewhat the
adverse effects of the Balanced Budget Act, the Company has not yet evaluated
what effect the CAA will have on its
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operating results. However, the Company does not believe the CAA will have a
material positive effect on its operating results. See "Business--Regulation."
The CAA, however, temporarily increases the acuity adjusted PPS rates by 20
percent for 15 acuity categories. As evidenced by the language of the CAA,
this payment increase is intended to compensate SNFs for the provision of care
to medically complex patients, pending appropriate refinements to the PPS
system. SNFs providing care to patients falling within every
non-rehabilitation acuity category above the presumptive (rebuttable) Medicare
eligibility line will benefit from this increase. Three acuity categories
falling within the "high" and "medium" rehabilitation category also are
subject to the increase. The increased payments will begin on April 1, 2000,
and end before the later of (A) October 1, 2000, or (B) the date the Health
Care Financing Administration ("HCFA") implements a refined PPS system that
better accounts for medically-complex patients. Neither the CAA nor the
accompanying Conference Report provides HCFA with specific directions
regarding such refinements to the PPS system. In addition, the CAA provides
for a four percent increase in the federal per diem payment rates for all
acuity categories in both fiscal years 2001 and 2002. This increase will not
be built into the base payment rates, however, and therefore future updates to
the federal payment rates will be calculated from the initial base rate.
Balanced Budget Act--Medicaid. The Balanced Budget Act also contains a
number of changes affecting the Medicaid program. Significantly, the law
repealed the Boren Amendment, which required state Medicaid programs to
reimburse nursing facilities for the costs that are incurred by efficiently
and economically operated nursing homes. It is unclear at this time whether
state Medicaid programs will adopt changes in their Medicaid reimbursement
systems, or, if adopted and implemented, what effect such initiatives would
have on the Company. Nevertheless, there can be no assurance that future
changes in Medicaid reimbursement rates to nursing facilities will not have an
adverse effect on the Company. Further, the Balanced Budget Act allows states
to mandate enrollment in managed care systems without seeking approval from
the Secretary of HHS for waivers from certain Medicaid requirements as long as
certain standards are met. These managed care programs have historically
exempted institutional care although some states have instituted pilot
programs to provide such care under managed care programs. Effective for
Medicaid services provided on or after October 1, 1997, states have
considerable flexibility in establishing payment rates. The Company is not
able to predict whether any states' waiver provisions will change the Medicaid
reimbursement systems for long-term care facilities from cost-based or fee-
for-service to managed care negotiated or capitated rates or otherwise affect
the level of payments to the Company.
Future Reform. Healthcare reform remains an issue for healthcare providers.
Many states are currently evaluating various proposals to restructure the
healthcare delivery system within their respective jurisdictions. It is
uncertain at this time what healthcare reform legislation will ultimately be
implemented or whether other changes in the administration or interpretation
of governmental healthcare programs will occur. Management anticipates that
state legislatures will continue to review and assess various healthcare
reform proposals and alternative healthcare systems and payment methodologies.
Management is unable to predict the ultimate impact of any future state
restructuring of the healthcare system, but such changes could have a material
adverse impact on the results of operations, financial condition and prospects
of the Company.
The Company expects Congress to continue to consider measures to reduce the
growth in Medicare and Medicaid expenditures. The Company cannot predict at
this time whether any additional measures 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 of patients eligible for reimbursement pursuant to such
programs.
Survey and Certification. Long-term care facilities must comply with
certain requirements to participate either as a skilled nursing facility under
Medicare or a nursing facility under Medicaid. Regulations promulgated
pursuant to the Omnibus Budget Reconciliation Act of 1987, obligate facilities
to demonstrate compliance with requirements relating to resident rights,
resident assessment, quality of care, quality of life, physician services,
nursing services, pharmacy services, dietary services, rehabilitation
services, infection control, physical environment and administration.
Regulations governing survey, certification, and enforcement procedures to be
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used by state and federal survey agencies to determine facilities' level of
compliance with the participation requirements for Medicare and Medicaid were
adopted by the Health Care Finance Administration ("HCFA") effective July 1,
1995. These regulations require that surveys focus on residents' outcomes of
care and state that all deviations from participation requirements will be
considered deficiencies, but a facility may have deficiencies and be in
substantial compliance with the regulations. The regulations identify
alternative remedies (meaning remedies other than termination of a facility
from the Medicare or Medicaid programs) against facilities and specify the
categories of deficiencies for which they will be applied. The alternative
remedies include, but are not limited to: civil money penalties of up to
$10,000 per day; facility closure and/or transfer of residents in emergencies;
denial of payment for new or all admissions; directed plans of correction; and
directed in-service training. HCFA requires long-term care providers to comply
with certain standards as a condition to participation in the Medicare and
Medicaid programs. Failure to comply may result in termination of the
provider's Medicare and Medicaid provider agreements.
The Company believes that its facilities and service providers materially
comply with applicable regulatory requirements. From time to time, however,
the Company receives notice of noncompliance with various requirements for
Medicare/Medicaid participation or state licensure. The Company reviews such
notices for factual correctness, and based on such review, either takes
appropriate corrective action and/or challenges the stated basis for the
allegation of noncompliance. In most cases, the Company and the reviewing
agency will agree upon any measures to be taken to bring the facility or
service provider into compliance. Under certain circumstances, however, such
as repeat violations or perceived severity of the violations, the federal
and/or state agencies have the authority to take adverse actions against a
facility or provider, including the imposition of monetary fines, the
decertification of a facility or provider from participation in the Medicare
and/or Medicaid programs, or licensure revocation. No such enforcement action
against a facility or provider has had a material adverse impact on the
Company in the past, although there can be no assurance that such an
enforcement action will not have a material impact on the Company in the
future. The Company believes it substantially complies with these regulatory
requirements, but there can be no assurance that the Company will be able to
maintain such compliance, or will not be required to expend significant
amounts to do so.
Referral Restrictions and Fraud and Abuse. The Medicare and Medicaid anti-
kickback statute, 42 U.S.C. Section 1320a-7(b), prohibits the knowing and
willful solicitation or receipt of any remuneration "in return for" referring
an individual, or for recommending or arranging for the purchase, lease, or
ordering, of any item or service for which payment may be made under Medicare
or a state healthcare program. In addition, the statute prohibits the offer or
payment of remuneration "to induce" a person to refer an individual, or to
recommend or arrange for the purchase, lease, or ordering of any item or
service for which payment may be made under the Medicare or state healthcare
programs. Violation of the anti-kickback statute, pursuant to the Balanced
Budget Act, now carries a civil monetary penalty of $50,000 per act, and
treble the remuneration involved without regard to whether any portion of that
remuneration relates to a lawful purpose. The statute contains "safe harbor"
exceptions including those for certain discounts, group purchasing
organizations, employment relationships, management and personal services
arrangements, health plans and certain other practices defined in regulatory
safe harbors.
The Ethics in Patient Referrals Act ("Stark I"), effective January 1, 1992,
generally prohibits physicians from referring Medicare patients to clinical
laboratories for testing if the referring physician (or a member of the
physician's immediate family) has a "financial relationship," through
ownership or compensation, with the laboratory. The Omnibus Budget
Reconciliation Act of 1993 contains provisions commonly known as "Stark II"
("Stark II") expanding Stark I by prohibiting physicians from referring
Medicare and Medicaid patients to an entity with which a physician has a
"financial relationship" for the furnishing of certain items set forth in a
list of "designated health services," including physical therapy, occupational
therapy, home health services, and other services. Subject to certain
exceptions, if such a financial relationship exists, the entity is generally
prohibited from claiming payment for such services under the Medicare or
Medicaid programs, and civil monetary penalties may be assessed for each
prohibited claim submitted.
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There are other provisions in the Social Security Act and in other federal
and state laws authorizing the imposition of penalties, including fines and
exclusion from participation in Medicare and Medicaid, for various billing and
other offenses.
Additionally, the Health Insurance Portability and Accountability Act of
1996 (the "Accountability Act") granted expanded enforcement authority to HHS
and the U.S. Department of Justice ("DOJ"), and provided enhanced resources to
support the activities and responsibilities of the Office of Inspector General
("OIG") and DOJ by authorizing large increases in funding for investigating
fraud and abuse violations relating to healthcare delivery and payment. The
Balanced Budget Act also includes numerous health care fraud provisions,
including new civil money penalties for contracting with an excluded provider;
new surety bond and information disclosure requirements for certain providers
and suppliers including home health agencies; and an expansion of the
mandatory and permissive exclusions added by the Accountability Act to any
federal healthcare program (other than the Federal Employees Health Benefits
Program).
In 1995, a major anti-fraud demonstration project, "Operation Restore
Trust," was announced by the OIG. A primary purpose for the project was to
scrutinize the activities of healthcare providers who are reimbursed under the
Medicare and Medicaid programs. Investigative efforts focused on skilled
nursing facilities, home health and hospice agencies, and durable medical
equipment suppliers as well as several other types of healthcare services.
Over the longer term, Operation Restore Trust investigative techniques will
eventually be used in all 50 states, and will be applied throughout the
Medicare and Medicaid programs. The OIG has issued, and will continue to
issue, Special Fraud Alert bulletins identifying "suspect" characteristics of
potentially illegal practices by providers, and illegal arrangements between
providers. The bulletins contain "Hot Line" numbers and encourage Medicare
beneficiaries, health care company employees, competitors, and others to call
to report suspected violations. Enforcement actions could include criminal
prosecutions, suit for civil penalties, and/or Medicare and Medicaid program
exclusion.
False claims are prohibited pursuant to criminal and civil statutes.
Criminal provisions at 42 U.S.C. Section 1320a-7(b) prohibit filing false
claims or making false statements to receive payment or certification under
Medicare or Medicaid, or failing to refund overpayments or improper payments;
offenses for violation are felonies punishable by up to five years
imprisonment, and/or $25,000 fines. Civil provisions at 31 U.S.C. Section 3729
prohibit the knowing filing of a false claim or the knowing use of false
statements to obtain payment; penalties for violations are fines of not less
than $5,000 nor more than $10,000, plus treble damages, for each claim filed.
Suits alleging false claims can be brought by individuals, including employees
and competitors. Allegations have been made under the civil provisions of the
statute in certain qui tam actions that the Company has filed false claims.
See "Legal Proceedings" for a discussion of these allegations.
In addition to qui tam actions brought by private parties, the Company
believes that governmental enforcement activities have increased at both the
federal and state levels. See "Legal Proceedings." There can be no assurance
that substantial amounts will not be expended by the Company to cooperate with
these investigations and proceedings or to defend allegations arising
therefrom. If it were found that any of the Company's practices failed to
comply with any of the anti-fraud provisions discussed in the paragraphs
above, the Company could be materially adversely affected.
Management is unable to predict the effect of future administrative or
judicial interpretations of the laws discussed above, or whether other
legislation or regulations on the federal or state level in any of these areas
will be adopted, what form such legislation or regulations may take, or their
impact on the Company. There can be no assurances that such laws will
ultimately be interpreted in a manner consistent with the Company's practices.
See "Legal Proceedings."
Certificates of Need. Certificate of Need ("CON") statutes and regulations
control the development and expansion of healthcare services and facilities in
certain states. The CON process is intended to promote quality healthcare at
the lowest possible cost and to avoid the unnecessary duplication of services,
equipment and facilities. CON or similar laws generally require that approval
be obtained from the designated state health planning agency for certain
acquisitions and capital expenditures, and that such agency determine that a
need
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exists prior to the expansion of existing facilities, construction of new
facilities, addition of beds, acquisition of major items of equipment or
introduction of new services. Additionally, several states have instituted
moratoria on new CONs or the approval of new beds.
Pharmacy Regulation. Pharmacy operations are subject to regulation by the
various states in which the Company conducts its business as well as by the
federal government. The Company's pharmacies are regulated under the Food,
Drug and Cosmetic Act and the Prescription Drug Marketing Act, which are
administered by the United States Food and Drug Administration. Under the
Comprehensive Drug Abuse Prevention and Control Act of 1970, which is
administered by the United States Drug Enforcement Administration ("DEA"), the
pharmacies, as dispensers of controlled substances, must register with the
DEA, file reports of inventories and transactions and provide adequate
security measures. Failure to comply with such requirements could result in
civil or criminal penalties. The Company believes that its pharmacy operations
are in substantial compliance with such regulations.
Nursing Home Enforcement Initiatives. President Clinton has announced
initiatives designed to improve the quality of care in nursing homes and to
reduce fraud in the Medicare program. On July 21, 1998, the President directed
HCFA to ensure that states take tougher enforcement measures in surveying
skilled nursing facilities; including the onsite imposition of fines without
grace periods, the imposition of fines per violation rather than per day of
noncompliance, and increased review of facilities' systems to prevent resident
neglect and abuse. On December 7, 1998, the President announced that the
Administration would continue its crackdown on providers who commit Medicare
program fraud by empowering specialized contractors to track down Medicare
scams and program waste, and by requiring providers to report evidence of
fraud so patterns of fraud can be identified early and stopped.
Senate Hearing. During the week of July 27, 1998, the Senate Special
Committee on Aging conducted a hearing concerning nursing home quality issues,
which resulted in heightened media attention and increased public scrutiny of
the nursing home industry. Since this hearing, there appears to have been
increased enforcement actions against nursing homes, including those operated
by the Company, by state survey agencies, including threats to terminate
facilities from participating in the Medicare and Medicaid programs, and the
impositions of fines. Two facilities operated by the Company have had Medicare
contracts terminated and a number have had fines imposed. The Company
evaluates each termination and fine imposition and either pays the fine as
assessed or appeals the assessment. Termination actions are either appealed or
settled. See "Survey and Certification." While the Company believes that it
substantially complies with applicable regulatory requirements, there can be
no assurance that the Company will be able to maintain such compliance, or
will not be required to expend significant amounts to pursue appeals of fine
impositions, terminations or other sanctions.
Draft Compliance Program. On October 28, 1999, the OIG issued draft
guidance to help nursing facilities design effective voluntary compliance
programs to prevent fraud, waste and abuse in health care programs, including
Medicare and Medicaid. The draft guidance, Compliance Program Guidance for
Nursing Facilities, was published as a notice in the Oct. 29, 1999, Federal
Register. After reviewing and incorporating comments receiving during a
comment period, as appropriate, the OIG will publish a final version of the
voluntary compliance guidance in the Federal Register. The draft guidance
recommends that nursing facilities enact certain procedures and policies in
prevention of fraud, waste, and abuse. The Company has a compliance program it
adopted voluntarily in early 1998, and believes its compliance program
substantially incorporates the guidance which the OIG has proposed to be
included in such programs. See "Business--Compliance Initiatives."
Possible Increase in Regulatory Oversight. As a result of the Chapter 11
Filings, the Company may experience an increase in regulatory oversight
compared to historical levels from both federal and state regulatory bodies.
The increased oversight may result from such regulatory bodies' concerns that
the Company's current financial difficulties may result in a decrease in the
quality of care provided at the Company's inpatient and other facilities.
Although the Company believes that it is in substantial compliance with
applicable regulatory requirements, no assurance can be given that, if the
Company is subject to an increase in regulatory oversight as
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a result of the concerns described above, such increased oversight will not
have a material adverse effect on the Company.
OIG Fiscal Year 2000 Work Plan. In October of 1999, the OIG released its
fiscal year 2000 Work Plan, which summarizes the major projects the OIG
intends to pursue in each of HHS' major operating areas, including HCFA.
Initiatives include review of skilled nursing facility coverage after
unnecessary hospital stays, hospitals exempt from PPS, home health compliance,
implementation of PPS, the role of the nursing home medical director, therapy
services in skilled nursing facilities, financing screening and the distinct
part rule. While the Company believes that it provides quality care to the
patients in its facilities and materially complies with all applicable
regulatory requirements, there can be no assurance that the Company will not
be required to expend significant sums in connection with increased
governmental investigatory activity.
COMPETITION
The long-term healthcare industry is segmented into a variety of
competitive areas which market similar services. These competitors include
nursing homes, hospitals, extended care centers, assisted living facilities,
retirement centers and communities and home health and hospice agencies. Many
operators of acute care hospitals offer or may offer post-acute care services
in the future. These operators would have the competitive advantage of being
able to offer services to patients at their affiliated post-acute care
operations. The Company's facilities historically have competed on a local
basis with other long-term care providers, and the Company's competitive
position will vary from center to center within the various communities it
serves. Significant competitive factors include the quality of care provided,
reputation, location and physical appearance of the long-term care facilities
and, in the case of private pay residents, charges for services. Since there
is little price competition with respect to Medicaid and Medicare residents,
the range of services provided by the Company's facilities covered by Medicaid
and Medicare as well as the location and physical condition of its facilities
will significantly affect its competitive position in its markets. The
Company's ability to compete may also be adversely affected by publicity
regarding the Company's Chapter 11 Filings. Competition in the institutional
pharmaceutical services markets ranges from small local operators to companies
that are national in scope and distribution capability.
INSURANCE
The Company maintains general and professional liability ("GL/PL")
insurance coverage on behalf of itself and its subsidiaries. Up until March
31, 1998, for various preceding policy years, the policies carried deductibles
or self-insured retentions in varying amounts up to $1 million depending on
the subsidiary and its location. From March 31, 1998 through March 31, 1999,
the Company maintained GL/PL insurance coverage that provided for a $100,000
self-insured retention per claim in all states in which the Company operated,
other than Texas, where the self-insured retention was $1 million. This policy
contained a cap on the aggregate self-insured retention that the Company could
be required to pay with respect to any covered year. Effective March 31, 1999,
the self-insured retention on the Company's former policy was increased to
$500,000 for all states except Texas and Florida, where it was $1 million. In
June 1999, the Company received notice of cancellation from the former carrier
of its GL/PL coverage, based upon claims of underwriting risks. Effective July
31, 1999, the Company obtained a replacement policy with another carrier,
which resulted in a $4.4 million increase in annual premium and elimination of
former policy's aggregate retention limit and a self-insured retention of $1.0
million with respect to any claim in any state. The elimination of the
aggregate retention limit is expected to increase the actuarial cost of GL/PL
claims by approximately $42.6 million in the next year. This increased expense
will have a delayed negative effect on cash flow as claims develop over the
next several years. The increased cost to the Company under the new insurance
program could have a material adverse effect on the Company's financial
condition.
The Company also requires that physicians practicing at its inpatient
facilities carry medical malpractice insurance to cover their individual
practice. In addition, insurance coverage for punitive damages is not
available in certain states in which the Company operates, and proceedings
involving claims of punitive damages are
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pending in certain of these states. Moreover, given the current regulatory
enforcement and litigation environment,
as well as the recent changes to the Company's insurance coverage, there can
be no assurance that costs for obtaining future PL/GL insurance coverage will
not continue to increase, or that the Company's current insurance coverages
will be adequate to satisfy any future adverse determinations against the
Company. See "Business--Regulation," "Legal Proceedings" and Notes 17 and 18
to the Consolidated Financial Statements.
EMPLOYEES
The Company employs approximately 54,000 employees. The Company depends
upon skilled personnel such as nurses as well as unskilled labor to staff its
facilities. In some areas in which the Company operates there is a labor
shortage that could have a material adverse effect upon the Company's ability
to attract or retain sufficient numbers of skilled personnel and the ability
to attract or retain sufficient numbers of unskilled labor at reasonable
wages. The Company's Chapter 11 Filings could also have a material adverse
effect on its ability to attract, retain and motivate a sufficient number of
both skilled and unskilled labor. The Company has collective bargaining
agreements with unions representing employees at 38 facilities and with
employee counsels at two of its facilities. Unions represent employees at
three additional facilities and the Company is currently negotiating
collective bargaining agreements with unions at two of such facilities. The
Company cannot predict the effect continued union representation or
organizational activities will have on its future activities. However, the
aforementioned organizations have not caused any material work stoppages in
the past.
RISK FACTORS AND CAUTIONARY STATEMENTS
Information provided herein by the Company contains, and from time to time
the Company may disseminate materials and make statements which may contain,
"forward-looking" information, as that term is defined by the Private
Securities Litigation Reform Act of 1995 (the "Act"). In particular, the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" contains
information concerning the Company's plan to restructure its debt obligations
and other financial commitments; and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000" contains information
concerning management's belief regarding the impact of the Year 2000 issue.
The aforementioned forward looking statements, as well as other forward
looking statements made herein, are qualified in their entirety by these
cautionary statements, which are being made pursuant to the provisions of the
Act and with the intention of obtaining the benefits of the "safe harbor"
provisions of the Act.
The Company cautions investors that any forward-looking statements made by
the Company are not guarantees of future performance and that actual results
may differ materially from those in the forward-looking statements as a result
of various factors, including, but not limited to, the following:
(i) There can be no assurance that the amounts available to the Company
through the DIP Financings will be sufficient to fund the
operations of the Company until such time as the Company is able to
propose a plan of reorganization that will be acceptable to
creditors and confirmed by the court overseeing the Company's
Chapter 11 Filings.
(ii) There can be no assurance that any plan of reorganization confirmed
in connection with the Chapter 11 Filings will allow the Company to
operate profitably under PPS or give the Company sufficient
liquidity to meet its operational needs.
(iii) There can be no assurance regarding the future availability or
terms of financing in light of the Company's Chapter 11 Filings.
(iv) There can be no assurance regarding any adverse actions which may
be taken by creditors or landlords of the Company which may have
the effect of preventing or unduly delaying confirmation of a plan
of reorganization in connection with the Company's Chapter 11
Filings.
(v) The Company may have difficulty in attracting patients or labor as
a result of its Chapter 11 Filings.
(vi) The Company may be subject to increased regulatory oversight as a
result of its Chapter 11 Filings.
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(vii) In recent years, an increasing number of legislative proposals
have been introduced or proposed by Congress and in some state
legislatures which would effect major changes in the healthcare
system. However, the Company cannot predict the type of healthcare
reform legislation which may be proposed or adopted by Congress or
by state legislatures. Accordingly, the Company is unable to
assess the effect of any such legislation on its business. There
can be no assurance that any such legislation will not have a
material adverse impact on the future growth, revenues and net
income of the Company.
(viii) The Company derives substantial portions of its revenues from
third-party payors, including government reimbursement programs
such as Medicare and Medicaid, and some portions of its revenues
from nongovernmental sources, such as commercial insurance
companies, health maintenance organizations and other charge-based
contracted payment sources. Both governmental and non-governmental
payors have undertaken cost-containment measures designed to limit
payments to healthcare providers. There can be no assurance that
payments under governmental and non-governmental payor programs
will be sufficient to cover the costs allocable to patients
eligible for reimbursement, especially with the implementation of
PPS and fee screens with respect to therapy services. The Company
cannot predict whether or what proposals or cost-containment
measures will be adopted in the future or, if adopted and
implemented, what effect, if any, such proposals might have on the
operations and financial condition of the Company.
(ix) The Company is subject to extensive federal, state and local
regulations governing licensure, conduct of operations at existing
facilities, construction of new facilities, purchase or lease of
existing facilities, addition of new services, certain capital
expenditures, cost-containment and reimbursement for services
rendered. The failure to obtain or renew required regulatory
approvals or licenses, the failure to comply with applicable
regulatory requirements, the delicensing of facilities owned,
leased or managed by the Company or the disqualification of the
Company from participation in certain federal and state
reimbursement programs, or the imposition of harsh enforcement
sanctions could have a material adverse effect upon the operations
and financial condition of the Company.
(x) With respect to the year 2000 disclosure contained in Management's
Discussion and Analysis of Financial Position and Results of
Operations-Year 2000, management is unable to predict the extent
to which its third-party payors will be affected by the Year 2000
Issue.
(xi) There can be no assurance that an adverse determination in a legal
proceeding or governmental investigation, whether currently
asserted or arising in the future, will not have a material
adverse effect on the Company's financial position.
In addition, the Company's Chapter 11 Filings may disrupt its operations and
may result in a number of other operational difficulties, including the
following:
(i) The Company's ability to access capital markets will likely be
limited;
(ii) The Company's senior management may be required to expend a
substantial amount of time and effort structuring a plan of
reorganization, which could have a disruptive impact on
management's ability to focus on the operation of the Company's
business;
(iii) The Company may be unable to retain top management and other key
personnel;
(iv) The Company may experience a reduction in the census at its
skilled nursing facilities and hospitals; and
(v) Suppliers to the Company may stop providing supplies or services
to the Company or provide such supplies or services only on "cash
on delivery," "cash on order" or other terms that could have an
adverse impact on the Company's cash flow.
16
<PAGE>
ITEM 2. PROPERTIES
As of September 30, 1999, the Company operates 413 long-term care
facilities (400 skilled nursing facilities and 13 free standing assisted
living facilities) with over 49,000 licensed beds located in 28 states. Of
this total, 74 facilities located in 15 states are Mariner Health facilities
("Mariner Health Facilities"). Substantially all of the Mariner Health
Facilities serve as collateral for the obligations of Mariner Health under the
Mariner Health senior credit facility. In connection with the Chapter 11
Filings, the Company agreed to manage these facilities for the lenders party
to Mariner Health's senior credit facility for a management fee equal to 5% of
the revenues attributable to the Mariner Health Facilities subject to Mariner
Health's Senior Credit Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources. Licensed beds represent the number of beds for which a license has
been issued and may vary from the actual beds available for use. The average
occupancy rate for the Company's inpatient facilities (excluding LTACs) was
85.2% for the year ended September 30, 1999. The Company operates the
following facilities:
<TABLE>
<CAPTION>
OWNED LEASED MANAGED TOTAL
----------------- ----------------- ---------------- -----------------
FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS
---------- ------ ---------- ------ ---------- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama................. 7 848 -- -- -- -- 7 848
Arizona................. 4 506 10 1,236 -- -- 14 1,742
California.............. 7 832 31 3,727 4 385 42 4,944
Colorado................ 30 2,974 4 675 -- -- 34 3,649
Connecticut............. 2 250 1 90 -- -- 3 340
Delaware................ -- -- -- -- 1 99 1 99
Florida................. 26 3,225 2 237 -- -- 28 3,462
Georgia................. 5(1) 571 6 740 -- -- 11 1,311
Iowa.................... 1 99 -- -- 6(2) 448 7 547
Illinois................ 14 1,271 5 667 -- -- 19 1,938
Indiana................. -- -- 3 415 -- -- 3 415
Louisiana............... 1 276 5 984 -- -- 6 1,260
Maryland................ 11 1,768 2 368 -- -- 13 2,136
Massachusetts........... 5 576 -- -- 6 809 11 1,385
Michigan................ 13 1,863 -- -- -- -- 13 1,863
Mississippi............. 1 121 10 1,104 -- -- 11 1,225
Nebraska................ 7 585 -- -- -- -- 7 585
North Carolina.......... 27 3,261 7(3) 909 -- -- 34 4,170
Ohio.................... 1 93 1 100 -- -- 2 193
Oklahoma................ -- -- 1 161 -- -- 1 161
Pennsylvania............ 2 205 -- -- -- -- 2 205
South Carolina.......... 3 565 9 964 -- -- 12 1,529
Tennessee............... 2 210 4 479 -- -- 6 689
Texas................... 58 6,935 42 4,447 1 116 101 11,498
Virginia................ -- -- 2 166 1 60 3 226
West Virginia........... 1 186 -- -- -- -- 1 186
Wisconsin............... 6(4) 1,074 9 1,136 -- -- 15 2,210
Wyoming................. 4 417 2(3) 140 -- -- 6 557
--- ------ --- ------ --- ----- --- ------
Total................... 238 28,711 156 18,745 19 1,917 413 49,373
=== ====== === ====== === ===== === ======
</TABLE>
- --------
(1) One assisted living facility was divested subsequent to September 30,
1999.
(2) All of the indicated facilities were divested subsequent to September 30,
1999.
(3) One skilled nursing facility was divested subsequent to September 30,
1999.
(4) One skilled nursing facility opened subsequent to September 30, 1999.
17
<PAGE>
In addition to long-term care facilities, the Company operates 37
institutional pharmacies in 17 states, as follows:
<TABLE>
<CAPTION>
STATE PHARMACIES
----- ----------
<S> <C>
Alabama......................................................... 1
Arizona......................................................... 1
Colorado........................................................ 2
Connecticut..................................................... 1
Florida......................................................... 7
Georgia......................................................... 2
Illinois........................................................ 1
Indiana......................................................... 1
Louisiana....................................................... 2
Maryland........................................................ 1
Massachusetts................................................... 1
Mississippi..................................................... 1
New Jersey...................................................... 1
North Carolina.................................................. 2
Tennessee....................................................... 1
Texas........................................................... 11
Wisconsin....................................................... 1
---
Total........................................................... 37
===
</TABLE>
All of the Company's institutional pharmacy locations are leased,
substantially all of which are subject to "triple net" leases containing
standard market terms.
The Company's LTAC business operates 14 owned, leased or managed LTAC's
located in the following states:
<TABLE>
<CAPTION>
OWNED OR LEASED MANAGED TOTAL
--------------- --------------- ---------------
FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS
---------- ---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Arizona......................... 1 21 -- -- 1 21
Louisiana....................... 3 172 1 20 4 192
Ohio............................ -- -- 1 45 1 45
Texas........................... 6 377 2 76 8 453
--- --- --- --- --- ---
Total........................... 10 570 4 141 14 711
=== === === === === ===
</TABLE>
The average occupancy rate for the Company's LTACs for the year ended
September 30, 1999 was 56.3%.
Certain of the above properties serve as collateral for various mortgage
debt instruments or capitalized lease obligations. See Notes 12 and 17 to the
Consolidated Financial Statements. The Company is in the process of actively
reviewing its portfolio of properties and intends to divest those properties
that it believes do not meet acceptable quality or financial performance
standards or do not fit strategically into the Company's operations.
As a result of the Chapter 11 Filings, the Company is in default under
certain of the leases and security arrangements pertaining to the facilities
listed above. Additionally, certain of the Company's leases contain cross
default provisions that may be triggered if certain of the Company's debt
obligations are accelerated. The Company has received default notices under its
leases from landlords owning a material number of the Company's facilities and
security arrangements with certain lenders, primarily as a result of the
Company's financial condition. There can be no assurance that the existing
defaults and/or defaults that may arise in the future under such leases and
security arrangements will not have a material adverse effect on the Company or
its attempts to structure a plan of reorganization acceptable to the Company's
landlords and other creditors.
18
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
As is typical in the healthcare industry, the Company is and will be
subject to claims that its services have resulted in resident injury or other
adverse effects, the risks of which will be greater for higher acuity
residents receiving services from the Company than for other long-term care
residents. In addition, resident, visitor, and employee injuries will also
subject the Company to the risk of litigation. The Company has experienced an
increasing trend in the number and severity of litigation claims asserted
against the Company. Management believes that this trend is endemic to the
long-term care industry and is a result of the increasing number of large
judgments, including large punitive damage awards, against long-term care
providers in recent years resulting in an increased awareness by plaintiff's
lawyers of potentially large recoveries. In certain states in which the
Company has significant operations, including California and Florida,
insurance coverage for the risk of punitive damages arising from general and
professional liability litigation is not available due to state law public
policy prohibitions. There can be no assurance that the Company will not be
liable for punitive damages awarded in litigation arising in states for which
punitive damage insurance coverage is not available. The Company also believes
that there has been, and will continue to be, an increase in governmental
investigations of long-term care providers, particularly in the area of
Medicare/Medicaid false claims as well as an increase in enforcement actions
resulting from these investigations. While the Company believes that it
provides quality care to the patients in its facilities and materially
complies with all applicable regulatory requirements, given the Company's
current financial difficulties and lack of liquidity, an adverse determination
in a legal proceeding or governmental investigation, whether currently
asserted or arising in the future, could have a material adverse effect on the
Company.
From time to time, the Company and its subsidiaries have been parties to
various legal proceedings in the ordinary course of their respective
businesses. In the opinion of management, except as described below, there are
currently no proceedings which, individually, if determined adversely to the
Company and after taking into account the insurance coverage maintained by the
Company, would have a material adverse effect on the Company's financial
position or results of operations. Although the Company believes that any of
the proceedings not discussed below will not individually have a material
adverse impact on the Company if determined adversely to the Company, given
the Company's current financial condition, lack of liquidity and change in the
Company's GL/PL insurance policy, settling a large number of cases within the
Company's $1 million self-insured retention limit could have a material
adverse effect on the Company .
On August 26, 1996, a class action complaint was asserted against GranCare
in the Denver, Colorado District Court, Salas, et al v. GranCare, Inc. and AMS
Properties, Inc. d/b/a Cedars Healthcare Center, Inc., case no. 96-CV-4449. On
March 15, 1998, the Court entered an Order in which it certified a class
action in the matter. On June 10, 1998, the Company filed a Motion to Dismiss
all claims and Motion for Summary Judgment Precluding Recovery of Medicaid
Funds and these motions were partially granted by the Court on October 30,
1998. Plaintiffs' Motion for Reconsideration was denied by the Court on
November 19, 1998, the Court's decision was certified as a final judgment on
December 10, 1998, and plaintiffs then filed a writ with the Colorado Supreme
Court and an appeal with the Colorado Court of Appeal. This Supreme Court writ
has been denied, the Court of Appeal matter has been briefed and Oral Argument
has been set for January 18, 2000. The Company will continue in its opposition
to all appeals and further intends to vigorously contest the remaining
allegations of class status.
The Company received a letter dated September 5, 1997 from an Assistant
United States Attorney ("AUSA") in the United States' Office for the Eastern
District of Texas (Beaumont) advising that the office was involved in an
investigation of allegations that services provided at some of the Company's
facilities may violate the Civil False Claims Act. The AUSA informed the
Company that the investigation was the result of a qui tam complaint filed
under seal against the Company. On May 3, 1999, the Government advised that it
has declined to intervene into this matter, but the case remains under seal.
The Company received a letter from the court clerk informing the Company that
this case was closed as of September 15, 1999.
On March 18, 1998, a complaint was filed under seal by a former employee
against the Company, certain of its predecessor entities and affiliates in the
United States District Court for the Northern District of Alabama,
19
<PAGE>
alleging, inter alia, employment discrimination, wrongful discharge, negligent
hiring, violation of the Federal False Claims Act, and retaliation under the
False Claims Act. The action is titled Powell, et al. v. Paragon Health Inc.,
et al., civil action No. CV-98-0630-S. The complaint has been unsealed and the
Company has been advised that the government has declined to intervene in this
matter under the Federal False Claims Act. The Company is vigorously
contesting the alleged claims.
On May 18, 1998, a class action complaint was asserted against the Company,
certain of its predecessor entities and affiliates and certain other parties
in the Tampa, Florida Circuit Court, Wilson, et al, v. Mariner Post-Acute
Network, Inc., et al., case no. 98-03779, asserting seven claims for relief,
including breach of contract, breach of fiduciary duty, unjust enrichment,
violation of Florida Civil Remedies for Criminal Practices Act, violation of
Florida Racketeer and Corrupt Organization Act, false advertising and common
law conspiracy arising out of quality of care issues at a healthcare facility
formerly operated by the Brian Center Health and Rehabilitation/Tampa, Inc.
and later by a subsidiary of LCA as a result of the Brian Center Corporation
merger. The Company removed this case to Federal Court on June 10, 1998 and
the matter was pending in the United States District Court for the Middle
District of Florida, Tampa division, case no. 98-1205-CIV-T23B. The plaintiff
voluntarily dismissed this case on April 16, 1999.
On August 25, 1998, a complaint was filed by the United States against the
Company's GranCare and International X-Ray subsidiaries and certain other
parties under the Civil False Claims Act and in common law and equity. The
lawsuit, U.S. v. Sentry X-Ray, Ltd., et al., civil action no. 98-73722, was
filed in United States District Court for the Eastern District of Michigan.
Valley X-Ray operates a mobile X-Ray company in Michigan. A Company
subsidiary, International X-Ray, owns a minority partnership interest in
defendant Valley X- Ray. The case asserts five claims for relief, including
two claims for violation of the Civil False Claims Act, two alternative claims
of common law fraud and unjust enrichment, and one request for application of
the Federal Debt Collection Procedures Act. The two primary allegations of the
complaint are: that the X-Ray company received Medicare overpayments for
transportation costs in the amount of $657,767; and that the X-Ray company
"upcoded" Medicare claims for EKG services in the amount of $631,090. The
United States has requested treble damages as well as civil penalties of
$5,000 to $10,000 for each of the alleged 388 submitted Medicare claims. The
total damages sought varies from $5.3 to $7.2 million. The Company is
vigorously contesting all claims and filed two motions to dismiss on behalf of
its subsidiaries on November 23, 1998. The United States has agreed to the
motion to dismiss GranCare as a party. The Court has heard a motion to dismiss
the Civil False Claims Act and other claims against International X-Ray. The
Company is awaiting the Court's decision.
On October 1, 1998, a class action complaint was asserted against certain
of the Company's predecessor entities and affiliates and certain other parties
in the Tampa, Florida, Circuit Court, Ayres, et al v. Donald C. Beaver, et al,
case no. 98-7233. The complaint asserted three claims for relief, including
breach of fiduciary duty against one group of defendants, breach of fiduciary
duty against another group of defendants, and civil conspiracy arising out of
issues involving facilities previously operated by the Brian Center
Corporation or one of its subsidiaries, and later by a subsidiary of LCA, as a
result of the merger with Brian Center Corporation. All defendants submitted
Motions to Dismiss which were heard by the Court on September 15, 1999. The
Company is awaiting a decision from the Court and is not in a position to
evaluate the probability of a favorable outcome or the range of potential
loss. The Company intends to vigorously contest the request for class
certification, as well as all alleged claims made.
On November 16, 1998, a complaint was filed under seal by a former employee
against the Company, certain of its predecessor entities and affiliates in the
United States District Court for the Southern District of Texas, alleging
violation of the Federal False Claims Act. The action is titled United States
ex rel. Nelius, et al., v. Mariner Health Group, Inc., et al., civil action
No. H-98-3851. The complaint which was unsealed, has been recently amended to
add additional relators and allegations under the Federal False Claims Act.
The Company has been advised that the government is evaluating its decision
not to intervene with regard to the amended complaint and relators. The
Company will vigorously contest the alleged claims. In addition, a three judge
panel of the United States Court of Appeals for the Fifth Circuit recently
held that qui tam lawsuits in which the
20
<PAGE>
government does not intervene are unconstitutional under the Take Care Clause
of Article II of the United States Constitution. The Court declined to rule
whether qui tam suits in which the government does intervene are
unconstitutional. The full bench of the U.S. Court of Appeals for the Fifth
Circuit agreed November 15, 1999, to review this decision. Riley v. St. Luke's
Episcopal Hospital, No. 97-20948, rehearing en banc granted (5th Cir., 1999).
A full court determination affirming the court's decisions could favorably
effect the outcome of this action, which is currently before a United States
District Court located in the Fifth Circuit.
On approximately June 8, 1999, OIG issued a subpoena duces tecum to Mariner
of Catonsville. The subpoena requests medical records pertaining to eighteen
residents. The subpoena also requests other broad categories of documents. The
Company has produced a substantial amount of documents responsive to the
Subpoena. The Company is cooperating with the investigation and has retained
experienced counsel to assist in responding to the subpoena and to advise the
Company with respect to this investigation. This investigation is still in its
preliminary stages; therefore, the Company is unable to predict the outcome of
this matter.
On October 27, 1999, the Company was served with a Complaint in United
States ex rel. Cindy Lee Anderson Rutledge and Partnership for Fraud Analysis
and State of Florida ex rel. Cindy Lee Anderson Rutledge Group, Inc., ARA
Living Centers, Inc. and Living Centers of America, Inc., No. 97-6801, filed
in the United States District Court for the Eastern District of Pennsylvania.
This action originally was filed under seal on November 5, 1997, by relators
Cindy Lee Anderson Rutledge and the Partnership for Fraud Analysis under the
Federal False Claims Act and the Florida False Claims Act. The Complaint
alleges that the Company is liable under the Federal False Claims Act and the
Florida False Claims Act for alleged violations of regulations pertaining to
the training and certification of nurse aides at former LCA facilities. After
conducting an investigation in which the Company cooperated by producing
documents responsive to an administrative subpoena and allowing certain
employee interviews, the United States Department of Justice elected not to
intervene. The district court unsealed the Complaint on October 15, 1999. On
December 14, 1999, the Company filed a motion to dismiss the relators'
complaint. The Company intends vigorously to defend this action.
On November 10, 1999, suit was filed in the United States District Court
for the Western District of Tennessee against the Company and its subsidiary,
National Heritage Realty, Inc. ("National Heritage") by Mid-South Healthcare
Associates, L.L.C. ("Mid-South"), civil action No. 99-299-MIA. Mid-South in
its complaint seeks declaratory judgment and injunctive relief related to Mid-
South's contention that two leases, currently held by National Heritage, for
twelve nursing home facilities in Tennessee and Mississippi expire on January
31, 2000, and Mid-South's contention that the nursing home facilities have not
been maintained to the levels required by the leases. Mid-South also seeks
unspecified damages. On December 16, 1999, the Company and National Heritage
answered the complaint and counterclaims were asserted on behalf of National
Heritage seeking a declaratory judgment that it properly exercised certain
options to extend the leases for five year periods (through January 31, 2005),
seeking injunctive relief to prevent interference with its right of possession
and seeking damages for Mid-South's breach of its duty of good faith and fair
dealing. The dispute involves the interpretation of language in certain lease
amendments and whether or not Mid-South, by failing to renew certain ground
leases upon which three of the twelve leased facilities are built, can
unilaterally extinguish National Heritage's options to extend the leases for
an additional five year term.
On January 13, 2000, the Company, National Heritage and Mid-South entered
into a Lease Amendment Agreement (the "Agreement") to settle and resolve all
of the claims pending in the subject litigation. The Agreement requires, inter
alia, all parties to release and dismiss their respective claims and
counterclaims. In addition, Mid-South will agree that the leases on the
Facilities have been extended through January 31, 2005 (with an option term
through January 31, 2010), will invest up to $3.0 million in capital
improvements to certain of the Facilities and will provide certain consulting
services in connection therewith. The Company will pay Mid-South a consulting
fee of $1.7 million per year and additional rent contingent on the level of
capital expenditures actually made by Mid-South. The Company will also make
certain capital improvements to the Facilities. The Company will file the
necessary motion with the Bankruptcy Court seeking approval to assume this
contract on a post-petition basis.
21
<PAGE>
On January 18, 2000, the Company and substantially all of its subsidiaries,
including Mariner Health and its subsidiaries, filed voluntary petitions (the
"Chapter 11 Filings") in the United States Bankruptcy Court for the District
of Delaware (the "Bankruptcy Court") under Title 11 of the United States Code,
11 U.S.C. (S)(S) 101, et seq. (the "Bankruptcy Code"). While this action will
likely constitute a default under the Company's and such subsidiaries various
financing arrangements, Section 362 of the Bankruptcy Code imposes an
automatic stay that will generally preclude the creditors and other interested
parties under such arrangements from taking any remedial action in response to
any such resulting default without prior Bankruptcy Court approval. The
Company's need to seek relief afforded by the Bankruptcy Code is due, in part,
to the significant financial pressure created by the Balanced Budget Act of
1997 ("Balanced Budget Act") and its implementation, which reduced the
Company's Medicare reimbursement rate by approximately $115 per resident, per
day.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRINCIPAL MARKETS AND SALES PRICES OF COMMON EQUITY SECURITIES
From November 4, 1997 through July 31, 1998, the Company's common stock was
traded on the New York Stock Exchange ("NYSE") under the symbol "PGN." On
August 1, 1998, the Company's symbol on the NYSE was changed to "MPN." On
November 2, 1999, trading in the Company's common stock was suspended on the
NYSE and the common stock commenced trading on the OTCBB under the symbol
"MPAN."
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ----- ----- ------ ------
<S> <C> <C> <C> <C>
December 31............................ $ 7 1/8 $ 3 3/16 $ 20 3/4 $ 16 1/4
March 31............................... 5 1/16 2 1/16 21 1/2 17 1/16
June 30................................ 3 3/4 1/2 21 13 7/8
September 30........................... 1 1/16 5/16 17 1/4 4 7/8
</TABLE>
NUMBER OF STOCKHOLDERS
As of January 12, 2000, there were approximately 1,737 owners of record of
the Company's common stock.
DIVIDENDS
The Company has not paid any cash dividends on its common stock since
inception and, in light of the Chapter 11 Filings, does not anticipate paying
any such dividends on its common stock in the future. In addition, the terms
of the DIP Financings, the Company's Senior Credit Facility, the indenture
with respect to the Company's outstanding Senior Subordinated Notes, and
various other note agreements contain covenants that effectively limit the
ability of the Company to pay cash dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and Note 12 to the Consolidated Financial Statements.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL INFORMATION
The following selected financial data are derived from the Company's
Consolidated Financial Statements, which have been audited by Ernst & Young
LLP, independent auditors. The Consolidated Financial Statements give
retroactive effect to the acquisition by merger of the Brian Centers
Corporation as though the transaction occurred on October 1, 1994; such
transaction has been accounted for using the pooling of interests method of
accounting. THE CONSOLIDATED FINANCIAL STATEMENTS GIVE EFFECT TO THE
APOLLO/LCA/GRANCARE MERGERS EFFECTIVE NOVEMBER 1, 1997 AND THE MARINER MERGER
EFFECTIVE JULY 31, 1998. The information set forth below is qualified by
reference to, and should be read in conjunction with, the Consolidated
Financial Statements and the Notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this filing.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND
STATISTICAL DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.......... $ 2,272,580 $2,035,529 $1,140,288 $1,114,491 $893,869
Income (loss) from op-
erations............. (1,583,135) (94,072) 95,108 89,556 57,005
Interest expense,
net................ 195,261 114,302 16,852 12,461 10,817
Equity
earnings/minority
interests.......... 114 (562) (735) (156) (204)
Extraordinary loss.. -- (11,275) -- -- --
Net income (loss)... (1,778,282) (209,652) 43,917 43,180 24,234
Pro forma taxes(1).... -- -- -- -- 599
Pro forma net income
(loss)(1)............ (1,778,282) (209,652) 43,917 43,180 23,635
Earnings (loss) per
share--basic(2)...... $ (24.21) $ (4.31) $ 0.75 $ 0.72 $ 0.43
Pro forma earnings
(loss) per share--ba-
sic(1)(2)............ $ (24.21) $ (4.31) $ 0.75 $ 0.72 $ 0.42
Earnings (loss) per
share--diluted(2).... $ (24.21) $ (4.31) $ 0.73 $ 0.71 $ 0.42
Pro forma earnings
(loss) per share--
diluted(1)(2)........ $(24.21) $ (4.31) $ 0.73 $ 0.71 $ 0.41
Weighted average num-
ber of shares out-
standing--basic (in
thousands)(2)........ 73,459 48,601 58,613 60,372 56,553
Weighted average num-
ber of shares out-
standing--diluted (in
thousands)(2)........ 73,459 48,601 59,808 60,946 57,134
OPERATING STATISTICS:
Number of centers (end
of period)........... 413 428 202 206 294
Average occupancy
rate................. 85.4 % 84.1 % 82.9 % 83.9 % 85.1 %
Percentage of patient
revenues from:
Private............. 31.8 % 29.9 % 33.4 % 31.9 % 25.5 %
Medicare............ 21.0 31.5 25.7 25.5 23.9
Medicaid............ 47.2 38.6 40.9 42.6 50.6
Percentage operating
margin............... N/M (4.6)% 8.3 % 8.0 % 6.4 %
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....... $(1,945,915) $ 350,216 $ 102,104 $ 101,091 $ 34,631
Total assets.......... 1,274,971 3,036,651 874,367 809,612 730,708
Long term debt, in-
cluding current por-
tion................. 2,141,844 2,024,115 295,959 276,448 216,910
Stockholders' (defi-
cit) equity.......... (1,386,019) 397,014 375,283 329,315 303,596
Total capitalization.. 755,825 2,421,129 671,242 605,763 520,506
</TABLE>
- --------
(1) Effective July 31, 1995, the Company consummated a merger transaction
with The Brian Center Corporation ("BCC") and 16 related S Corporations.
The merger was accounted for using the pooling of interest methodology. A
pro forma income tax provision has been provided to reflect the estimated
federal and state income taxes as if all BCC S Corporations were taxable
entities.
(2) Earnings per share and number of shares outstanding have been adjusted to
reflect the three-for-one stock split.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Effective July 31, 1998, the Company acquired Mariner Health Group, Inc.
("Mariner Health") in a stock for stock merger (the "Mariner Merger") pursuant
to which: (i) Mariner Health became a wholly-owned subsidiary of the Company;
and (ii) the Company changed its name to "Mariner Post-Acute Network, Inc."
The Mariner Merger was accounted for under the purchase method of accounting
and, accordingly, the results of Mariner Health's operations have been
included in the Company's consolidated financial statements since the date of
acquisition.
Effective November 1, 1997 for accounting purposes, the Company completed
two merger transactions. First, pursuant to an agreement and plan of merger
among Apollo Management, L.P. ("Apollo Management," and together with certain
of its affiliates, "Apollo"), Apollo LCA Acquisition Corp. (a corporation
owned by certain Apollo affiliates and other investors, "Apollo Sub") and
Living Centers of America, Inc. ("LCA"), Apollo Sub was capitalized with $240
million in cash and was merged with and into LCA (the "Recapitalization
Merger"). In the Recapitalization Merger, LCA was the surviving corporation
and was renamed "Paragon Health Network, Inc." Second, pursuant to an
agreement and plan of merger among LCA, GranCare, Inc. "GranCare"), Apollo
Management and LCA Acquisition Sub, Inc., a wholly-owned subsidiary of the
Company ("LCA Sub"), GranCare merged with LCA Sub with GranCare surviving as a
wholly-owned subsidiary of the Company (the "GranCare Merger," and
collectively with the Recapitalization Merger, the "Apollo/LCA/GranCare
Mergers"). The GranCare Merger was accounted for under the purchase method of
accounting and, accordingly, the results of GranCare's operations have been
included in the Company's consolidated financial statements since the date of
acquisition, which, for accounting purposes, is November 1, 1997.
Unless otherwise indicated, the information herein does not give pro forma
effect to the Apollo/LCA/GranCare Mergers or the Mariner Merger as if they had
been completed as of the beginning of the period presented. The Company also
completed other acquisitions in fiscal 1998 including Summit Medical Holdings,
Inc. and Professional Rehabilitation, Inc., among others, all of which were
accounted for as purchase business combinations and were not material to the
Company as a whole.
On January 18, 2000, the Company and substantially all of its subsidiaries,
including Mariner Health and its subsidiaries, filed voluntary petitions (the
"Chapter 11 Filings") in the United States Bankruptcy Court for the District
of Delaware (the "Bankruptcy Court") under Title 11 of the United States Code,
11 U.S.C. (S)(S) 101, et seq. (the "Bankruptcy Code"). While this action will
likely constitute a default under the Company's and such subsidiaries various
financing arrangements, Section 362 of the Bankruptcy Code imposes an
automatic stay that will generally preclude the creditors and other interested
parties under such arrangements from taking any remedial action in response to
any such resulting default without prior Bankruptcy Court approval. The
Company's need to seek relief afforded by the Bankruptcy Code is due, in part,
to the significant financial pressure created by the Balanced Budget Act of
1997 ("Balanced Budget Act") and its implementation, which reduced the
Company's Medicare reimbursement rate by approximately $115 per resident, per
day and had a substantial negative effect on its ancillary businesses.
In connection with the Chapter 11 Filings, the Company obtained a
commitment for $100 million in debtor-in-possession ("DIP") financing (the
"Company DIP Financing") from a group of banks led by The Chase Manhattan
Bank. Mariner Health also obtained a commitment for $50 million in DIP
financing from a group of banks led by PNC Bank (the "Mariner Health DIP
Financing"; together with the Company DIP Financing, the "DIP Financings").
For a description of the principal terms of the DIP Financings, see
"Management's Discussion and Analysis of Operations--Liquidity and Capital
Resources."
GENERAL
The Company is one of the nation's largest providers of post-acute health
care services, primarily through the operation of its skilled-nursing
facilities. As of September 30, 1999, the Company's significant operations
24
<PAGE>
consist of (i) over 400 inpatient and assisted living facilities containing
approximately 49,000 beds, (ii) 37 institutional pharmacies servicing more
than 2,000 facilities and (iii) 14 long-term acute care hospitals ("LTACs")
with approximately 700 licensed beds. In addition, the Company has limited
home health, physician management and hospital contract management operations,
the majority of which the Company plans to exit in the near future. The
Company operates in 40 states with significant concentrations of facilities
and beds in eight states and several metropolitan markets.
Historically, the Company also (i) operated a large contract rehabilitation
therapy business that provided comprehensive therapy programs and services, on
a contractual basis, to over 1,200 inpatient healthcare facilities throughout
the United States, (ii) operated approximately 170 outpatient rehabilitation
therapy clinics in eighteen states, (iii) managed specialty medical programs
in acute-care hospitals through more than 100 hospital relationships in
nineteen states (the Company was out of this line of business as of December
31, 1999), and (iv) operated more than thirty home health, hospice and private
duty nursing branches in seven states (only two of which are still operated by
the Company and are in the process of being divested). Primarily as a result
of changes in Medicare reimbursement effected under the Balanced Budget Act of
1997 (the "Balanced Budget Act"), these businesses began to generate, or were
anticipated to generate, significant operating losses and negative cash flow
and have been or are being divested or closed.
The Company's revenues and profitability are affected by ongoing efforts of
third-party payors to contain healthcare costs by limiting reimbursement
rates, increasing case management review and negotiating reduced contract
pricing. The Company's percentage of total net patient revenues derived from
Medicare and Medicaid programs were 21.0% and 47.2%, respectively, for the
year ended September 30, 1999. Government payors, such as state-administered
Medicaid programs and, to a lesser extent, the federal Medicare program,
generally provide more restricted coverage and lower reimbursement rates than
private pay sources. Private payors accounted for 31.8% of the Company's total
net patient revenues for the year ended September 30, 1999.
The administrative procedures associated with the Medicare cost
reimbursement program, with respect to facilities and periods not subject to
PPS, generally preclude final determination of amounts due the Company until
annual cost reports are audited or otherwise reviewed and settled with the
applicable fiscal intermediaries and administrative agencies. Certain Medicare
fiscal intermediaries have made audit adjustments to settle cost reports for
some of the Company's facilities that reduce the amount of reimbursement that
was previously received by the facilities (see "--Results of Operations"). The
Company believes that it has properly recorded revenue under cost
reimbursement programs based on the facts and current regulations. If the
Company was to receive adverse adjustments that it had not contemplated in
recording its revenue in the past, the differences could be significant to the
Company's results of operations in the period of final determination.
Beginning July 1, 1998, the Company's facilities began to be phased into the
PPS System under which nursing home providers are paid a fixed per diem rate
for Medicare patients based on their acuity level. Under PPS, the Company is
still required to file cost reports; however, the audit and settlement process
of Medicare cost reports is not expected to have a material impact on total
Medicare revenue. See "--Liquidity and Capital Resources."
RESULTS OF OPERATIONS
Net revenues totaled $2.3 billion for the year ended September 30, 1999, an
increase of $237.1 million as compared to fiscal 1998. Net revenues increased
by $412.8 million as a result of the Mariner Merger effective July 31, 1998
and decreased by $167.8 million as a result of the termination of all
contracts to provide therapy services effective May 31, 1999 and the
divestiture or closure of the Company's outpatient rehabilitation clinics,
hospital rehabilitation management contract business, and substantially all
home health operations during fiscal year 1999. Net revenues totaled $2.0
billion for the year ended September 30, 1998, an increase of $895.2 million
as compared to fiscal 1997. Net revenues increased by $700.4 million as a
result of the GranCare Merger effective November 1, 1997 and $129.2 million as
a result of the Mariner Merger.
Loss from operations, which includes impairment of long-lived assets of
$995.9 million, loss on disposal of assets of $242.7 million, and
recapitalization, indirect merger and other expenses of $65.4 million, totaled
25
<PAGE>
$1.6 billion for the year ended September 30, 1999, an increase of $1.5
billion compared to fiscal 1998. Loss from operations, which includes
impairment of long-lived assets of $135.8 million and recapitalization,
indirect merger, and other expenses of $87.3 million, totaled $94.1 million
for the year ended September 30, 1998. Excluding impairment of long-lived
assets, loss on disposal of assets, and recapitalization, indirect merger and
other expenses, costs and expenses included in loss from operations primarily
consist of salaries, wages, employee benefits and purchased services and
supplies. Various federal, state, and local regulations impose, depending on
the services provided, a variety of regulatory standards for the type, quality
and level of personnel required to provide care or services. These regulatory
requirements have an impact on staffing levels, as well as the mix of staff,
and therefore impact total costs and expenses. See "Business--Regulation." The
cost of ancillary services, which includes pharmaceuticals, is also affected
by the level of service provided and patient acuity. General and
administrative expenses include the indirect administrative costs associated
with operating the Company and its lines of business. Insurance expense
includes the costs of the various insurance programs such as automobile,
general and professional liability and workers' compensation.
Rent expense totaled $103.8 million for the year ended September 30, 1999,
an increase of $17.2 million as compared to fiscal 1998. Depreciation and
amortization expense totaled $120.5 million for the year ended September 30,
1999, an increase of $45.5 million as compared to fiscal 1998. These increases
were primarily a result of the Mariner Merger. Rent expense totaled $86.6
million for the year ended September 30, 1998, an increase of $44.1 million as
compared to fiscal 1997. Depreciation and amortization expense totaled
$75.0 million for the year ended September 30, 1998, an increase of $35.7
million as compared to fiscal 1997. These increases were primarily a result of
the GranCare Merger.
Provision for bad debts totaled $142.5 million for the year ended September
30, 1999, an increase of $112.9 million as compared to the year ended
September 30, 1998. The increase is due to a full year of operations related
to the Mariner Merger and the implementation of PPS by pharmacy's and
therapy's customers. PPS reduced the cash flows of pharmacy's and therapy's
customers which resulted in an increased aging and uncollectable accounts in
both pharmacy's and therapy's accounts receivable. In addition, the Company's
accounts receivable continued to deteriorate during the year due to the
multiple complexities involved with the change to Medicare PPS billing, system
conversions and consolidation, and turnover of facility-level billing and
collection personnel. The Company's facilities were phased into PPS based upon
their cost report years (20 facilities on July 1, 1998; 105 facilities on
October 1, 1998; 189 facilities on January 1, 1999; and 83 facilities on April
1, 1999). At September 30, 1999, all facilities are being paid by Medicare
under PPS, and as such, revenue recorded will consist of the aggregate
payments expected from Medicare for individual claims at the appropriate
payment rates. The PPS billing methodology is extremely complex and its
implementation is resource intensive. The claims amendment process lacks
procedures and the coordination of certain policies. The Company has a
commitment to training and compliance and has established procedures to
address PPS issues as they arise. The Company will continue to review the
collectability of its accounts receivable which may result in increased
provision for bad debts in the future. Provision for bad debts totaled $29.6
million for the year ended September 30, 1998, an increase of $3.3 million as
compared to the year ended September 30, 1997.
In the fourth quarter of fiscal year 1999 the Company recorded a non-cash
charge related to the impairment of certain long-lived assets as required by
the Company's accounting policy, which follows the guidelines of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121").
SFAS 121 requires impairment losses to be recognized for long-lived assets
when indicators of impairment are present and the undiscounted cash flows are
not sufficient to recover the assets' carrying amount. The revenues recorded
by the Company in its nursing facilities under PPS are substantially less than
the cost-based reimbursement it received previously. In addition, the
implementation of PPS resulted in a greater than expected decline in the
demand and market rates for the Company's pharmacy services. Management
determined that these revenue declines in its nursing facilities and pharmacy
services are other than temporary and are expected to have a material adverse
effect on future revenues and cash flow. As a result of these indicators, a
detailed analysis of the Company's long-lived assets and their
26
<PAGE>
estimated future cash flows was completed. The analysis resulted in the
identification and measurement of an impairment loss of $995.9 million
principally related to the Company's nursing facilities and pharmacies with
either cash flow losses or where projected cash flow was not sufficient to
recover the carrying amount of their goodwill, property and equipment, and
other intangible assets which primarily include leasehold rights. The
following is a summary of the impairment loss by segment for the year ended
September 30, 1999:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999
------------------------------------------
OTHER
PROPERTY AND INTANGIBLE
GOODWILL EQUIPMENT ASSETS TOTAL
--------- ------------ ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Inpatient Nursing Home Services...... $ 526,411 $306,845 $38,073 $871,329
Pharmacy Services.................... 104,661 11,632 4,546 120,839
Other................................ 3,764 -- -- 3,764
--------- -------- ------- --------
$ 634,836 $318,477 $42,619 $995,932
========= ======== ======= ========
</TABLE>
In the fourth quarter of fiscal year 1998 the Company recorded an
impairment charge based on a detailed analysis of the Company's long-lived
assets and their estimated future cash flows. The analysis resulted in the
identification and measurement of an impairment loss of $135.8 million related
to the Company's nursing facilities and home health agencies with either cash
flow losses or nursing facilities where management believed an impairment
existed.
Each analysis included management's estimate of the undiscounted cash flows
to be generated by these assets with a comparison to their carrying value. If
the undiscounted future cash flow estimates were less than the carrying value
of the asset then the carrying value was written down to estimated fair value.
Goodwill associated with an impaired asset was included with the carrying
value of that asset in performing both the impairment test and in measuring
the amount of impairment loss related to the asset. Fair value was estimated
based on either management's estimate of fair value, present value of future
cash flows, or market value less estimated cost to sell for certain facilities
to be disposed.
Loss on disposal of assets totaled $242.7 million during the year ended
September 30, 1999 which primarily reflected the termination of contracts to
provide therapy services and the closure of the therapy business effective May
31, 1999. As a result of the therapy closure, the Company recorded a loss on
the disposal of the goodwill associated with the therapy business of $228.5
million and a loss of $7.5 million related to the abandonment of certain
assets as a result of the terminations. The Company also recorded a loss on
disposal of $2.5 million resulting from the sale of the assets of the
Company's outpatient rehabilitation clinics to HealthSouth Corporation, which
was completed June 30, 1999, and the sale of the hospital rehabilitation
management contract business to National Rehab Partners, Inc. for a net loss
of $4.9 million. The Company also recorded a net gain of $0.7 million as a
result of the divestiture or non-renewal of existing leases for approximately
15 long-term care facilities and the divestiture of substantially all of its
home health operations.
Recapitalization, indirect merger and other expenses totaled $65.4 million
and $87.3 million for the years ended September 30, 1999 and 1998,
respectively. The fiscal 1999 amount included approximately $15.6 million of
costs incurred and paid related to the Mariner Merger, approximately $15.1
million of costs incurred to outside professionals related to the Company's
defaults in connection with its indebtedness, and $34.7 million of other
expenses. At September 30, 1999 approximately $54.3 million of these costs had
been paid. The Company anticipates incurring additional expenses during fiscal
year 2000 to further reduce overhead and complete its strategy to restructure
its capital and operating structure such that it can operate profitably under
PPS. See "Liquidity and Capital Resources." The fiscal 1998 amount included
$66.2 million related to the Apollo/LCA/GranCare Mergers, $12.0 million
related to the Mariner Merger and approximately $8.7 million of other
expenses. Approximately $79.0 million of these expenses were paid as of
September 30, 1999.
Interest expense totaled $204.4 million for the year ended September 30,
1999, an increase of $79.0 million as compared to fiscal 1998. The acquisition
of Mariner Health contributed $57.4 million of the increase, while the
interest expense on the debt entered into on November 3, 1997 in conjunction
with the Apollo/LCA/GranCare
27
<PAGE>
Merger, increased borrowings under the Company's revolver and term loans and
increased interest rates associated with the December Amendment and
noncompliance with certain of the financial covenants contained in the Mariner
Health Senior Credit Facility and the Mariner Health Term Loan Facility
contributed to the remaining $21.6 million increase. Interest expense totaled
$125.4 million for the year ended September 30, 1998, an increase of $103.9
million as compared to fiscal 1997, which was primarily a result of $1.7
billion of additional debt incurred in conjunction with the
Apollo/LCA/GranCare Mergers and the Mariner Merger.
During the year ended September 30, 1999, the Company established a
valuation allowance which completely offsets all net deferred tax assets
generated from the Company's net losses. For the year ended September 30,
1998, the provision for income taxes was affected by charges for
recapitalization, indirect merger and impairment of long-lived assets that are
not deductible for income tax purposes as well as additional non-deductible
amortization of goodwill associated with the GranCare Merger. Excluding the
effect of the non-recurring, non-deductible items, the effective income tax
rate (benefit) for the year ended September 30, 1998 was approximately (5.1%)
compared to 43.3% for the same period in 1997.
For the year ended September 30, 1998, the Company recognized an
extraordinary loss of $11.3 million (net of a $6.0 million income tax benefit)
associated with prepayment penalties on the early extinguishment of debt and
the write-off of certain deferred financing fees.
As a result of the substantial impact of the change to PPS reimbursement
and resulting divestiture or closure of the non-nursing home businesses, the
Company is focusing only on its continuing Inpatient and Pharmacy operations.
The following table provides income (loss) from operations by business segment
for the years ended September 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------
1999 1998 1997
----------- --------- --------
<S> <C> <C> <C>
Inpatient Nursing Home Services.......... $ (910,323) $ 18,482 $ 85,618
Pharmacy Services........................ (159,550) 21,661 27,038
Other.................................... (513,262) (134,215) (17,548)
----------- --------- --------
Total.................................... $(1,583,135) $ (94,072) $ 95,108
=========== ========= ========
</TABLE>
INPATIENT NURSING HOME SERVICES
Inpatient revenues are a function of occupancy rates in the Company's
nursing facilities and payor mix. As identified in the following table, the
fiscal 1999 weighted average occupancy rate increased by 1.3% over fiscal
1998, which included a 1.0% improvement as a result of the Mariner Merger. The
fiscal 1998 weighted average occupancy rate increased by 1.2% over fiscal
1997, which included a 0.2% improvement as a result of the Mariner Merger and
a 0.1% improvement as a result of the GranCare Merger:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Weighted average licensed bed count................ 47,269 46,395 23,028
Total average residents............................ 40,389 39,476 19,095
Weighted average occupancy......................... 85.4% 84.1% 82.9%
</TABLE>
Payor mix is the source of payment for the services provided and consists
of private pay, Medicare and Medicaid. Private pay includes revenue from
individuals who pay directly for services without government assistance
through the Medicare and Medicaid programs, managed care companies, commercial
insurers, health maintenance organizations, Veteran's Administration
contractual payments and payments for services provided under contract
management programs.
Reimbursement rates from government sponsored programs, such as Medicare
and Medicaid, are strictly regulated and subject to funding appropriations
from federal and state governments. Changes in reimbursement
28
<PAGE>
rates, including the implementation of PPS and the fee screen schedules and
therapy caps for Part B Medicare patients beginning January 1, 1999, have
adversely affected the Company resulting in significantly lower Medicare
revenues than the Company would have received under the previous payment
methodology. The table below presents the approximate percentage of
Inpatient's revenues derived from the various sources of payment for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Private pay.................................. 22.0% 19.4% 19.8%
Medicare..................................... 26.5% 35.3% 29.0%
Medicaid..................................... 51.5% 45.3% 51.2%
</TABLE>
The percentage of revenues derived from all pay sources was impacted by the
implementation of PPS which significantly reduced Medicare revenue and
increased the percentage of revenue derived from both private pay and Medicaid
sources. The percentage of revenues derived from private pay sources also
increased in fiscal 1999 as a result of the Mariner Merger. Excluding the
impact of the Mariner Merger, the percentage of revenues derived from private
pay sources in fiscal 1999 was 20.9%. The Mariner Merger also increased the
percentage of revenues derived from Medicare and decreased the percentage of
revenues derived from Medicaid sources. Excluding the impact of the Mariner
Merger, the percentage of revenues derived from Medicare and Medicaid sources
in fiscal 1999 was 25.7% and 53.4%, respectively.
The percentage of revenues derived from private pay sources declined for
fiscal year 1998, primarily as a result of the GranCare Merger. GranCare
historically had a lower percentage of private pay revenue than LCA, while
Mariner Health's percentage of private pay revenue for the year ended
September 30, 1998 was approximately the same as compared to LCA. Excluding
the impact of both the GranCare Merger and Mariner Merger, the percentage of
net revenues derived from private pay sources in fiscal 1998 was 20.0%. The
GranCare Merger reduced the percentage of private pay revenue by 0.8% while
the Mariner Merger increased the percentage of private pay revenue by 0.2%.
The GranCare Merger increased the percentage of revenues derived from Medicare
in fiscal year 1998 by 5.0%. GranCare's facilities historically had a higher
Medicare payor mix than LCA's. In addition, prior to the implementation of
PPS, average reimbursement rates for Medicare patients increased more rapidly
than for Medicaid residents primarily due to the higher reimbursement rates
associated with the increase in acuity levels. Although cost reimbursement for
Medicare residents generated a higher level of net revenue per patient day,
profitability was not proportionally increased due to the additional costs
associated with the required higher level of care and other services for such
residents.
Inpatient revenue increased by $193.6 million in fiscal 1999 and $751.9
million in fiscal 1998. The increase in fiscal 1999 revenue included $309.5
million related to the Mariner Merger. Excluding the Mariner Merger, Inpatient
revenue decreased by $115.9 million which included a decrease in Medicare
revenue of $194.4 million which was partially offset by an increase in private
and Medicaid revenue of $78.5 million. The decline in Medicare revenue was a
result of lower average census, approximately $19.1 million, and lower average
per diem rates, approximately $136.2 million and $39.1 million in adjustments
to reduce the estimated amount due from third party payors (see below). The
fiscal 1998 increase included $628.0 million related to the GranCare Merger
and $90.7 million related to the Mariner Merger. With respect to the former
LCA facilities, rate increases of $25.3 million and higher ancillary service
billings resulting from the improvement in mix, primarily Medicare, of $17.5
million also contributed to the increase, partially offset by a $2.9 million
reduction due to a lower average number of residents and a $4.3 million
reduction due to divested facilities.
During fiscal year 1999, the Company recorded $122.0 million of adjustments
to reduce the estimated amount due from third-party payors, of which $39.3
million was recorded to reduce the estimated amount receivable from cost
reports filed, remaining open or settled during the year. The remaining $82.7
million of adjustments was recorded to reflect amounts due to the Medicare
program for previously received reimbursement and to reduce the estimated
amount receivable from all Medicare cost report appeal items and primarily
pertains to related party adjustments asserted by Medicare intermediaries (and
disputed by the Company) through the
29
<PAGE>
intermediaries' May 1999 reopening of certain Mariner Health Medicare cost
reports for 1995, 1996, and some of 1997. These reopenings were to incorporate
adjustments that reduced the allowable cost of rehabilitation therapy services
that were provided to Mariner Health facilities by Mariner Health's
rehabilitation subsidiaries. During the three months ended June 30, 1999,
Mariner Health received revised notices of program reimbursement ("NPRs") for
certain of the cost reports on approximately 50 of its facilities that require
Mariner Health to repay approximately $15.9 million to the Medicare program,
net of outstanding cost report receivables. On July 27, 1999 Mariner Health
reached agreement with HCFA to extend repayment of the $15.9 million net
liabilities resulting from the issuance of the revised NPR's. The extended
repayment plan requires payment of $1.8 million per month from July through
December 1999, and $1.5 million per month from January through May 2000. The
current intermediary has notified Mariner Health that it intends to issue
revised NPRs for the remaining facility cost reports (1997 through 1999)
starting in fiscal year 2000. Should the revised NPRs result in a repayment
requirement, the Company and Mariner Health would seek to enter into an
extended repayment plan with HCFA at that time. The Company is vigorously
disputing the intermediaries' overpayment determinations through the appeal
process; however, a favorable outcome cannot be assured at this time.
Excluding impairment of long-lived assets of $871.3 million, loss on
disposal of assets of $3.5 million, and recapitalization, indirect merger and
other expenses of $0.08 million, costs and expenses totaled $1.7 billion for
the year ended September 30, 1999, an increase of $338.1 million compared to
fiscal 1998. Costs and expenses increased by $377.4 million as a result of the
Mariner Merger. Excluding the Mariner Merger, salaries, wages and benefits and
provision for bad debts increased by $66.9 million and $30.0 million,
respectively, and ancillary expenses decreased by $157.6 million. The increase
in provision for bad debts was a result of continued deterioration in the
Company's accounts receivable during the year due to the multiple complexities
involved with the change to Medicare PPS billing, system conversions and
consolidation, and turnover of facility-level billing and collection
personnel. See "--Results of Operations". The Company will continue to review
the collectability of its accounts receivable which may result in increased
provision for bad debts in the future. The decrease in ancillary expenses was
primarily a result of the implementation of PPS and the insourcing of
previously outsourced contract rehabilitation therapists.
Excluding impairment of long-lived assets of $102.6 million, costs and
expenses totaled $1.4 billion for the year ended September 30, 1998, an
increase of $716.4 million compared to fiscal 1997. Approximately
$75.4 million of this increase was due to the Mariner Merger and approximately
$589.1 million was due to the GranCare Merger.
PHARMACY SERVICES
Pharmacy revenues increased by $51.4 million in fiscal 1999 and $9.2
million in fiscal 1998. The Mariner Merger contributed $32.2 million and $5.6
million of this increase, respectively. The remaining fiscal 1999 increase was
primarily related to increased sales to new and existing customers.
Excluding impairment of long-lived assets of $120.8 million and
recapitalization, indirect merger and other expenses of $3.5 million and $8.7
million for fiscal years 1999 and 1998, respectively, Pharmacy operating
income decreased by $65.6 million in fiscal 1999 compared to a $3.4 million
increase in fiscal 1998. The fiscal 1999 decrease was primarily a result of a
lower gross profit margin, higher salaries, wages, and benefits of $9.7
million as a result of increased sales and the Mariner Merger, and a higher
provision for bad debts of $31.7 million. The implementation of PPS by
Pharmacy's customers starting July 1, 1998 resulted in a significant reduction
in the market rates for Pharmacy's services as gross profit margins were lower
by 8.7% in fiscal 1999. In addition, PPS also reduced the cash flows of
Pharmacy's customers which resulted in an increased aging and uncollectable
accounts in Pharmacy's accounts receivable. The fiscal 1998 increase was
primarily a result of the Mariner Merger.
OTHER OPERATIONS
Other operations include the LTAC group, overhead, and the businesses that
were divested or closed during fiscal year 1999 such as contract
rehabilitation therapy, outpatient rehabilitation therapy clinics, managed
30
<PAGE>
specialty medical programs, and home health. Revenues from Other operations
decreased by $8.0 million during fiscal year 1999 which included an increase
of $71.1 million as a result of the Mariner Merger and a decrease of $79.1
million as a result of the termination of contracts to provide therapy
services and closure of the therapy business and the disposal or closure of
the outpatient rehabilitation therapy clinics, managed specialty medical
programs, and home health. Excluding impairment of long-lived assets of $3.8
million, loss on disposal of assets of $239.2 million, and recapitalization,
indirect merger and other expenses of $61.8 million, costs and expenses
increased by $194.8 million of which approximately $135.8 million was related
to the Mariner Merger. Depreciation and amortization expense increased by
$18.1 million primarily as a result of goodwill amortization related to the
Mariner Merger and provision for bad debts increased by $7.4 million. The
implementation of PPS by therapy customers starting July 1, 1998 resulted in a
significant reduction in contract rates for therapy services and reduced cash
flows of therapy's customers which resulted in an increased aging and
uncollectable accounts in therapy's accounts receivable.
Excluding impairment of long-lived assets of $33.1 million and
recapitalization, indirect merger and other expenses of $78.6 million and $2.6
million in fiscal years 1999 and 1998, respectively, the operating loss for
Other operations increased by $7.5 million in fiscal year 1998, substantially
all of which was related to the Mariner Merger.
SEASONALITY
The Company's revenues and operating income generally fluctuate from
quarter to quarter. This seasonality is related to a combination of factors
which include the timing of Medicaid rate increases, the number of work days
in the period and seasonal census cycles.
THE YEAR 2000 ISSUE
In connection with the Year 2000 ("Y2K") transition, the Company
established a project for addressing issues relating to the potential
inability of computer programs to recognize dates that follow December 31,
1999 (the "Year 2000 Issue"). The Year 2000 Issue presented potential problems
not only for computer hardware and software but also for devices that
incorporate embedded chips, such as critical medical devices utilized in the
Company's facilities.
The Company established a committee with members from the information
technology, operations, purchasing, legal, accounting, payroll, and risk
management areas of the Company (the "Year 2000 Committee"). This committee
reported to the Company's senior management and was responsible for
identifying business line specific Year 2000 Issues. The Company additionally
established a corporate Y2K Office responsible for project coordination.
The Company's Y2K program addressed potential issues in the following
areas: information technology and infrastructure; software for corporate and
business applications; suppliers and payers; and equipment with date-sensitive
embedded chips. Y2K remediation of the technology infrastructure was
accomplished in conjunction with a company-wide technology upgrade effort and
was completed in December 1999. Software remediation was completed for
corporate applications as the Company completed the installation of a new
client-server based financial and payroll-human resources package. For the
Company's Mariner Health subsidiary, the applications already in place were
remediated by the end of September 1999. Conversion of those facilities to the
package in use across the remainder of the Company is scheduled to take place
after January 2000. Remediation of business applications in connection with
the Year 2000 Issue was accomplished through internal software development
efforts and through upgrading or replacing of non-compliant externally
supplied software. All remediation of business applications software was
complete by December 1999. Subject to limited exceptions, verification of Y2K
readiness on the part of critical suppliers was complete by August 1999.
Verification of the readiness of Medicare and Medicaid fiscal agents continued
through December 1999. The Company centralized its research and verification
efforts in connection with equipment at risk for embedded chip issues. This
effort was completed by July 1999 and remediation was completed by December
1999. Only a minimal amount of equipment replacement or upgrades were
required.
31
<PAGE>
The Company established a patient-focused contingency planning process
geared toward the development of action plans for potential failures to
mission critical systems and equipment. A set of guidelines were utilized by
each facility to develop local plans. Final drills and contingency
preparations were completed in November and December 1999.
A plan was established for monitoring and communications over the
transition weekend which included: management personnel on duty at each
facility before, during and after the rollover to verify and report on, the
performance of life-safety and patient care equipment; a communications
network of district and regional personnel; and the establishment of a command
center to monitor and communicate developments from throughout the Company as
well as pertinent Y2K developments from around the country.
Y2K issues or problems observed within the Company were minimal. No
problems were seen with patient care equipment, life safety systems,
information technology infrastructure or utilities. Problems seen included
isolated issues with phone and voice mail systems and minor discrepancies with
business applications which were repaired within hours of identification. No
Y2K related supplier issues have been observed and there are no indications to
date of payer or fiscal intermediary issues.
Exclusive of expenditures relating to the conversion of corporate
financial, payroll and human resource systems approximately $6.9 million was
spent to remedy potential problems associated with the Year 2000 Issue.
The Company believes that the principal risk for the Company from the Year
2000 Issue is from the potential for delay in the receipt of payments from
third-party payors. Currently, the Company's primary source of liquidity is
the DIP Financings. If the amounts available under the DIP Financings become
exhausted or unavailable, the Company will have minimal access to credit
facilities and its operating resources will be limited to invested cash,
working capital and proceeds from asset sales not required to be applied to
satisfy obligations under the plan of reorganization approved in connection
with the Company's Chapter 11 Filings. Given the Company's current and future
liquidity sources, a delay in receipts from third party payors could have a
material adverse effect on the Company's financial condition and results of
operations.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Cash and cash equivalents were $71.8 million at September 30, 1999. Working
capital was a deficit of approximately $2.0 billion, a decrease of
approximately $2.3 billion during the year ended September 30, 1999, primarily
due to defaults which required substantially all of the Company's debt to be
reflected as current obligations. See Notes 2 and 12 to the Consolidated
Financial Statements. Cash used in operating activities was $59.6 million in
the year ended September 30, 1999, as compared to $15.5 million used in
operating activities for the year ended September 30, 1998. Other current
assets decreased by $69.6 million primarily as a result of income tax refunds
the Company received from federal and state taxing authorities. Accounts
payable decreased by $30.7 million and accrued expenses and other current
liabilities decreased by $22.0 million, primarily as a result of the
divestiture or closure of several of the Company's operations during fiscal
1999.
Cash provided by investing activities was $38.0 million in the year ended
September 30, 1999, as compared to $211.8 million used in investing activities
for the year ended September 30, 1998. Investing activities included the use
of $73.3 million related to capital expenditures. Cash provided by investing
activities also included $87.0 million of proceeds from the sale of
operations, primarily the divestiture of the Company's outpatient
rehabilitation clinics and hospital rehabilitation management contracts.
Cash provided by financing activities was $90.1 million in the year ended
September 30, 1999, as compared to $216.3 million for the year ended September
30, 1998. Cash provided by financing activities included $222.4 million in net
draws under the Company's credit line, principal repayments of $105.1 million,
and $7.5 million in payments for financing fees associated with certain
amendments to the Company's debt agreements. Cash provided by financing
activities also included $26.5 million proceeds from the Deficiency Note and
$46.7 million repurchase of subordinated debt (see Note 12 to the Consolidated
Financial Statements).
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The primary source of revenues for the Company are the State Medicaid
programs and federal Medicare program. The Company receives payment for
nursing facility services based on rates that are set by individual state
Medicaid programs. Although payment cycles for these programs vary, payments
generally are made within 30 to 60 days after services are provided. For
Medicare cost reporting periods beginning July 1, 1998 and after, the federal
Medicare program converted to PPS for skilled nursing facility services. As of
September 30, 1999 all of the Company's skilled nursing facilities are
reimbursed under PPS. The prospective payment system provides acuity-based
rates that are established at the beginning of the Medicare reporting year.
Under PPS, claims are filed monthly and clean claims are paid 14 days after
submission.
For cost reporting periods that ended before the start of PPS, the
facilities were (and to the extent final cost reports for prior periods are
not settled, still are) reimbursed under Medicare on the basis of reasonable
and necessary cost as determined from annual cost reports. This retrospective
settlement system resulted in final cost report settlements that generally
were not finally settled until two years after the end of the cost reporting
period and that could be further delayed by appeals and litigation.
PPS has had a material adverse effect on the Company's financial condition.
While the effects of PPS have been somewhat ameliorated by recent legislation,
PPS is in large part responsible for the inability of the Company to operate
under its existing capital structure. See "Business--Regulation" and "--
Healthcare Regulatory Matters."
PPS reduced the cash flows of pharmacy's and therapy's customers which
resulted in an increased aging and uncollectable accounts in both pharmacy's
and therapy's accounts receivable. In addition, the Company's accounts
receivable continued to deteriorate during the year due to the multiple
complexities involved with the change to Medicare PPS billing. The Company's
facilities were phased into PPS based upon their cost report years (20
facilities on July 1, 1998; 105 facilities on October 1, 1998; 189 facilities
on January 1, 1999; and 83 facilities on April 1, 1999). At September 30,
1999, all facilities were being paid by Medicare under PPS, and as such,
revenue recorded will consist of the aggregate payments expected from Medicare
for individual claims at the appropriate payment rates. The PPS billing
methodology is extremely complex and its implementation is resource intensive.
The claims amendment process lacks procedures and the coordination of certain
policies. The Company has a commitment to training and compliance and has
established procedures to address PPS issues as they arise.
The Company provides certain services and supplies between subsidiary
companies, some of which are charged at cost and others of which are charged
at market rates. Subject to certain exceptions, Medicare's "related
organization principle" generally requires that services and supplies
furnished to nursing facilities by related entities be included in the nursing
facility's reimbursable cost at the cost of the supplying entity. The Company
believes that the services and supplies furnished to nursing facilities at
market rates qualify for exception to the related organization principle.
Certain of the Company's Medicare fiscal intermediaries have taken the
position that the related party transactions do not qualify for this exception
to the related party rules and have made adjustments that reduce Medicare
allowable cost to the cost of the supplying entity. During the third quarter
of fiscal 1999, the intermediaries for the Mariner Health facilities reopened
previously settled cost reports to impose such related party adjustments for
services furnished to the facilities by Mariner Health's rehabilitation
subsidiary. All related party adjustments have been or will be appealed to the
Provider Reimbursement Review Board and through the full appeal process as is
warranted. The adjustments effect only periods during which the facilities
were reimbursed for Medicare on the basis of reasonable and necessary cost;
there would not be any impact for periods that are reimbursed under PPS
following transition.
During fiscal year 1999, the Company recorded $122.0 million of adjustments
to reduce the estimated amount due from third-party payors, of which $39.3
million was recorded to reduce the estimated amount receivable from cost
reports filed, remaining open or settled during the year. The remaining $82.7
million of adjustments was recorded to reflect amounts due to the Medicare
program for previously received reimbursement and to reduce the estimated
amount receivable from all Medicare cost report appeal items. This amount
primarily pertains to related party adjustments asserted by Medicare
intermediaries (and disputed by the Company) through the intermediaries' May
1999 reopening of certain Mariner Health Medicare cost reports for 1995, 1996
and
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some of 1997. These reopenings were to incorporate adjustments that reduced
allowable cost of rehabilitation therapy services that were provided to
Mariner Health facilities by Mariner Health's rehabilitation subsidiaries.
During the three months ended June 30, 1999, Mariner Health received revised
Notices of Program Reimbursement ("NPRs") for certain of the cost reports on
approximately 50 of its facilities that require Mariner Health to repay
approximately $15.9 million to the Medicare program, net of outstanding cost
report receivables. On July 27, 1999, Mariner Health reached agreement with
HCFA to extend repayment of the $15.9 million net liabilities resulting from
the issuance of the revised NPRs. The extended repayment plan requires payment
of $1.8 million per month from July through December 1999, and $1.5 million
per month from January through May 2000. The current intermediary has notified
Mariner Health that it intends to issue revised NPRs for the remaining
facility cost reports (1997 through 1999) starting in fiscal year 2000. Should
the revised NPRs result in a repayment requirement, the Company and Mariner
Health would seek to enter into an extended repayment plan with HCFA at that
time. The Company is vigorously disputing the intermediaries' overpayment
determinations through the appeal process; however, a favorable outcome cannot
be assured at this time.
In addition to the related party adjustments and cost report settlements
discussed above, any plan of reorganization confirmed by the Bankruptcy Court
in connection with the Company's Chapter 11 Filings will affect the Company's
liquidity in the future and could have a material adverse effect on the
Company.
Subsequent to September 30, 1999, Mariner Health did not make the October
1, 1999 interest payment on the Mariner Notes (defined below, see "--Mariner
Health Senior Subordinated Notes"), and the Company did not make the November
1, 1999 interest payment on the Senior Subordinated Notes (defined below, see
"--Senior Subordinated Notes"), did not pay November, December or January rent
under the Synthetic Lease (defined below, see "--Other Factors Affecting
Liquidity and Capital Resources"), and did not make or any principal or
interest payments on the Senior Credit Facility coming due after November 1,
1999 (defined below, see "--Senior Credit Facility"). Also, the Mariner Health
Senior Credit Facility and Mariner Health Term Loan Facility (defined below,
see "--Mariner Health Senior Credit Facility and Mariner Health Term Loan
Facility") matured on January 3, 2000, and Mariner Health did not make the
required payments in connection with those obligations. The inability of the
Company and Mariner Health to service or restructure their respective debt and
other obligations culminated in the Chapter 11 Filings on January 18, 2000.
Except as may be otherwise determined by the Bankruptcy Court overseeing the
Chapter 11 Filings, the automatic stay protection afforded by the Chapter 11
Filings prevents any action from being taken by creditors with regard to any
defaults under the prepetition obligations of the Company and those of its
subsidiaries which are debtors in the Chapter 11 Filings.
Senior Credit Facility. In connection with the Recapitalization Merger, the
Company entered into the Senior Credit Facility, which originally consisted of
a $150.0 million revolving credit facility (the "Revolving Credit Facility"),
and three term loan credit facilities: a 6-1/2 year term loan facility in an
aggregate principal amount of $240.0 million (the "Tranche A Term Loan
Facility"), a 7-1/2 year term loan facility in an aggregate principal amount
of $250.0 million (the "Tranche B Term Loan Facility"), and an 8-1/2 year term
loan facility in an aggregate principal amount of $250.0 million (the "Tranche
C Term Loan Facility"). Loans made under the Tranche A Term Loan Facility
("Tranche A Term Loans"), the Tranche B Term Loan Facility ("Tranche B Term
Loans") and the Tranche C Term Loan Facility ("Tranche C Term Loans") are
collectively referred to herein as "Term Loans." Advances under the Revolving
Credit Facility are sometimes referred to as "Revolving Loans." The proceeds
from borrowings under the Term Loans were used, along with the proceeds of the
Notes (defined below) offering, to fund a portion of the Recapitalization
Merger, refinance a significant portion of LCA's and GranCare's pre-merger
indebtedness and to pay costs and expenses associated with the
Apollo/LCA/GranCare Mergers.
In July 1998 the Revolving Credit Facility was increased to $175.0 million
and the Tranche A Term Loan Facility to $315.0 million in connection with the
Mariner Merger. The proceeds of the $75.0 million increase in the Tranche A
Credit Facility and of certain Revolving Credit Loans were used to pay various
costs and expenses
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incurred in connection with the Mariner Merger. As of September 30, 1999,
there was $166.4 million borrowed under the Revolving Credit Facility and
approximately $8.6 million in letters of credit outstanding.
The obligations of the Company under the Senior Credit Facility are
guaranteed by substantially all of the Company's subsidiaries other than
Mariner Health and its subsidiaries, and are secured by substantially all of
the otherwise unencumbered owned assets of the Company and such subsidiaries.
Principal amounts outstanding under the Revolving Credit Facility were
originally due and payable in April 2005. The Term Loans are amortized in
quarterly installments which increase over the term of those loans. (see Note
12 to the Consolidated Financial Statements). Interest on outstanding
borrowings under the Senior Credit Facility accrue, at the option of the
Company, at the Alternate Base Rate (the "ABR") of The Chase Manhattan Bank
("Chase") or at a reserve-adjusted Eurodollar Rate (the "Eurodollar Rate"),
plus, in each case, an Applicable Margin. The term "Applicable Margin" means a
percentage that will vary in accordance with a pricing matrix based upon the
respective term loan tenor and the Company's leverage ratio (see Note 12 to
the Consolidated Financial Statements).
The Senior Credit Facility is subject to prepayment, in whole or in part,
at the Company's option and in certain minimum increments from time to time,
and is also subject to mandatory prepayment from the net cash proceeds
received from certain transactions. Those transactions include the sale or
issuance of equity by the Company, the incurrence of certain indebtedness by
the Company, and the sale of certain assets where the net cash proceeds are
not reinvested in the Company's business within 12 months (6 months in certain
cases). The Company must also make annual prepayments to the extent of 75% of
its excess cash flow for each fiscal year (reduced to 50% of excess cash flow
once the Company's leverage ratio as of the last day of any fiscal year is
less than or equal to 4.50 to 1.00). Mandatory prepayments will be applied pro
rata to the unmatured installments of the Term Loans; provided, however, that
holders of Tranche B Term Loans or Tranche C Term Loans may refuse any such
mandatory prepayment otherwise allocable to them, in which case the amount so
refused will be applied as an additional prepayment of the Tranche A Term
Loans. Subject to compliance with customary borrowing conditions, amounts
applied as prepayments of the Revolving Credit Facility may be reborrowed;
amounts prepaid under the Term Loans may not be reborrowed.
The covenants contained in the Senior Credit Facility, among other things,
require the Company to maintain certain financial ratios and restrict the
ability of the Company to dispose of assets, repay other indebtedness or amend
other debt instruments, pay dividends, make investments, and make
acquisitions. The Company received the consent of the requisite lenders under
the Senior Credit Facility to permit the Mariner Merger and certain covenants
in the Senior Credit Facility were modified to accommodate the Mariner Merger.
By amendment effective December 22, 1998, certain of the Senior Credit
Facility's financial and operating covenants were amended to provide the
Company with additional flexibility, in return for which the Applicable
Margins were increased. (See Note 12 to the Consolidated Financial
Statements.)
In May 1999, the Senior Credit Facility was further amended in order to
waive non-compliance by the Company with certain financial covenants as of
March 31, 1999, to increase loan pricing (see Note 12 to the Consolidated
Financial Statements) and, among other things, (i) to prohibit acquisitions,
(ii) to eliminate the Company's ability to defer mandatory prepayments with
the proceeds from asset sales and other transactions by reinvesting such
proceeds in other capital assets, and (iii) to restrict the Company's right to
sell assets without administrative agent or lender approval, incur capital
expenditures other than for maintenance and repair purposes, or make
investments in Mariner Health and the Mariner Health subsidiaries.
As of June 30, 1999, and again as of September 30, 1999, the Company was in
violation of certain of these financial covenants and as a result has not been
able to make additional borrowings under the Senior Credit Facility. The
Company was unable to obtain waivers of the June 30, 1999 or September 30,
1999 financial covenant defaults under the Senior Credit Facility. In
addition, in order to conserve its liquidity and facilitate a restructuring of
its indebtedness and other obligations, the Company did not made the interest
payments due on the Senior Credit Facility after October, 1999. The lenders
under the Senior Credit Facility signed a forbearance
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agreement, pursuant to which they temporarily agreed (but without waiving any
events of default) not to take any remedial action with respect to such events
of default (including acceleration of their debt), subject to no new events of
default occurring. The forbearance agreement has expired by its terms.
However, the automatic stay protection afforded by the Chapter 11 Filings
prevents any action from being taken with regard to any of the defaults under
the Senior Credit Facility, except as otherwise may be determined by the
Bankruptcy Court.
Senior Subordinated Notes. In connection with the Apollo/LCA/GranCare
Mergers, on November 4, 1997 the Company completed a private offering to
institutional investors of $275 million of its 9.5% Senior Subordinated Notes
due 2007 (the "Senior Subordinated Notes"), at a price of 99.5% of face value
and $294 million of its 10.5% Senior Subordinated Discount Notes due 2007, at
a price of 59.6% of face value (collectively, the "Notes"). Interest on the
Senior Subordinated Notes is payable semi-annually. Interest on the Senior
Subordinated Discount Notes will accrete until November 1, 2002 at a rate of
10.57% per annum, compounded semi-annually, and will be cash pay at a rate of
10.5% per annum thereafter. The Notes mature on November 1, 2007. The net
proceeds from the offering, along with proceeds from the Senior Credit
Facility, were used to fund a portion of the Recapitalization Merger of the
Notes, refinance a significant portion of LCA's and GranCare's pre-merger
indebtedness and to pay costs and expenses associated with the
Apollo/LCA/GranCare Mergers. Pursuant to the terms of the indenture with
respect to the Notes, in March 1998, the Company completed an exchange offer
with respect to the Notes whereby Notes registered under the Securities Act of
1933, as amended, were exchanged for unregistered Notes. The terms of the
exchange Notes are identical to the original Notes. Mariner Health and its
subsidiaries are "restricted subsidiaries" under the indenture pursuant to
which the Notes were issued. The Company did not make its scheduled November
1, 1999 semi-annual interest payment on the Senior Subordinated Notes, and
such default was not cured within the applicable grace period. Certain holders
of the Senior Subordinated Notes have formed an unofficial committee of
holders of the Senior Subordinated Notes, and have engaged counsel to
represent their interests in connection with the Company's Chapter 11 Filings.
Although the Company is in default with respect to the Notes, unless otherwise
determined by the Bankruptcy Court, the automatic stay protection afforded by
the Chapter 11 Filings prevents any action from being taken with regard to
such defaults.
Other Significant Indebtedness and Commitments. The Company, through
various of its GranCare subsidiaries, is a party to various agreements
(collectively, the "HRPT Agreements") between GranCare and Health and
Retirement Properties Trust ("HRPT"). HRPT is the lessor with respect to
certain facilities leased by two subsidiaries of GranCare (the "Tenant
Entities"). In connection with obtaining HRPT's consent to the
Apollo/LCA/GranCare Mergers, GranCare and HRPT executed a Restructure and
Asset Exchange Agreement dated October 31, 1997 pursuant to which HRPT and
GranCare restructured their relationship (the "HRPT/GranCare Restructuring").
As a part of the HRPT/GranCare Restructuring, HRPT consented to the
consummation of the Apollo/LCA/GranCare Mergers and the transactions related
thereto, and HRPT has an unlimited guaranty by the Company and all
subsidiaries of the Company having an ownership interest in Tenant Entities
which guaranty is secured by a cash collateral deposit of $15 million, the
earned interest on which is retained by HRPT. The performance by the Tenant
Entities of their respective obligations to HRPT continues to be secured by a
pledge of one million shares of HRPT common stock beneficially owned by
GranCare. The Company does not have the ability to sell these shares to meet
any capital requirements. During the Fall of 1999, SPTMNR Properties Trust
("SPTMNR") has succeeded to the interests of HRPT under the HRPT Agreements,
and references to HRPT herein are deemed to include SPTMNR in such capacity.
Unless otherwise determined by the Bankruptcy Court, the automatic stay
protection afforded by the Chapter 11 Filings prevents any action from being
taken by HRPT with regard to any defaults that may exist under the HRPT
Agreements.
In connection with the GranCare Merger, the Company and its GranCare
subsidiary became parties to an agreement between GranCare and Omega
Healthcare Investors, Inc. ("Omega"). A wholly-owned subsidiary of the
Company, Professional Health Care Management, Inc. ("PHCMI"), is the borrower
under a $58.8 million mortgage note executed on August 14, 1992 (the "Omega
Note") in favor of Omega, and under the related Michigan loan agreement dated
as of June 7, 1992 as amended (the "Omega Loan Agreement"). All $58.8 million
was outstanding as of September 30, 1999.
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The Omega Note bears interest at a rate which is adjusted annually based on
either (i) changes in the Consumer Price Index or (ii) a percentage of the
change in gross revenues of PHCMI and its subsidiaries from year to year,
divided by $58.8 million, whichever is higher, but in any event subject to a
maximum rate not to exceed 105% of the interest rate in effect for the Omega
Note for the prior calendar year. The current interest rate is 15.5% per annum
which is paid monthly. Additional interest accrues on the outstanding
principal of the Omega Note at the rate of 1% per annum and totaled
approximately $4.3 million at September 30, 1999. Such interest is compounded
annually and is due and payable on a pro rata basis at the time of each
principal payment or prepayment.
In addition to the interest on the Omega Note described in the preceding
paragraph, and as a condition to obtaining Omega's consent to a February 1997
transaction between Vitalink Pharmacy Services, Inc. and GranCare, PHCMI
agreed to pay additional interest to Omega in the amount of $20,500 per month,
through and including July 1, 2002. If the principal balance of the Omega Note
for any reason becomes due and payable prior to that date, there will be added
to the indebtedness owed by PHCMI: (i) the sum of $1.0 million, plus
(ii) interest thereon at 11% per annum to the prepayment date; less (iii) the
amount of such additional interest paid to Omega prior to the prepayment date.
Subsequent to September 30, 1999, PHCMI and GranCare received notice from
Omega asserting that PHCMI was in default of its obligation to maintain its
required minimum tangible net worth. Omega demanded that such default be cured
within 30 days, either by PHCMI or by GranCare under its guaranty of PHCMI's
compliance with such minimum tangible net worth test, or else an event of
default would exist under the Omega loan documents. The Company received
notice in late December, 1999, declaring an event of default as a result of
the alleged breach of the tangible net worth covenants contained in the Omega
Loan Documents and accelerating all amounts due under obligations to Omega.
Effective January, 2000, PHCMI ceased making its monthly interest payments on
the Omega Note. Omega subsequently initiated foreclosure proceedings on three
skilled nursing facilities located in North Carolina. Hearings on the
foreclosures were scheduled for February 3, 2000; however, unless otherwise
determined by the Bankruptcy Court, the automatic stay protection afforded by
the Chapter 11 Filings prevents any action from being taken by Omega with
regard to any defaults that may exist under the Omega Loan Documents.
Debtor-in-Possession Financing for the Company. Among the orders entered by
the Bankruptcy Court on the Petition Date in the Company's Chapter 11 case
were orders approving on an interim basis (i) the use of cash collateral by
the Company and those of its subsidiaries which had filed petitions for
reorganization under Chapter 11 of the Bankruptcy Code (excluding Mariner
Health and the direct and indirect subsidiaries of Mariner Health, the
"Company Debtors"), and (ii) the funding of up to $25.0 million in principal
amount at any time outstanding under a debtor-in-possession financing
arrangement (the "Company DIP Financing") established pursuant to that certain
Revolving Credit and Guaranty Agreement dated as of January 18, 2000 (the
"Petition Date") (as amended from time to time, the "Company DIP Credit
Agreement") by and among the Company, as borrower, the other Company Debtors,
as guarantors, the lenders signatory thereto as lenders (the "Company DIP
Lenders"), and The Chase Manhattan Bank, as Administrative Agent,
Documentation Agent and Collateral Agent (the "Company DIP Agent"). The
Bankruptcy Court set a hearing on January 28, 2000 for an interim order (the
"Company Interim DIP Order") to increase the approved portion of the Company
DIP Financing to $50.0 million, and another hearing on February 16, 2000 for
consideration of a final order (the "Final Company DIP Order,") approving the
full $100.0 million amount of the Company DIP Financing.
The Company DIP Credit Agreement establishes a one-year, $100.0 million
secured revolving credit facility to provide funds for working capital and
other lawful corporate purposes for use by the Company and the other Company
Debtors; provided, however, that amounts outstanding under the Company DIP
Financing may not at any time exceed the maximum borrowing amounts established
for the Company under the initial DIP order (the "Company Initial DIP Order"),
the Company Interim DIP Order or the Final Company DIP Order (collectively,
the "Company DIP Orders"), as the case may be, or the Company's borrowing base
of eligible accounts receivable (the "Company Borrowing Base"). Up to $10.0
million of the Company DIP Financing may be utilized for the issuance of
letters of credit as needed in the businesses of the Company Debtors. Interest
accrues
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on the principal amount outstanding under the Company DIP Financing at a per
annum rate of interest equal to the ABR of Chase, plus three percent (3%) and
is payable monthly in arrears. During the existence and continuation of a
default in the payment of any amount due and payable by the Company Debtors
under the Company DIP Credit Agreement, interest will accrue at the default
rate of ABR plus five percent (5%) per annum.
The outstanding principal of the Company DIP Financing, together with all
accrued and unpaid interest and all other obligations thereunder, are due and
payable one year from the Petition Date or, if earlier, on the Prepayment
Date. The term, "Prepayment Date," is defined as the first business day which
is at least 30 days after the entry of the Company First Day DIP Order, if the
Company Final DIP Order has not been entered. The Company must also prepay
principal to the extent that the principal amount outstanding under the
Company DIP Financing at any time exceeds the Company Borrowing Base then in
effect. To the extent proceeds of loans under the Company DIP Financing are
used to complete the construction of certain healthcare facilities that are
part of the Synthetic Lease (which proceeds are not permitted to exceed $8.8
million), proceeds from the sale of any such properties must be used first to
repay any portion of the loans made pursuant to the Company DIP Financing,
with 75% of any remaining net cash proceeds to be applied as an adequate
protection payment to the lenders under the Senior Credit Facility, and the
remaining 25% of such excess net cash proceeds to be retained by the Company
or its applicable subsidiary as additional working capital. Pursuant to the
terms of the Initial DIP Order, 75% of the net cash proceeds of other asset
sales approved by the Bankruptcy Court and the requisite Company DIP Lenders
are to be applied as an adequate protection payment to the lenders under the
prepetition Senior Credit Facility. The Company has the right to make optional
prepayments in increments of $1.0 million, and to reduce the commitment under
the Company DIP Credit Agreement in increments of $5.0 million.
The obligations of the Company under the Company DIP Credit Agreement are
jointly and severally guaranteed by each of the other Company Debtors pursuant
to the Company DIP Agreement. Under the terms of the Initial Company DIP
Order, the obligations of the Company Debtors under the Company DIP Credit
Agreement (the "Company DIP Obligations") constitute allowed superpriority
administrative expense claims pursuant to Section 364(c)(1) of the Bankruptcy
Code (subject to a carve-out for certain professional fees and expenses
incurred by the Company Debtors). The Company DIP Obligations will be secured
by perfected liens on all or substantially all of the assets of the Company
Debtors (excluding bankruptcy causes of action), the priority of which liens
(relative to prepetition creditors having valid, non-avoidable, perfected
liens in those assets and to any "adequate protection" liens granted by the
Bankruptcy Court) is established in the Initial Company DIP Order and the
related cash collateral order entered by the Bankruptcy Court (the "Initial
Company Cash Collateral Order"). The Bankruptcy Court has also granted certain
prepetition creditors of the Company Debtors replacement liens and other
rights as "adequate protection" against any diminution of the value of their
existing collateral that may result from allowing the Company Debtors to use
cash collateral in which such creditors had valid, non-avoidable and perfected
liens as of the Petition Date. The discussion contained in this paragraph is
qualified in its entirety by reference to the Interim Company DIP Order and
the Initial Company Cash Collateral Order, and reference should be made to
such orders (which are available from the Bankruptcy Court) for a more
complete description of such terms.
The Company DIP Credit Agreement contains customary representations,
warranties and covenants of the Company Debtors, as well as certain financial
covenants relating to minimum EBITDA, maximum capital expenditures, and
minimum patient census. The breach of such representations, warranties or
covenants, to the extent not waived cured within any applicable grace or cure
periods, could result in the Company being unable to obtain further advances
under the Company DIP Financing and possibly the exercise of remedies by the
Company DIP Lenders, either of which events could materially impair the
ability of the Company to successfully reorganize in Chapter 11.
Mariner Health Senior Credit Facility and Mariner Health Term Loan
Facility. At the time of the Mariner Merger, Mariner Health was the borrower
under a $460.0 million revolving credit facility (the "Mariner Health Senior
Credit Facility"), by and among Mariner Health, the lenders signatory thereto
(the "Mariner Health Lenders"), and PNC Bank, National Association ("PNC
Bank"), as agent for the Mariner Health Lenders (the "Mariner Agent").
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Outstanding advances under the Mariner Health Senior Credit Facility bear
interest based, at the borrower's option, either on PNC Bank's prime rate or
on a Eurodollar-based rate, in each case plus an applicable margin which
fluctuates based on a pricing matrix related to Mariner Health's leverage
ratio. The Mariner Health Senior Credit Facility contains covenants which,
among other things, require Mariner Health and its subsidiaries to maintain
certain financial ratios and impose certain limitations or prohibitions on
Mariner Health with respect to the incurrence of indebtedness, liens and
capital leases; the payment of dividends on, and the redemption or repurchase
of, its capital stock; investments and acquisitions, including acquisitions of
new facilities; the merger or consolidation of Mariner Health with any person
or entity; and the disposition of any of Mariner Health's properties or
assets.
Effective December 23, 1998, Mariner Health amended the Mariner Health
Senior Credit Facility (the "Mariner Health Senior Credit Facility Amendment")
(a) to reduce the amount of the revolving commitment from $460.0 million to
$250.0 million, (b) to provide additional financial covenant flexibility for
Mariner Health and its subsidiaries, (c) to modify certain of the financial
and operating covenants referred to in the immediately preceding paragraph,
(d) to increase the applicable interest rate margins (see Note 12 to the
Consolidated Financial Statements) and (e) to expand the amount and types of
collateral pledged to secure the Mariner Health Senior Credit Facility.
Mariner Health's obligations under the Mariner Health Senior Credit
Facility are guaranteed by substantially all of its subsidiaries and are
secured by substantially all of the otherwise unencumbered assets of Mariner
Health and such subsidiary guarantors.
Contemporaneously with the effectiveness of the Mariner Health Senior
Credit Facility Amendment, Mariner Health entered into a term loan agreement
dated as of December 23, 1998 (the "Mariner Health Term Loan Facility") with
PNC Bank, as administrative agent, First Union National Bank, as syndication
agent, and the financial institutions signatory thereto as lenders (the "Term
Lenders"), pursuant to which the Term Lenders made a $210.0 million senior
secured term loan to Mariner Health (the "Mariner Health Term Loan"). Proceeds
of the Mariner Term Loan were applied to reduce outstanding amounts under the
Mariner Health Senior Credit Facility in connection with the Mariner Health
Senior Credit Facility Amendment. The interest rate pricing and covenants
contained in the Mariner Health Term Loan Agreement are substantially similar
to the corresponding provisions of the Mariner Health Senior Credit Facility,
as amended by the Mariner Health Senior Credit Facility Amendment. The Mariner
Health Term Loan Facility is guaranteed by the same subsidiary guarantors as
the Mariner Health Senior Credit Facility and is cross-defaulted and cross-
collateralized with the Mariner Health Senior Credit Facility.
As of September 30, 1999, approximately $223.3 million of loans and $6.6
million of letters of credit were outstanding under the Mariner Health Senior
Credit Facility, and $197.6 million of the Mariner Health Term Loan was
outstanding. All but one of the letters of credit were drawn subsequent to
September 30, 1999, and the related reimbursement obligations were added to
the outstanding revolving loan balance.
Mariner Health and its subsidiaries are treated as unrestricted
subsidiaries under the Senior Credit Facility. Unlike other subsidiaries of
the Company (the "Non-Mariner Subsidiaries"), Mariner Health and its
subsidiaries neither guarantee the Company's obligations under the Senior
Credit Facility nor pledge their assets to secure such obligations.
Correspondingly, the Company and the Non-Mariner Subsidiaries do not guarantee
or assume any obligations under the Mariner Health Senior Credit Facility or
the Mariner Health Term Loan Facility. Mariner Health and its subsidiaries are
not subject to the covenants contained in the Senior Credit Facility, and the
covenants contained in the Mariner Health Senior Credit Facility and the
Mariner Health Term Loan Facility are not binding on the Company and the Non-
Mariner Subsidiaries. Mariner Health and the Mariner Health subsidiaries are
obligated to continue to comply with the covenants contained in the Mariner
Health Senior Credit Facility and the Mariner Health Term Loan Facility
without taking into account the revenues, expenses, net income, assets or
liabilities of the Company and the Non-Mariner Subsidiaries. The converse is
true with respect to the Company, which (together with its Non-Mariner
Subsidiaries) must continue to comply with the covenants contained in its
Senior Credit Facility without taking into account the revenues, expenses, net
income, assets or liabilities of Mariner Health and its subsidiaries.
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Mariner Health was not in compliance with certain of the financial
covenants contained in the Mariner Health Senior Credit Facility and in the
Mariner Health Term Loan Facility as of March 31, 1999, and again as of June
30, 1999 and September 30, 1999. Mariner Health has been unable to obtain a
waiver of such financial covenant defaults from the Mariner Agent, the Mariner
Health Lenders and the Term Lenders. Mariner Health failed to make its October
1, 1999 interest payments due on the Mariner Health Senior Credit Facility and
in the Mariner Health Term Loan Facility within the applicable grace period,
although it subsequently made such payment with cash collateral previously
delivered to the collateral agent for the Mariner Health Lenders, pursuant to
amendments to the Mariner Health Senior Credit Facility and the Mariner Health
Term Loan Facility. Finally, Mariner Health did not repay the Mariner Health
Term Loan and Mariner Health Senior Credit Facility when they matured by their
terms on January 3, 2000. As a result, events of default exist with respect to
both the Mariner Health Term Loan and the Mariner Health Senior Credit
Facility. However, the automatic stay protection afforded by the Chapter 11
Filings by the Mariner Health Debtors prevents any action from being taken by
the Mariner Health Lenders and the Term Lenders with regard to any such events
of default unless otherwise determined by the Bankruptcy Court.
Mariner Health Senior Subordinated Notes. Mariner Health is also the issuer
of $150.0 million of 9% Senior Subordinated Notes due 2006 (the "Mariner
Notes") which were issued pursuant to an indenture dated as of April 4, 1996
(the "Mariner Indenture") with Mariner Health as issuer and State Street Bank
and Trust Company as trustee (the "Mariner Trustee"). The Mariner Notes are
obligations solely of Mariner Health and are not guaranteed by the Company or
any of its subsidiaries (other than Mariner Health). Because of the existing,
unwaived financial covenant defaults under the Mariner Health Senior Credit
Facility and the Mariner Health Term Loan Facility, the agents under such
facilities gave notice to Mariner Health and the Mariner Trustee that they
were instituting a 179-day payment blockage period, during which no payments
of debt service on the Mariner Notes could be made. Accordingly, Mariner
Health did not make the scheduled $7.1 million interest payment due on the
Mariner Notes on October 1, 1999. The 30-day grace period having expired
without such interest being paid, an event of default exists under the Mariner
Indenture. Two holders of substantially all of the Mariner Notes not owned by
the Company (see below) have formed an unofficial committee of holders of the
Mariner Notes, and have engaged counsel to represent their interests in
connection with the Chapter 11 Filings. Unless otherwise determined by the
Bankruptcy Court, the automatic stay protection afforded by the Chapter 11
Filings prevents any action from being taken by the Mariner Trustee and any
holders of the Mariner Notes with regard to any defaults that may exist under
the Mariner Indenture.
As a consequence of the Mariner Merger and the resulting change of control
at Mariner Health, the holders of the Mariner Notes had the right under the
Mariner Indenture to require that their Mariner Notes be purchased (the
"Change of Control Purchase") at a purchase price equal to 101% of the
outstanding principal amount of the Mariner Notes purchased. Effective on
September 11, 1998, Mariner Health and the Mariner Trustee entered into an
amendment to the Mariner Indenture which permitted Mariner Health to designate
a third-party to purchase any Mariner Notes tendered pursuant to the Change of
Control Purchase. Mariner Health designated NationsBank, N.A. (n/k/a Bank of
America, N.A., and herein referred to as "Bank of America") as a third-party
purchaser, and on September 21, 1998 Bank of America acquired all $40.7
million of the Mariner Notes tendered in connection with the Change of Control
Purchase (the "Tendered Mariner Notes"). In agreeing to act as third-party
purchaser, Bank of America required the Company to enter into a total return
swap agreement (the "Total Return Swap"), with the financial institution as
counterparty. See "Quantitative and Qualitative Disclosures about Market
Risk." The Company's obligations under the Total Return Swap are guaranteed by
Mariner Health and substantially all of the subsidiaries of Mariner Health.
During the quarter ended December 31, 1998, an additional $6.0 million of the
Mariner Notes were acquired by Bank of America and made a part of the Total
Return Swap.
The Total Return Swap terminated by its terms on August 16, 1999. Based on
the bids for the Tendered Mariner Notes solicited by Bank of America pursuant
to the Total Return Swap Agreement, the market value of the Tendered Mariner
Notes for purposes of unwinding the Total Return Swap was determined to be
approximately $700,000, resulting in capital depreciation of approximately
$46.5 million being owed by the Company. The Company was the winning bidder in
the auction for the Tendered Mariner Notes. On the
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August 16, 1999 termination date, Bank of America applied $15.0 million drawn
by it under a letter of credit issued pursuant to the Mariner Health Senior
Credit Facility and applied $5.0 million of cash collateral previously posted
by Mariner Health, to satisfy $20.0 million of the total amount owed to Bank
of America under the Total Return Swap, leaving a net deficiency of
approximately $26.5 million (the "Net Total Return Swap Deficiency").
Effective August 16, 1999, Bank of America and the Company incorporated the
Net Total Return Swap Deficiency into a promissory note (the "Deficiency
Note") which generally matures and is payable as to principal and interest on
the same terms as the notes evidencing the Revolving Loans. The guarantee of
the Total Return Swap obligations of the Company by Mariner Health and its
subsidiary guarantors remains in place. Bank of America also waived any
default arising from any failure to be paid the Net Deficiency on the
termination date of the Total Return Swap, in return for the lenders under the
Senior Credit Facility amending the Senior Credit Facility to acknowledge the
Deficiency Note as permitted indebtedness and as an "Obligation" that is
secured on a pari passu basis with the indebtedness outstanding under the
Senior Credit Facility. The $46.7 million of Mariner Notes acquired by Mariner
Post-Acute Network, Inc. in connection with the unwinding of the Total Return
Swap remain outstanding as an obligation of Mariner Health.
The Company did not make the scheduled interest payments due under the
Deficiency Note coming due and payable after October 1999 and is in default
under the Deficiency Note. Unless otherwise determined by the Bankruptcy
Court, however, the automatic stay protection afforded by the Chapter 11
Filings prevents any action from being taken by Bank of America with regard to
any defaults that may exist under the Total Return Swap, the Deficiency Note
or the related guaranty of the Mariner Health Debtors.
Debtor-in-Possession Financing for Mariner Health. Among the orders entered
by the Bankruptcy Court on the Petition Date in the Chapter 11 cases of
Mariner Health and its subsidiaries (the "Mariner Health Debtors"), were
orders approving (a) the use of cash collateral by the Mariner Health Debtors,
and (b) the funding of up to $15.0 million in principal amount at any time
outstanding under a debtor-in-possession financing arrangement (the "Mariner
Health DIP Financing" and together with the Company DIP Financing, the "DIP
Financings") pursuant to that certain Debtor-in-Possession Credit Agreement
dated as of January 20, 2000 (as amended from time to time, the "Mariner
Health DIP Credit Agreement") by and among Mariner Health and each of the
other Mariner Health Debtors, as co-borrowers thereunder, the lenders
signatory thereto as lenders (the "Mariner Health DIP Lenders"), First Union
National Bank, as syndication agent, PNC Capital Markets, Inc. and First Union
Securities, Inc., as co-arrangers, and PNC Bank, National Association, as
administrative Agent and collateral Agent. The Bankruptcy Court set a hearing
on February 16, 2000 to consider Mariner Health's motion for final approval of
the full $50.0 million of the Mariner Health DIP Financing.
The Mariner Health DIP Credit Agreement establishes a one-year, $50.0
million secured revolving credit facility, which is divided into two
tranches--a $40.0 million tranche A commitment, and a $10.0 million tranche B
commitment. The tranche b loan commitment is not activated unless and until
the holders of at least 75% of the Mariner Health DIP Financing loans or
commitments so approve. Advances under the Mariner Health DIP Financing may be
used by the Mariner Health Debtors (and to a limited degree, by certain joint
venture subsidiaries of Mariner Health that are not debtors in the Mariner
Health Chapter 11 cases) for working capital and other lawful corporate
purposes. Amounts outstanding under the Mariner Health DIP Financing may not
at any time exceed the maximum borrowing amounts established for the Mariner
Health Debtors under the initial DIP order (the "Mariner Health Initial DIP
Order") or the final DIP order (the "Final Mariner Health DIP Order," and
collectively with the Initial Mariner Health DIP Order, the "Mariner Health
DIP Orders"), as the case may be. Up to $5.0 million of the Mariner Health DIP
Financing may be utilized for the issuance of letters of credit as needed in
the businesses of the Mariner Health Debtors.
Interest accrues on the principal amount outstanding under the Mariner
Health DIP Financing at a per annum rate of interest equal to the "base rate"
of PNC Bank (i.e., the higher of the PNC Bank prime rate or a rate equal to
the federal funds rate plus 50 basis points) plus the applicable spread, which
is 250 basis points for tranche A and 300 basis points for tranche B. Such
interest is due and payable monthly in arrears. During the
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existence and continuation of any event of default under the Mariner Health
DIP Credit Agreement, the interest rates normally applicable to tranche A
loans and tranche B loans under the Mariner Health DIP Financing will be
increased by another 250 basis points per annum.
The outstanding principal of the Mariner Health DIP Financing, together
with all accrued and unpaid interest and all other obligations thereunder, are
due and payable in one year or, if earlier, on the Commitment Termination
Date. The term, "Commitment Termination Date," is defined as the first to
occur of the following: (i) the first anniversary of the Petition Date, (ii)
the effective date of a joint plan of reorganization for the Mariner Health
Debtors, (iii) the date of termination of the exclusivity rights of the
Mariner Health Debtors to file a plan of reorganization, (iv) the filing by
the Mariner Health Debtors of any plan of reorganization (or the modification
of any such plan previously filed with the Bankruptcy Court) no previously
approved by the holders of at least 66-2/3% of the outstanding loans or
commitments under the Mariner Health DIP Financing, (v) the date of
termination of the commitments under the Mariner Health DIP Credit Agreement
during the continuation of an event of default thereunder, (vi) 30 days after
the Petition Date if the Final Mariner Health DIP Order has not been entered
(which deadline is subject to extension at the discretion of the holders of at
least 66-2/3% of the outstanding loans or commitments under the Mariner Health
DIP Financing), or (vii) the date on which all or substantially all of the
assets or stock of the Mariner Health Debtors is sold or otherwise
transferred. The Mariner Health Debtors must also prepay principal to the
extent that the principal amount outstanding under the Mariner Health DIP
Financing at any time exceeds the Borrowing Base then in effect. The Mariner
Health Borrowing Base for any month is an amount equal to $7.5 million in
excess of the "Working Capital Facility" borrowings projected for such month
in Mariner Health's year 2000 DIP budget. The Mariner Health DIP Credit
Agreement also provides for mandatory prepayments under the following
circumstances: (i) with net cash proceeds from asset sales, the incurrence of
certain debt, the issuance of new equity, the receipt of tax refunds exceeding
$100,000 in the aggregate, and the receipt of casualty proceeds in excess of
$100,000 that are not applied within 60 days after receipt to the repair,
rebuilding, restoration or replacement of the assets damaged or condemned (or
committed within such period of time to be so applied); and (ii) on each
business day, the amount of cash held by the Mariner Health Debtors in excess
of the sum of $5.0 million plus the aggregate sum of the minimum amount
required by depositary banks to be kept in deposit accounts, concentration
accounts and other with such banks. Amounts prepaid pursuant to clause (i) of
the immediately preceding sentence will permanently reduce the amount of the
Mariner Health DIP Financing commitments on a dollar-for-dollar basis (first
tranche A, and then tranche B). Amounts prepaid pursuant to clause (ii) of the
same sentence will not permanently reduce such commitments. The Mariner Health
Debtors have the right to make optional prepayments in the minimum principal
amount of $1.0 million, and in increments of $100,000 in excess thereof, and,
on three business days' notice, to reduce the commitments under the Mariner
Health DIP Credit Agreement in the minimum amount of $5.0 million, or in
increments of $1.0 million in excess thereof.
Under the terms of the Initial Mariner Health DIP Order, the obligations of
the Mariner Health Debtors under the Mariner Health DIP Credit Agreement
(together with certain potential cash management system liabilities secured on
a pari passu basis therewith, the "Mariner Health DIP Obligations") constitute
allowed superpriority administrative expense claims pursuant to Section
364(c)(1) of the Bankruptcy Code (subject to a carve-out for certain
professional fees and expenses incurred by the Mariner Debtors). The Mariner
Health DIP Obligations will be secured by perfected liens on all or
substantially all of the assets of the Mariner Health Debtors (excluding
bankruptcy causes of action), the priority of which liens (relative to
prepetition creditors having valid, non-avoidable, perfected liens in those
assets and to any "adequate protection" liens granted by the Bankruptcy Court)
is established in the Initial Mariner Health DIP Order and the related cash
collateral order entered by the Bankruptcy Court (the "Initial Mariner Health
Cash Collateral Order"). The Bankruptcy Court has also granted certain
prepetition creditors of the Mariner Health Debtors replacement liens and
other rights as "adequate protection" against any diminution of the value of
their existing collateral that may result from allowing the Mariner Health
Debtors to use cash collateral in which such creditors had valid, non-
avoidable and perfected liens as of the Petition Date. The discussion
contained in this paragraph is qualified in its entirety by reference to the
Interim Mariner Health DIP Order and the Initial Mariner Health Cash
Collateral Order, and
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reference should be made to such orders (which are available from the
Bankruptcy Court) for a more complete description of such terms.
The Mariner Health DIP Credit Agreement contains customary representations,
warranties and covenants of the Mariner Health Debtors, as well as certain
financial covenants relating to minimum EBITDAR, minimum patient census,
minimum eligible accounts receivable, maximum variations from Mariner Health's
year 2000 DIP budget and maximum capital expenditures. The breach of such
representations, warranties or covenants, to the extent not waived or cured
within any applicable grace or cure periods, could result in the Mariner
Health Debtors being unable to obtain further advances under the Mariner
Health DIP Financing and the possible exercise of remedies by the Mariner
Health DIP Lenders, either of which events could materially impair the ability
of the Mariner Health Debtors to successfully reorganize in Chapter 11.
Among its other restrictive covenants, the Mariner Health DIP Credit
Agreement limits affiliate transactions with the Company Debtors, but does
contemplate weekly overhead payments to the Company equal to 1.25% of
projected net inpatient revenues for such month, subject to a monthly "true-
up," such that the payments for such month equal 5% of actual net inpatient
revenues of the Mariner Health Debtors. Such payments may be suspended by the
Mariner Health Debtors if certain defaults specified in the Mariner Health
Credit Agreement occur and are continuing, though such fees will still accrue
and will become due and payable if and when the subject default has been cured
or waived.
Healthcare Regulatory Matters. The Balanced Budget Act contains numerous
changes to the Medicare and Medicaid programs with the intent of slowing the
growth of payments under these programs by $115.0 billion and $13.0 billion,
respectively, through the year ended 2002. Approximately 50% of the savings
were to be achieved through a reduction in the growth of payments to providers
and physicians. These cuts have had, and will continue to have, a material
adverse effect on the Company.
The Balanced Budget Act amended the Medicare program by revising the
payment system for skilled nursing services. Historically, nursing homes were
reimbursed by the Medicare program based on the actual costs of services
provided. However, the Balanced Budget Act required the establishment of a PPS
system for nursing homes for cost reporting periods beginning on or after July
1, 1998. Under PPS, nursing homes receive a fixed per diem rate for each of
their Medicare Part A patients which, during the first three years, is based
on a blend of facility specific rates and Federal acuity adjusted rates.
Thereafter, the per diem rates will be based solely on Federal acuity adjusted
rates. Subsumed in this per diem rate are ancillary services, such as pharmacy
and rehabilitation services, which historically have been provided to many of
the Company's nursing facilities by the Company's pharmacy and therapy
subsidiaries. The inclusion of ancillary services in the PPS per diem has
resulted in significantly lower margins in the Company's pharmacy operations
as a result of increased pricing competition, a change in buying patterns by
customers and the decision by the Company to exit certain businesses
previously operated by the Company such as its third party therapy, home
health and hospital contract management businesses.
On May 12, 1998, HCFA published the "Interim Final Rule" for the skilled
nursing facility ("SNF") PPS along with the acuity adjusted federal PPS rates
for Part A Medicare patients and the facility specific inflation factors
effective from July 1, 1998 through September 30, 1999 and the inflation
factors that are used to adjust the facility specific base period cost to the
payment rates for periods beginning July 1, 1998 through periods beginning
September 1, 1999. On July 30, 1999, HCFA published the "Final Rule" for PPS
along with acuity adjusted federal PPS rates that are effective October 1,
1999 through September 30, 2000, and the inflation factors that are used to
adjust the specific facility specific base period cost to payment rates for
periods beginning October 1, 1999 through periods beginning September 1, 2000.
The acuity adjusted federal PPS rates and facility specific inflation factor
that are published along with the Final Rule follow the guidance included in
the Interim Final Rule and do not provide any long-term relief from the
overall effect of PPS on Medicare revenue decreases. On November 29, 1999,
President Clinton signed into law H.R. 3194, the "Consolidated Appropriations
Act" (the "CAA") (P.L. 106-113), legislation designed to mitigate the effects
of the Balanced Budget Act. While the CAA is expected to ameliorate somewhat
the adverse effects of the Balanced Budget Act, the Company has not
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yet evaluated what effect the CAA will have on its operating results. However,
the Company does not believe the CAA will have a material positive effect on
its operating results. See "Business--Regulation." The CAA, however,
temporarily increases the acuity adjusted PPS rates by 20 percent for 15
acuity categories. As evidenced by the language of the CAA, this payment
increase is intended to compensate SNFs for the provision of care to medically
complex patients, pending appropriate refinements to the PPS system. SNFs
providing care to patients falling within every non-rehabilitation acuity
category above the presumptive (rebuttable) Medicare eligibility line will
benefit from this increase. Three acuity categories falling within the "high"
and "medium" rehabilitation category also are subject to the increase. The
increased payments will begin on April 1, 2000, and end before the later of
(A) October 1, 2000, or (B) the date HCFA implements a refined PPS system that
better accounts for medically-complex patients. Neither the CAA nor the
accompanying Conference Report provides HCFA with specific directions
regarding such refinements to the PPS system. In addition, the CAA provides
for a four percent increase in the federal per diem payment rates for all
acuity categories in both fiscal years 2001 and 2002. This increase will not
be built into the base payment rates, however, and therefore future updates to
the federal payment rates will be calculated from the initial base rate.
As of July 1, 1999, all of the Company's SNFs are receiving Medicare
payment through PPS, although transition PPS rates vary from facility to
facility depending on each facility's base period cost that comprises the
facility specific component of the rates and the facility's geographic
location that defines the wage adjuster that is applied to the acuity adjusted
federal component of the rates. For most of the Company's facilities, the
facility specific base period cost is higher than the base period cost that
was used to develop the acuity adjusted federal rates. For some facilities,
however, the facility base period cost is lower than the base period cost used
to develop the PPS rates. The CAA allows SNFs to elect transition to the full
federal rate at the beginning of their cost reporting periods beginning on or
after January 1, 2000. SNFs may make the election up to 30 days after the
start of their cost reporting period. The Company will take advantage of this
waiver where appropriate.
The Balanced Budget Act also repealed the Boren Amendment ("Boren"), which
had required state Medicaid programs to reimburse nursing facilities for the
costs that are incurred by efficiently and economically operated providers in
order to meet quality and safety standards. Because of the repeal of Boren,
states now have considerable flexibility in establishing Medicaid payment
rates. In addition, Boren provided a dispute resolution mechanism whereby
providers could challenge Medicaid rates set by the various states, the repeal
of which will now make it more difficult to challenge these rates in the
future. At least one state, North Carolina, is proposing to change its
Medicaid payment rates and/or payment methodology. However, it is unclear how
the procedural protections imposed by the Balanced Budget Act will constrain
these types of changes. Pending the publication of a final rule implementing
the procedural limitations of the Balanced Budget Act, the Company anticipates
that other states may attempt to change their payment rate methodologies, and
that such changes could result in a reduction in payments to nursing
facilities.
The Balanced Budget Act also revised the reimbursement methodology for
therapy services under Medicare Part B. Historically, Medicare Part B therapy
services were reimbursed based on the cost of the services provided, subject
to prudent buyer and salary equivalency restrictions. In November 1998,
certain fee screen schedules were published setting forth the amounts that can
be charged for specific therapy services. Additionally, the Balanced Budget
Act set forth maximum per beneficiary limits of $1,500 per provider for
physical therapy and speech pathology and $1,500 per provider for occupational
therapy. Both the fee screens and per beneficiary limits were effective for
services rendered following December 31, 1998. The imposition of fee screens,
together with the inclusion of ancillary services in the federal per diem, has
had a material adverse effect on the Company's therapy business resulting in
the decision by the Company to terminate its contracts to provide therapy
services. The CAA temporarily mitigates the Balanced Budget Act limitations by
providing that the therapy caps will not apply in 2000 and 2001. The CAA
requires the Secretary of Health and Human Services (the "Secretary") to
conduct focused medical reviews of therapy services during 2000 and 2001, with
an emphasis on claims for services provided to residents of SNFs. The CAA also
requires the Secretary to study and to submit recommendations to Congress on
therapy utilization patterns in 2000 compared to those in 1998 and 1999.
The CAA also excludes certain items and services from the formerly all-
inclusive SNF per diem rates. Specifically, the following items and services
will become separately reimbursable outside of the PPS rates:
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(1) ambulance services furnished to an individual in conjunction with renal
dialysis services; (2) chemotherapy items and administration services (as
identified by certain HCFA Common Procedure Coding System ("HCPCS") codes);
(3) radioisotope services (as identified by certain HCPCS codes); and (4)
customized prosthetic devices (artificial limbs) and other custom prostheses
if provided to a SNF resident and intended to be used after discharge (as
identified by certain HCPCS codes and other instances chosen by HCFA). Payment
for such items and services, which are "passed-through" the per diem payment
rates, will be made under Part B, in conformance with Part B payment rules.
Although these items are separately reimbursed from the PPS rate, the CAA also
directs HCFA to make appropriate adjustments to the PPS payments rates to
reflect the fact that certain items and services have been excluded, and to
ensure budget neutrality. Thus, HCFA is directed to make an appropriate
proportional reduction in PPS payments at that time.
In the process of finalizing certain Medicare cost reports or reopening
previously finalized cost reports filed by various of the Company's Medicare
provider facilities, certain Medicare fiscal intermediaries have issued NPRs,
which include significant audit adjustments that reduce the amount of
reimbursement that previously was received by the facilities. The adjustments
are based, for the most part, on denials of exception to the related
organization principles with regard to services and supplies furnished to the
facilities by the Company's pharmacy and rehabilitation companies and
reductions to costs claimed for therapy services under the prudent buyer
principles.
The prudent buyer principle states, in part, "the prudent and cost-
conscious buyer not only refuses to pay more than the going price for an item
or service, he also seeks to economize by minimizing cost." Certain of the
fiscal intermediaries have alleged that the Company was not prudent in its
purchase of occupational therapy and speech pathology services prior to HCFA's
establishing salary equivalency guidelines, effective April 1998. Fiscal
intermediaries calculated facilities' costs to provide services through
employed therapists and reduced costs claimed on the cost reports for
providing services through contracts and adjusted the cost reports
accordingly. Appeals were filed with the Provider Reimbursement and Review
Board ("PRRB") and resulted in a favorable outcome. However, on review the
Social Security Administrator reversed the PRRB and restored the
intermediaries' adjustments. The Company believes that it has substantial
arguments to support its position that the contested costs are allowable and
the issue is being appealed through judicial review, pursued through the
appropriate legal processes. Another unrelated provider received a favorable
judicial decision on its prudent buyer appeal based on similar facts. The
Company currently is negotiating a settlement with HCFA for all of its prudent
buyer appeals and believes that it will have a favorable outcome. However,
until the settlement is finalized, there can be no assurance that the Company
will prevail or that it will not have to expend significant amounts to
complete the appeal process. Contracts between facilities and therapy
providers generally provide for the therapy provider to indemnify the nursing
facility in the event of denials or cost report disallowances. There can be no
assurance that the therapy providers will not contest the triggering of the
indemnity provisions of the contracts or that they will be able to fund the
indemnity provisions.
The related organization principle states, in part, "a provider's allowable
cost for services, facilities, and supplies furnished by a party related to
the provider are the costs the related party incurred in furnishing the items
in question." The regulations provide for an exception to the related
organization principle if certain requirements are met and the Company
believes that it meets these requirements with respect to services its
facilities previously received from related pharmacy and rehabilitation
subsidiaries. Some fiscal intermediaries have denied the request for exception
and have made adjustments to reduce the allowable cost that is included in
nursing facility cost reports to the cost of the related organization. The
Company has requested PRRB appeals for these adjustments, but the appeals have
not yet been heard. There can be no assurance that the Company will prevail in
the appeal process.
During the third quarter of fiscal 1999, the Medicare fiscal intermediaries
for the subsidiaries operated by Mariner Health reopened approximately 50 1995
and 1996 cost reports and issued revised NPRs imposing prudent buyer or
related party adjustments and applying an administrative resolution related to
the cost report treatment of admissions cost. The reopenings resulted in
reductions in reimbursable cost of approximately $16.9 million. The Company
believes that it has substantial arguments for both issues and will appeal the
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adjustments to the PRRB. In lieu of recoupment by the fiscal intermediary, the
Company has reached an agreement with HCFA and the intermediary and has
implemented an extended repayment plan. The balance as of the date of the
agreement was approximately $15.9 million, which will be repaid over a period
of one year. The first six monthly payments of $1.8 million, including
interest, have been made. The intermediary has notified Mariner Health that it
intends to issue revised NPRs for the remaining facility cost reports (1997
through 1999) starting in fiscal year 2000. As part of the Chapter 11 process,
Mariner Health entered into a stipulation with the U.S. Department of Health
and Human Services ("DHHS") whereby, among other things, HCFA will not recoup
certain pre-petition overpayments for other than the current cost reporting
years for the pendancy of Mariner Health's DIP obligations. Accordingly,
repayment obligations which may arise from the issuance of revised NPRs may be
stayed for an interim period. Should the revised NPRs result in a repayment
requirement not within the purview of the stipulation, or after the pendancy
of the DIP obligations, the Company and Mariner Health would seek to enter
into an extended repayment plan with HCFA at that time.
Other Factors Effecting Liquidity and Capital Resources. In addition to
principal and interest payments on its long-term indebtedness, the Company has
significant rent obligations relating to its leased facilities. Without giving
any effect to any potential restructuring of current rent obligations, the
Company's estimated rent obligations for fiscal year 2000 are approximately
$90 million. In connection with its review of its portfolio of facilities, the
Company anticipates divesting itself of under-performing facilities, which
will have a favorable impact on the Company's rent obligations.
The Company's operations require capital expenditures for renovations of
existing facilities in order to continue to meet regulatory requirements, to
upgrade facilities for the treatment of subacute patients and to accommodate
the addition of specialty medical services, and to improve the physical
appearance of its facilities for marketing purposes. In addition, there are
capital expenditures required for completion of certain existing facility
expansions and new construction projects in process, as well as supporting
non-nursing home operations and Year 2000 compliance. The Company estimates
that total capital expenditures for the year ending September 30, 2000 will be
approximately $38 million.
The Company has a lease arrangement, originally providing for up to $100.0
million to be used as a funding mechanism for future skilled nursing facility
construction, lease conversions, and other facility acquisitions (the
"Synthetic Lease"). This leasing program historically has allowed the Company
to complete these projects without committing significant financing resources.
The lease is an unconditional "triple net" lease for a period of seven years
with the annual lease obligation a function of the amount spent by the lessor
to acquire or construct the project, a variable interest rate, and commitment
and other fees. The Company guarantees a minimum of approximately 83% of the
residual value of the leased property and also has an option to purchase the
properties at any time prior to the maturity date at a price sufficient to pay
the entire amount financed, accrued interest, and certain expenses. At
September 30, 1999, approximately $66.6 million of this leasing arrangement
was utilized. The leasing program is accounted for as an operating lease under
GAAP. The Synthetic Lease was amended on December 23, 1998 to mirror certain
changes made to the Senior Credit Facility and subsequently amended effective
March 31, 1999 to reduce the commitment to $80 million. At June 30, 1999 and
September 30, 1999, the Company was in violation of certain of these financial
covenants and ceased making rent payments under the Synthetic Lease in
November 1999. Notwithstanding the expiration of the temporary forbearance by
the lessor and its lenders against exercising remedies with respect to such
events of default, the automatic stay protection afforded by the Chapter 11
Filings prevents any action from being taken with respect to any defaults that
may existing under the Synthetic Lease. One consequence of the defaults under
the Synthetic Lease documents was that the lessor under the Synthetic Lease,
FBTC Leasing Corp., has been unable to make additional borrowings under the
related credit facility and make such proceeds available for the completion of
the five facilities currently under construction. Under the terms of the
Company DIP Credit Facility, the Company is permitted to borrow and spend up
to $8.8 million to complete such facilities. The parties have filed a
stipulation with the Bankruptcy Court agreeing that, subject to approval of
the Final Company DIP Order, the Synthetic Lease transaction will be treated
as a secured financing rather than a true lease for purposes of the
reorganization of the Company Debtors.
46
<PAGE>
The Company has experienced an increasing trend in the number and severity
of litigation claims asserted against the Company. Management believes that
this trend is endemic to the long-term care industry and is a result of the
increasing number of large judgments against long-term care providers in
recent years resulting in an increased awareness by plaintiff's lawyers of
potentially large recoveries. The Company also believes that there has been,
and will continue to be, an increase in governmental investigatory activity of
long-term care providers, particularly in the area of false claims. While the
Company believes that it provides quality care to the patients in its
facilities and materially complies with all applicable regulatory
requirements, an adverse determination in a legal proceeding or governmental
investigation, whether currently asserted or arising in the future, could have
a material adverse effect on the Company. See "Legal Proceedings."
The Company currently maintains two captive insurance subsidiaries to
provide for reinsurance obligations under workers' compensation, general and
professional liability, and automobile liability for periods ended prior to
April 1, 1998. These obligations are funded with long-term, fixed income
investments which are not available to satisfy other obligations of the
Company.
By letter dated June 1999, the Company received a 90-day cancellation
notice from its former general and professional liability ("GL/PL") carrier.
In June, the Company binded a replacement GL/PL policy, effective July 31,
1999, which resulted in a $4.4 million increase in annual premium and
elimination of the Royal policy's aggregate retention limit under the former
policy. The elimination of the aggregate retention limit is expected to
increase the actuarial cost of general and professional liability claims by
approximately $42.6 million per year. This increased exposure will have a
delayed negative effect on operating cash flow as claims develop over the next
several years. See "Business--Insurance." The Company is examining its
alternatives with respect to its former insurer.
The Mariner Health Senior Credit Facility generally prohibits Mariner
Health from paying dividends or making distributions to the Company, except as
follows: (a) Mariner Health can make a one-time dividend (which has not yet
been utilized) to the Company in an amount not to exceed Mariner Health's
consolidated net income for the most recent 12 fiscal months subject to the
absence of any default under the Mariner Health Senior Credit Facility or the
Mariner Health Term Loan Facility, and subject further to demonstrating pro
forma compliance with certain financial covenants; and (b) Mariner Health may
reimburse the Company for ordinary course of business expenses paid by the
Company on behalf of Mariner Health or its subsidiaries. By amendments
effective as of January 19, 1999, the Mariner Health Senior Credit Facility
and the Mariner Health Term Loan Facility were each amended to allow Mariner
Health also to make a dividend or distribution of up to $25.0 million to the
Company to enable the Company to purchase Mariner Notes pursuant to the Total
Return Swap or to otherwise satisfy the Company's obligations under the Total
Return Swap, subject to the absence of any default under the Mariner Health
Senior Credit Facility or the Mariner Health Term Loan Facility, and subject
further to demonstrating pro forma compliance with certain financial covenants
thereunder. All such dividends or distributions other than the reimbursement
of the Company for ordinary course of business expenses paid by the Company on
behalf of Mariner Health or its subsidiaries have since been prohibited by
subsequent amendments to the Mariner Health Senior Credit Facility and the
Mariner Health Term Loan Facility, due to Mariner Health's noncompliance with
various financial covenants.
The Mariner Health DIP Credit Agreement also limits the ability of the
Mariner Debtors from engaging in affiliate transactions and making restricted
payments, specifically including payments to the Company Debtor. However, the
Mariner Health DIP Credit Agreement permits, among other things, weekly
overhead payments to the Company (see "--Mariner Health Debtor-in-Possession
Financing" above), the purchase of pharmaceutical goods and services from
certain Company Debtors, the allocation to, and payment by, the Mariner Health
Debtors of their share of certain taxes, insurance obligations and employee
benefit obligations paid for and administered on a consolidated basis by the
Company, and certain ordinary course transactions which are on terms no less
favorable to the subject Mariner Health Debtors than the terms obtainable from
a non-affiliate, and for which the approval of the requisite Mariner Health
DIP Lenders and the Bankruptcy Court have been obtained.
There can be no assurance that the amounts available to the Company Debtors
from the Company DIP Financing and cash collateral will be sufficient to fund
the operations of the Company Debtors until such time as
47
<PAGE>
the Company Debtors are able to take the steps necessary to structure a plan
of reorganization that will be acceptable to creditors and confirmed by the
Bankruptcy Court. Furthermore, the Company is unable to predict whether the
Company Debtors will have sufficient cash flow generated from their operations
and cash on hand to fund their working capital needs, anticipated capital
expenditures, rent, debt service requirements and other operating expenses in
the event the amounts available under the Company DIP Financing are exhausted
prior to obtaining confirmation of a plan of reorganization. Finally, there
can be no assurance that any plan of reorganization confirmed in connection
with the Chapter 11 Filings of the Company Debtors will allow the Company
Debtors to operate profitably under PPS or give the Company Debtors sufficient
liquidity to meet their operational needs. The ability of the Company Debtors
to fund such requirements will depend, among other things, on future economic
conditions and on financial, business and other factors, many of which are
beyond the control of the Company Debtors.
There can be no assurance that the amounts available to the Company Debtors
from the Mariner Health DIP Financing and cash collateral will be sufficient
to fund the operations of the Mariner Health Debtors until such time as the
Mariner Health Debtors are able to take the steps necessary to structure a
plan of reorganization that will be acceptable to creditors and confirmed by
the Bankruptcy Court. Furthermore, the Company and the Mariner Health Debtors
are unable to predict whether the Mariner Health Debtors will have sufficient
cash flow generated from their operations and cash on hand to fund their
working capital needs, anticipated capital expenditures, rent, debt service
requirements and other operating expenses in the event the amounts available
under the Mariner Health DIP Financing are exhausted prior to obtaining
confirmation of a plan of reorganization. Finally, there can be no assurance
that any plan of reorganization confirmed in connection with the Chapter 11
Filings of the Mariner Health Debtors will allow the Mariner Health Debtors to
operate profitably under PPS or give the Mariner Health Debtors sufficient
liquidity to meet their operational needs. The ability of the Mariner Health
Debtors to fund such requirements will depend, among other things, on future
economic conditions and on financial, business and other factors, many of
which are beyond the control of the Mariner Health Debtors.
At September 30, 1999, the Company had approximately $45 million of
invested cash for funding operations and servicing debt. Due to the existence
of financial covenant defaults under the Senior Credit Facility as of June 30,
1999 and September 30, 1999, and the payment defaults referred to above, the
Company has not been able to satisfy the borrowing conditions under the
Revolving Credit Facility. Under the terms of the Initial Company DIP Order
and the Company DIP Financing, up to $25.0 million is available to fund the
Company operations of the Company Debtors, subject to increase upon the order
of the Bankruptcy Court and upon satisfaction of the conditions set forth in
the documents pertaining to the Company DIP Financing, including borrowing
base requirements. No assurance can be given regarding the timing or
likelihood that the Bankruptcy Court will approve the Interim Company DIP
Order or the Final Company DIP Order, or the terms on which such approval may
be conditioned.
At September 30, 1999, Mariner Health had $19 million of invested cash for
funding operations and servicing debt. The revolving loan commitment under the
Mariner Health Senior Credit Facility terminated, and the Mariner Health
Senior Credit Facility and Mariner Health Term Loan Facility matured on
January 3, 2000. Under the terms of the Initial Mariner health DIP Order and
the Mariner Health DIP Financing, up to $15.0 million is available to fund
Mariner Health's operations, subject to increase upon the order of the
Bankruptcy Court and upon satisfaction of the conditions set forth in the
documents pertaining to the Mariner Health DIP Financing, including borrowing
base requirements. No assurance can be given regarding the timing or
likelihood that the Bankruptcy Court will approve the Final Mariner Health DIP
Order, or the terms on which such approval may be conditioned.
Impact of Inflation. The health care industry is labor intensive. Wages and
other labor-related costs are especially sensitive to inflation. Increases in
wages and other labor-related costs as a result of inflation or the increase
in minimum wage requirements without a corresponding increase in Medicaid and
Medicare reimbursement rates would adversely impact the Company. In certain of
the markets where the Company
48
<PAGE>
operates there is a labor shortage that could have an adverse effect upon the
Company's ability to attract or retain sufficient numbers of skilled and
unskilled personnel at reasonable wages. Accordingly, rising wage rates could
have an adverse effect on the Company in certain of its markets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company periodically enters into interest rate swap agreements (the
"Swap Agreements") to manage interest rate risk. The Swap Agreements
effectively convert a portion of the Company's floating interest rate debt to
fixed interest rate debt. Notional amounts of interest rate agreements are
used to measure interest to be paid or received relating to such agreements
and do not represent an amount of exposure to credit loss. On August 13, 1999,
two Swap Agreements, each with a notional amount of $20 million, were
terminated at a loss to the Company of $100,000. As of September 30, 1999, the
Company had one Swap Agreements in effect with a notional amount of $20.0
million. This Swap Agreement was terminated effective October 27, 1999 at no
cost to the Company.
In September 1998 the Company entered into a total return swap agreement
relating to approximately $40.7 million face amount of Mariner Notes,
subsequently amended to $46.5 million face amount of Mariner Notes (the "Total
Return Swap Agreement"). The Total Return Swap Agreement was restructured in
August, 1999 resulting in capital depreciation payable by the Company of
approximately $46.5 million, of which amount $20.0 million was satisfied from
collateral previously provided by Mariner Health and the balance of which has
been incorporated into a promissory note. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Mariner Health Senior Subordinated Notes." Accordingly, as
of October 27, 1999, the Company did not have any Swap Agreements outstanding.
49
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Mariner Post-Acute Network, Inc.
We have audited the accompanying consolidated balance sheets of Mariner
Post-Acute Network, Inc. (formerly Paragon Health Network, Inc., formerly
Living Centers of America, Inc.), and subsidiaries as of September 30, 1999
and 1998, and the related consolidated statements of operations, stockholders'
(deficit) equity and cash flows for each of the three years in the period
ended September 30, 1999. Our audits also included the financial statement
schedule listed in the index at Item 14. These consolidated financial
statements and schedule are the responsibility of the management of Mariner
Post-Acute Network, Inc. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Mariner Post-Acute Network, Inc., and subsidiaries at September 30, 1999
and 1998, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended September 30, 1999, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
incurred net losses, has a working capital deficiency of approximately $2.0
billion and has a capital deficit of approximately $1.4 billion at September
30, 1999. In addition, the Company was not in compliance with certain
convenants of various loan agreements at September 30, 1999. As discussed in
Note 2 to the accompanying consolidated financial statements, on January 18,
2000, the Company and certain of its subsidiaries filed separate voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. These
conditions raise substantial doubts about the Company's ability to continue as
a going concern. Management is in the process of developing a plan of
reorganization for approval by the U.S. Bankruptcy Court and the Company's
creditors. In the event the plan of reorganization is accepted, continuation
of the business thereafter is dependent on the Company's ability to achieve
successful future operations. The consolidated financial statements do not
include adjustments, if any, to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of these uncertainties.
Ernst & Young LLP
Atlanta, Georgia
January 19, 2000
50
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 71,817 $ 3,314
Receivables (less allowances of $87,066 and $68,581). 307,571 617,380
Notes receivable, net................................ 3,259 9,656
Supplies............................................. 22,866 31,516
Prepaid expenses..................................... 18,787 11,943
Income tax refund receivable......................... 1,943 57,323
Deferred income taxes................................ -- 58,875
Other (including patient trust funds of $5,021 and
$5,399)............................................. 15,413 17,916
----------- ----------
TOTAL CURRENT ASSETS............................... 441,656 807,923
PROPERTY AND EQUIPMENT:
Land, buildings and improvements..................... 532,589 863,451
Furniture, fixtures and equipment.................... 196,875 231,682
Leased property under capital leases................. 63,797 89,718
----------- ----------
793,261 1,184,851
Less accumulated depreciation........................ 333,708 257,698
----------- ----------
459,553 927,153
GOODWILL, NET......................................... 247,353 1,084,473
RESTRICTED INVESTMENTS................................ 69,188 88,467
NOTES RECEIVABLE, NET................................. 16,792 20,861
OTHER ASSETS.......................................... 40,429 107,774
----------- ----------
$ 1,274,971 $3,036,651
=========== ==========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term
debt................................................ $ 2,028,226 $ 46,250
Accounts payable..................................... 134,829 160,240
Accrued payroll and related expenses................. 111,395 127,774
Accrued property taxes............................... 12,873 12,277
Patient trust funds.................................. 5,021 5,399
Accrued interest..................................... 49,317 35,057
Other accrued expenses............................... 45,910 70,710
----------- ----------
TOTAL CURRENT LIABILITIES.......................... 2,387,571 457,707
LONG-TERM DEBT, NET OF CURRENT MATURITIES............. 113,618 1,977,865
LONG-TERM INSURANCE RESERVES.......................... 80,899 61,310
DEFERRED INCOME TAXES AND OTHER NONCURRENT LIABILI-
TIES................................................. 69,733 133,137
MINORITY INTEREST..................................... 9,169 9,618
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred stock, par value $.01; 5,000,000 autho-
rized; none issued.................................. -- --
Common stock, par value $.01; 500,000,000 shares au-
thorized; 73,695,081 and 73,276,866 shares issued... 737 733
Capital surplus...................................... 980,952 980,142
Accumulated deficit.................................. (2,361,393) (583,111)
Accumulated other comprehensive loss................. (6,315) (750)
----------- ----------
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY............... (1,386,019) 397,014
----------- ----------
$ 1,274,971 $3,036,651
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
51
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
NET REVENUES
Nursing home revenue:
Net patient services................... $ 1,758,595 $1,513,420 $ 742,046
Other.................................. 33,811 14,645 6,004
Non-nursing home revenue:
Pharmacy services...................... 281,718 230,313 196,748
Therapy services....................... 159,575 194,125 179,506
Home health, hospital services, and
other................................. 38,881 83,026 15,984
----------- ---------- ----------
2,272,580 2,035,529 1,140,288
COSTS AND EXPENSES:
Salaries and wages....................... 1,049,860 782,520 438,693
Employee benefits........................ 215,510 158,883 85,712
Nursing, dietary and other supplies...... 130,369 96,462 53,531
Ancillary services....................... 390,622 430,715 224,912
General and administrative............... 301,199 187,701 105,522
Insurance expense........................ 97,285 58,988 26,142
Rent..................................... 103,786 86,625 42,489
Depreciation and amortization............ 120,526 75,044 39,309
Provision for bad debts.................. 142,474 29,544 26,282
Impairment of long-lived assets.......... 995,932 135,783 --
Loss on disposal of assets............... 242,735 -- --
Recapitalization, indirect merger and
other expenses.......................... 65,417 87,336 2,588
----------- ---------- ----------
3,855,715 2,129,601 1,045,180
----------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS............ (1,583,135) (94,072) 95,108
OTHER INCOME AND EXPENSE:
Interest expense......................... 204,384 125,384 21,492
Interest and dividend income............. (9,123) (11,082) (4,640)
----------- ---------- ----------
195,261 114,302 16,852
----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES, MINOR-
ITY INTEREST, AND EXTRAORDINARY LOSS.... (1,778,396) (208,374) 78,256
PROVISION (BENEFIT) FOR INCOME TAXES...... -- (10,559) 33,604
----------- ---------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND EXTRAORDINARY LOSS.................. (1,778,396) (197,815) 44,652
MINORITY INTEREST......................... 114 (562) (735)
----------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS.. (1,778,282) (198,377) 43,917
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET OF $6,034 INCOME TAX BENE-
FIT...................................... -- (11,275) --
----------- ---------- ----------
NET INCOME (LOSS)......................... $(1,778,282) $ (209,652) $ 43,917
=========== ========== ==========
EARNINGS (LOSS) PER SHARE:
Basic.................................... $ (24.21) $ (4.31) $ 0.75
=========== ========== ==========
Diluted.................................. $ (24.21) $ (4.31) $ 0.73
=========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTAND-
ING:
Basic.................................... 73,459 48,601 58,613
=========== ========== ==========
Diluted.................................. 73,459 48,601 59,808
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
52
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
COMMON STOCK EARNINGS OTHER TREASURY STOCK
--------------- CAPITAL (ACCUMULATED COMPREHENSIVE ------------------
SHARES AMOUNT SURPLUS DEFICIT) INCOME (LOSS) SHARES AMOUNT TOTAL
------- ------ --------- ------------ ------------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30,
1996................... 60,804 $608 $ 227,766 $ 120,733 $ (18) 2,301 $ (19,774) $ 329,315
Comprehensive income:
Net income............. 43,917 43,917
Unrealized gain on
securities available-
for-sale, net of tax.. 262 262
-----------
Comprehensive income.... 44,179
Funding of employee
benefit plans.......... 92 (177) 1,521 1,613
Funding of options
exercised under 1992
Employee Stock Option
Plan, net of tax....... (15) (21) 191 176
Issuance of treasury
stock in exchange for
warrants............... (871) (99) 871 --
------- ---- --------- ----------- ------- ------- --------- -----------
BALANCE, SEPTEMBER 30,
1997................... 60,804 608 226,972 164,650 244 2,004 (17,191) 375,283
Comprehensive (loss):
Net (loss)............. (209,652) (209,652)
Unrealized loss on se-
curities available-
for-sale, net of tax.. (994) (994)
-----------
Comprehensive (loss).... (210,646)
Issuance of shares to
Apollo Management, L.P.
and affiliates, net of
associated costs....... 17,778 178 232,572 232,750
Repurchase of shares in
connection with the
Recapitalization
Merger................. 54,461 (735,223) (735,223)
Retirement of treasury
stock.................. (55,082) (551) (202,060) (538,109) (55,082) 740,720 --
Issuance of shares and
options in exchange for
GranCare common stock
and options............ 17,440 175 238,814 238,989
Issuance of shares to
Professional
Rehabilitation, Inc.... 1,147 11 22,575 22,586
Issuance of shares to
Summit Medical
Holdings, Inc.......... 1,043 10 16,690 16,700
Issuance of shares in
exchange for Mariner
Health Group, Inc.
common stock........... 29,615 296 443,922 444,218
Funding of options
exercised or canceled
under 1992 Employee
Stock Option Plan, net
of tax................. (5,918) (1,350) 11,410 5,492
Funding of employee
benefit plans ......... 92 (32) 275 367
Issuance of treasury
stock in exchange for
warrants............... (9) (1) 9 --
Issuance of stock under
various stock option
plans, net of tax...... 532 6 6,492 6,498
------- ---- --------- ----------- ------- ------- --------- -----------
BALANCE, SEPTEMBER 30,
1998................... 73,277 733 980,142 (583,111) (750) -- -- 397,014
Comprehensive (loss):
Net (loss)............. (1,778,282) (1,778,282)
Unrealized loss on se-
curities available-
for-sale, net of tax.. (5,565) (5,565)
------- ---- --------- ----------- ------- ------- --------- -----------
Comprehensive (loss).... (1,783,847)
Issuance of common
stock.................. 49 127 127
Funding of employee
benefit plan........... 369 4 683 687
------- ---- --------- ----------- ------- ------- --------- -----------
BALANCE, SEPTEMBER 30,
1999................... 73,695 $737 $ 980,952 $(2,361,393) $(6,315) -- -- $(1,386,019)
======= ==== ========= =========== ======= ======= ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1999 1998 1997
----------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $(1,778,282) $(209,652) $ 43,917
Adjustments to reconcile net income to net
cash provided by
(used in) operating activities:
Depreciation and amortization............ 120,526 75,044 39,309
Interest expense on discounted debt...... 20,091 16,995 --
Deferred income taxes.................... -- 478 (753)
Equity earnings/minority interest........ (114) 562 735
Provision for bad debts.................. 142,474 29,544 26,282
Impairment of long-lived assets.......... 995,932 135,783 --
Change in estimate related to reduction
in Medicare
reimbursement revenue................... 122,023 -- --
Loss on disposal of assets............... 242,735 -- --
Changes in noncash working capital:
Receivables.............................. 11,997 (71,582) (44,362)
Supplies................................. 8,650 (11,670) (3,984)
Prepayments and other current assets..... 69,601 (3,207) 195
Accounts payable......................... (30,655) (21,538) (2,073)
Accrued expenses and other current lia-
bilities................................ (22,022) 23,749 (5,673)
Changes in long-term insurance reserves.... 19,589 16,308 1,462
Other...................................... 17,897 3,654 (215)
----------- --------- --------
NET CASH PROVIDED BY (USED IN) OPERATING AC-
TIVITIES.................................... (59,558) (15,532) 54,840
----------- --------- --------
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES:
Acquisitions and investments............... -- (171,894) (30,548)
Purchases of property and equipment........ (73,251) (65,168) (36,961)
Disposals of property, equipment and other
assets.................................... 87,032 3,289 8,365
Restricted investments..................... 13,714 7,474 (20,543)
Net collections on notes receivable........ 10,466 21,844 2,580
Other...................................... -- (7,340) (211)
----------- --------- --------
NET CASH PROVIDED BY (USED IN) INVESTING AC-
TIVITIES.................................... 37,961 (211,795) (77,318)
----------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net draws under credit line................ 222,350 114,000 24,560
Repayment of debt.......................... (105,135) (641,924) (9,297)
Proceeds from Deficiency Note.............. 26,486 -- --
Repurchase of subordinated debt............ (46,661) -- --
Deferred financing fees.................... (7,538) (30,178) --
Issuance of shares to Apollo Management,
L.P....................................... -- 232,750 --
Proceeds from Senior Credit Facility....... -- 815,000 --
Proceeds from Senior Notes................. -- 448,871 --
Repurchase of shares in recapitalization... -- (735,223) --
Other...................................... 598 12,990 176
----------- --------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES.... 90,100 216,286 15,439
----------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS....................................... 68,503 (11,041) (7,039)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR. 3,314 14,355 21,394
----------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR....... $ 71,817 $ 3,314 $ 14,355
=========== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Mariner Post-Acute Network, Inc. (the "Company") changed its name effective
August 1, 1998 from its former name, Paragon Health Network, Inc. ("Paragon"),
following the consummation of the merger (the "Mariner Merger") with Mariner
Health Group, Inc. ("Mariner Health") on July 31, 1998 pursuant to an
agreement and plan of merger dated as of April 13, 1998 (the "Mariner Merger
Agreement"). See Note 5. The Company had previously changed its name from
Living Centers of America, Inc. ("LCA") to Paragon on November 4, 1997. At the
time of the Mariner Merger, Mariner Health operated long-term health care
facilities that provided skilled nursing and residential care services in 16
states and comprehensive rehabilitation services. The Company was formed in
November 1997 through the recapitalization by merger of LCA with a newly-
formed entity owned by certain affiliates of Apollo Management, L.P. and
certain other investors (the "Recapitalization Merger"), and the subsequent
merger of GranCare, Inc. ("GranCare") with a wholly-owned subsidiary of LCA
(the "GranCare Merger" and collectively with the Recapitalization Merger, the
"Apollo/LCA/GranCare Mergers") pursuant to an agreement and plan of merger
dated as of May 7, 1997, as amended and restated as of September 17, 1997 (the
"GranCare Merger Agreement"). See Notes 3 and 4. At the time of the GranCare
Merger, GranCare operated long-term health care facilities that provided
skilled nursing and residential care services in 15 states, a specialty
hospital geriatric services company, and home health operations. At September
30, 1999, the Company's operations consist principally of over 400 inpatient
and assisted living facilities, 37 institutional pharmacies and 14 long-term
acute care hospitals. The Company operates in 40 states with significant
concentrations of facilities and beds in eight states and several metropolitan
markets. The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries and all significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced significant losses, has a working capital deficiency of
approximately $2.0 billion, and has a capital deficit of approximately $1.4
billion at September 30, 1999. In addition, the Company has violated certain
covenants of various loan agreements. On January 18, 2000, the Company,
Mariner Health and certain of their respective subsidiaries filed separate
voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code
(referred to herein as the "Chapter 11 Filings"). See Note 2.
CASH MANAGEMENT
As a result of separate Senior Credit Facilities (see Note 12), the Company
maintains separate centralized cash management systems for Paragon and Mariner
Health in which cash receipts are transferred daily from facility and
ancillary company depository accounts to a separate cash concentration account
for Paragon and Mariner Health. Funds are then used to provide for normal
working capital requirements, including reduction of the outstanding credit
lines or placement of excess funds in investment grade investments. To the
extent that cash transferred from the facility and ancillary company
depository accounts is not sufficient to provide for cash disbursement
requirements, a cash advance is obtained from one of the Company's sources of
liquidity. See Note 12. Cash equivalents consist of temporary investments with
original maturities of three months or less.
NOTES RECEIVABLE, NET
Notes receivable, net, aggregating $20.1 and $30.5 million at September 30,
1999 and 1998, respectively, consist primarily of notes which arose from
divestitures of certain operating facilities. These notes, which are generally
collateralized by long-term care facilities, have interest rates ranging
generally from 6.5% to 12% and maturities through 2012, including
approximately $16.8 million due after September 30, 2000. Notes receivable,
55
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
net, at September 30, 1999 and 1998, include reserves for potential
uncollectible amounts of $7.5 million and $4.0 million, respectively.
Management believes the collateral values are sufficient to recover the net
carrying amount of these notes in the event of default.
SUPPLIES
Supplies, consisting principally of pharmaceutical and medical supplies,
are valued at the lower of cost (first-in, first out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Capitalized interest related to
funds borrowed to finance construction was not significant for all periods
presented. Maintenance and repairs are charged to operations as incurred and
replacements and significant improvements are capitalized. Depreciation and
amortization are provided over the estimated useful lives of the assets on a
straight-line basis as follows:
<TABLE>
<S> <C>
Buildings........................................................ 25-40 years
Building improvements............................................ 10-15 years
Furniture, fixtures and equipment................................ 3-15 years
</TABLE>
Depreciation expense, including amortization of assets under capital
leases, related to property and equipment for the years ended September 30,
1999, 1998, and 1997 was $77.5 million, $49.1 million, and $32.0 million,
respectively.
GOODWILL, NET
Goodwill represents the excess of purchase price over fair market value of
assets acquired in various purchase transactions and is amortized on a
straight-line basis with lives ranging from 30 to 40 years. Accumulated
amortization at September 30, 1999 and 1998 was $67.5 million and $43.3
million, respectively. Amortization of goodwill charged to expense was $43.0
million, $23.0 million and $7.3 million for the years ended September 30,
1999, 1998 and 1997, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121") requires impairment losses to be recognized for long-lived assets
when indicators of impairment are present and the undiscounted cash flows are
not sufficient to recover the assets' carrying amount. Goodwill is also
evaluated for recoverability by estimating the projected undiscounted cash
flows, excluding interest, of the related business activities. The impairment
loss of these assets, including goodwill, is measured by comparing the
carrying amount of the asset to its fair value with any excess of carrying
value over fair value written off. Fair value is based on market prices where
available, an estimate of market value, or determined by various valuation
techniques including discounted cash flow. See Note 15.
RESTRICTED INVESTMENTS
Restricted investments represent cash, other investments, and common stock
holdings that have been designated to (i) pay insurance claims of the
Company's wholly-owned insurance subsidiaries, (ii) serve as partial
collateral for the Company's bank agreements, and (iii) serve as partial
collateral for the Company's lease
56
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
agreements with Health and Retirement Properties Trust ("HRPT") (See Notes 11
and 12). These restricted investments have been classified as available-for-
sale securities in accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
and are recorded at their estimated fair value. See Note 19.
INCOME TAXES
Noncurrent deferred income taxes arise primarily from timing differences
resulting from using accelerated depreciation for tax purposes and reserves
for uninsured losses not deductible in the current period. Current deferred
income taxes result from timing differences in the recognition of revenues and
expenses for tax and financial reporting purposes which are expected to
reverse within one year. See Note 16.
The Company files a consolidated federal income tax return. Federal and
state income tax payments made for the years ended September 30, 1999, 1998
and 1997 were $3.0 million, $1.0 million and $40.0 million, respectively. The
Company received $78.1 and $8.7 million in tax refunds during the years ended
September 30, 1999 and 1998, respectively, in addition to the tax payments
made by the Company.
TREASURY STOCK
During fiscal year 1996, the Company acquired 2,327,220 shares of treasury
stock (775,740 shares prior to the three-for-one stock split, see Note 6) on
the open market for a total cost of $20.0 million. The shares repurchased were
primarily intended to be used as part of a plan to fund the employer's
contributions to the Company's 401(k) Plan and Deferred Retirement Incentive
Plan and to fund employee purchases made under the Company's Employee Stock
Purchase Plan. All treasury stock was retired effective November 4, 1997 in
connection with the Company's recapitalization.
NET REVENUES
Net patient service revenue includes patient revenues payable by patients,
amounts reimbursable by third party payors under contracts, rehabilitation
therapy service revenues from management contracts to provide services to non-
affiliated skilled nursing facilities and other entities and revenues from the
Company's medical products and home health care services. Patient revenues
payable by patients at the Company's facilities are recorded at established
billing rates. Patient revenues to be reimbursed by contracts with third-party
payors are recorded at the amount estimated to be realized under these
contractual arrangements. Revenues from Medicare and Medicaid are generally
based on reimbursement of the reasonable direct and indirect costs of
providing services to program participants or, for cost reporting periods
beginning July 1, 1998, determined under a prospective payment system. The
Company separately estimates revenues due from each third party with which it
has a contractual arrangement and records anticipated settlements with these
parties in the contractual period during which services were rendered. The
amounts actually reimbursable under Medicare and Medicaid under cost
reimbursement programs are determined by filing cost reports which are then
subject to audit and retroactive adjustment by the payor. Legislative changes
to state or federal reimbursement systems may also retroactively affect
recorded revenues. Changes in estimated revenues due in connection with
Medicare and Medicaid may be recorded by the Company subsequent to the year of
origination and prior to final settlement based on improved estimates. Such
adjustments and final settlements with third party payors are reflected in
operations at the time of the adjustment or settlement. Medicare revenues
represented 21%, 32% and 26% and Medicaid revenues represented 47%, 39% and
41% of net revenue for the years ended September 30, 1999, 1998 and 1997,
respectively. In addition, indirect costs reimbursed under the Medicare
program are subject to regional limits. The Company's costs generally exceed
these limits and accordingly, the Company is required to submit exception
requests to recover such excess costs.
57
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On July 1, 1998, the Company began phasing in its facilities to a
Prospective Payment System ("PPS") for services to Medicare patients. The
Company's facilities were phased into PPS based upon their cost report years
(20 facilities on July 1, 1998; 105 facilities on October 1, 1998; 189
facilities on January 1, 1999; and 83 facilities on April 1, 1999). At
September 30, 1999, all facilities are being paid by Medicare under PPS, and
as such, revenue recorded will consist of the aggregate payments expected from
Medicare for individual claims at the appropriate payment rates, which include
reimbursement for ancillary services. The PPS billing methodology is extremely
complex and its implementation is resource intensive. The claims amendment
process lacks procedures and the coordination of certain policies. The Company
has a commitment to training and compliance and has established procedures to
address PPS issues as they arise.
The Company terminated substantially all of its contracts to provide
therapy services to both unaffiliated third-parties and to the Company's
skilled nursing facilities effective May 31, 1999. See Note 10.
The Company's rehabilitation management contracts which were terminated in
fiscal 1999 typically had a term of one year but frequently included automatic
renewals and were in general terminable on notice of 30 to 90 days by either
party. Under certain contracts, the Company billed Medicare or another third-
party payor directly. Under other contracts, the Company was compensated on a
fee for service basis and in general directly billed the skilled nursing
facility, which in turn received reimbursement from Medicare, Medicaid,
private insurance or the patient. The Company recognized payments under these
latter contracts as payments from private payors. Under these latter
contracts, the Company also generally indemnified its customers against
reimbursement denials by third-party payors for services determined not to be
medically necessary. The Company had established internal documentation
standards and systems to minimize denials and typically has the right to
appeal denials at its expense. Historically, reimbursement denials under these
contracts have been insignificant; however, an increase in denials could
materially and adversely affect the Company.
Under arrangements in which the Company billed a skilled nursing facility
for its rehabilitation services on a fee for service basis, Medicare
reimbursed the facility based on a reasonable cost standard. Specific
guidelines existed for evaluating the reasonable cost of physical,
occupational and speech therapy services. Medicare applied salary-equivalency
guidelines in determining the reasonable cost of physical therapy services,
which was the cost that would be incurred if the therapist were employed by a
nursing facility, plus an amount designed to compensate the provider for
certain general and administrative overhead costs. Medicare paid for
occupational and speech therapy services on a reasonable cost basis, subject
to the so-called "prudent buyer" rule for evaluating the reasonableness of the
costs. The Company's gross margins for its physical therapy services under the
salary equivalency guidelines were significantly less than for its speech and
occupational therapy services under the "prudent buyer" rule. In addition, the
Company provided certain services between subsidiary companies, some of which
were charged at cost and others of which are charged at market rates. The
Company believes that the services which were charged at market rates qualify
for an exception to Medicare's related organization principle. There can be no
assurance, however, that the Health Care Finance Administration ("HFCA") will
endorse the Company's position and the Medicare reimbursement received for
such services may be subject to audit and recoupment in future years.
In April 1995, HCFA issued a memorandum to its Medicare fiscal
intermediaries as a guideline to assess costs incurred by inpatient providers
relating to payment of occupational and speech language pathology services
furnished under arrangements that include contracts between therapy providers
and inpatient providers. While not binding on the fiscal intermediaries, the
memorandum suggested certain rates to assist the fiscal intermediaries in
making annual "prudent buyer" assessments of speech and occupational therapy
rates paid by inpatient providers. In addition, HCFA has promulgated new
salary equivalency guidelines effective April 1, 1998 which updated the then
current physical therapy and respiratory therapy rates and established new
guidelines for occupational therapy and speech therapy. These new payment
guidelines were in effect until the
58
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
client skilled nursing facility transitioned to PPS, at which time payment for
therapy services were included in the PPS rate. HCFA, through its
intermediaries, is also subjecting physical therapy, occupational therapy and
speech therapy to a heightened level of scrutiny resulting in increasing audit
activity. A majority of the Company's provider and rehabilitation contracts
provided for indemnification of the facilities for potential liabilities in
connection with reimbursement for rehabilitation services. There can be no
assurance that actions ultimately taken by HCFA with regard to reimbursement
rates for such therapy services will not materially adversely affect the
Company's results of operations.
After July 1, 1998, as the Company's pharmacy customers transitioned to
PPS, the Company amended the relationships with certain of its customers to
provide pharmaceutical services at a fixed per diem price.
During the year ended September 30, 1999, the Company recorded $122.0
million of adjustments to reduce the estimated amount due from third-party
payors, of which $39.3 million was recorded to reduce the estimated amount
receivable from cost reports filed, remaining open or settled during the
period. The remaining $82.7 million of adjustments was recorded to reflect
amounts due to the Medicare program for previously received reimbursement and
to reduce the estimated amount receivable from all Medicare cost report appeal
items and primarily pertains to related party adjustments asserted by Medicare
intermediaries (and disputed by the Company) through the intermediaries' May
1999 reopening of certain Mariner Health Medicare cost reports for 1995, 1996,
and 1997. These reopenings were to incorporate adjustments that reduced the
allowable cost of rehabilitation therapy services that were provided to
Mariner Health facilities by Mariner Health's rehabilitation subsidiaries.
During the three months ended June 30, 1999, Mariner Health received revised
notices of program reimbursement ("NPRs") for certain of the cost reports on
approximately 50 of its facilities that require Mariner Health to repay
approximately $15.9 million to the Medicare program, net of outstanding cost
report receivables. On July 27, 1999 Mariner Health reached agreement with
HCFA to extend repayment of the $15.9 million net liabilities resulting from
the issuance of the revised NPRs. The extended repayment plan requires payment
of $1.8 million per month from July through December 1999, and $1.5 million
per month from January through May 2000. The current intermediary has notified
Mariner Health that it intends to issue revised NPRs for the remaining
facility cost reports (1997 through 1999) starting in fiscal year 2000. Should
the revised NPRs result in a repayment requirement, the Company and Mariner
Health would seek to enter into an extended repayment plan with HCFA at that
time. The Company is vigorously disputing the intermediaries' overpayment
determinations through the appeal process; however, a favorable outcome cannot
be assured at this time. The loss per share of this $122.0 million change in
estimate was approximately ($1.66) for the year ended September 30, 1999.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company is aware of certain current
investigations and additional possible investigations involving allegations of
potential wrongdoing with respect to Medicare and Medicaid. See Notes 17 and
18. While the Company believes that it is in compliance with all applicable
laws and regulations, compliance with such laws and regulations can be subject
to future government review and interpretation as well as significant
regulatory action including fines, penalties, and exclusion from the Medicare
and Medicaid programs.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), was issued in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. The
Company adopted SFAS 130 effective October 1, 1998; the adoption of this
statement did not have a material impact on the Company's financial position
or results of operations. Comprehensive income includes net income (loss), as
well as charges and credits directly to stockholders' (deficit) equity which
are excluded from net income (loss).
59
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEGMENT REPORTING
The Company also adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131, which supersedes FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise", establishes standards for
the way that public business enterprises report information about operating
segments in financial statements. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not affect results of operations or
financial position. See Note 24.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion 25 "Accounting for Stock Issued to Employees" and, accordingly,
recognizes no compensation expense for the stock option grants.
In October 1995 the Financial Accounting Standards Board adopted Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows companies the option to retain the
current accounting approach for recognizing stock-based expense in the
financial statements or to adopt a new accounting method based on the
estimated fair value of the employee stock options. Companies that do not
follow the new fair-value based method are required to provide pro forma
disclosures of net income and earnings per share as if the fair-value method
of accounting had been applied. See Note 23 for the pro forma effects on the
Company's reported net income (loss) and earnings (loss) per share assuming
the election had been made to recognize compensation expense on stock-based
awards in accordance with SFAS 123.
EARNINGS PER SHARE
In February 1997 the Financial Accounting Standards Board adopted Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 is designed to simplify the standards for computing earnings per
share and increase the comparability of earnings per share data on an
international basis. The Company implemented SFAS 128 in the first quarter of
fiscal year 1998. The earnings (loss) per share impact of this implementation
was not significant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Although these estimates are based on management's knowledge
of current events, they may ultimately differ from actual results.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1998 the Financial Accounting Standards Board adopted Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits--an amendment of FASB Statements
No. 87, 88, and 106" ("SFAS 132"). SFAS 132 standardizes disclosure
requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair values
of plan assets, and eliminates certain existing disclosure requirements. The
Company adopted SFAS 132 effective October 1, 1998. The adoption of SFAS 132
did not affect results of operations or financial position.
60
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In March 1998 the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance as to whether certain
costs for internal-use software should be capitalized or expensed when
incurred. This SOP is effective for fiscal years beginning after December 15,
1998, but earlier application is encouraged. The Company does not expect the
adoption of SOP 98-1 to have a material impact on its financial statements.
In June 1998 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. In
June 1999 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of Effective Date of FASB Statement No. 133"
("SFAS 137"). SFAS 137 deferred the effective date of SFAS 133 for one year
which is now effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. SFAS No. 133 will become effective in the Company's fiscal year
ending September 30, 2001. The adoption of this statement is not expected to
have a material impact on the Company's financial statements.
In June 1998 the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5
provides guidance on the financial reporting of start-up costs. It requires
costs of start-up activities to be expensed as incurred. SOP 98-5is effective
for fiscal years beginning after December 15, 1998, but earlier application is
encouraged. The Company does not expect the adoption of this SOP to have a
material impact on its financial statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1999
financial statement presentation.
NOTE 2. GOING CONCERN AND ISSUES EFFECTING LIQUIDITY
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced significant losses, has a working capital deficiency of
approximately $2.0 billion, and has a capital deficit of approximately $1.4
billion at September 30, 1999. In addition, as more fully described below, the
Company has violated certain covenants of various loan agreements. On January
18, 2000, the Company, Mariner Health and certain of their respective
subsidiaries filed separate voluntary petitions for relief under Chapter 11 of
the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in the District of
Delaware. These matters, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management is in the process
of developing a plan of reorganization that will be submitted to the U.S.
Bankruptcy Court, the Company's and Mariner Health's creditors for their
approval. In the event the plan of reorganization is accepted, continuation of
the business thereafter is dependent on the Company's ability to achieve
successful future operations.
Mariner Health was not in compliance with certain of the financial
covenants contained in the Mariner Health Senior Credit Facility (see Note 12)
and the Mariner Health Term Loan Facility (see Note 12) as of March 31, 1999,
June 30, 1999, and September 30, 1999. The Company has been operating without
a waiver of noncompliance for these credit facilities and paying a default
rate of interest of 200 basis points above the credit facility rates. The
maturity date of the Mariner Health Senior Credit Facility and the Mariner
Health Term Loan Facility was January 3, 2000, and therefore such debt is
classified as a current obligation of the Company at September 30, 1999.
Mariner Health did not make the interest payments due on the Mariner Health
Senior Credit
61
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Facility and the Mariner Health Term Loan Facility (see Notes 12 and 26).
Mariner Health did not make the interest payment due October 1, 1999 on the
Mariner Notes (see Notes 12 and 26). At September 30, 1999, Mariner Health had
invested cash of $22.6 million for supporting its operations.
The Company obtained a waiver under the Senior Credit Facility (see Note
12) with respect to certain financial covenant defaults existing at March 31,
1999. However, at June 30, 1999 and September 30, 1999, the Company was not in
compliance with certain financial covenants under the Senior Credit Facility,
and such default has not been waived. The Company did not make the scheduled
interest and principal payments due on or subsequent to November 19, 1999 on
its Senior Credit Facility (see Notes 12 and 26). Due to the covenant
violations, the Company is not permitted to borrow additional cash under the
Senior Credit Facility. The Company did not make the interest payment due
November 1, 1999 on the Senior Subordinated Notes (see Notes 12 and 26). At
September 30, 1999, the Company had invested cash of $50.4 million for
supporting operations covered by the Senior Credit Facility.
The Company has also defaulted on certain covenants relating to the
Deficiency Note, Omega Note and various agreements with HRPT (see Note 12).
Except as may be otherwise determined by the Bankruptcy Court overseeing
the Chapter 11 Filings, the automatic stay protection afforded by the Chapter
11 Filings prevents any creditors or other third parties from taking any
action in connection with any defaults under prepetition obligations of the
Company and those of its subsidiaries which are debtors in the Chapter 11
Filings. In connection with the Chapter 11 Filings, the Company must develop a
plan of reorganization that will be approved by its creditors, including those
described above and confirmed by the Bankruptcy Court overseeing the Company's
Chapter 11 Filings.
In connection with the Chapter 11 Filings, the Company obtained a
commitment for $100 million in debtor-in-possession ("DIP") financing (the
"Company DIP Financing") from a group of banks led by The Chase Manhattan
Bank. Mariner Health also obtained a commitment for $50 million in DIP
financing from a group of banks led by PNC Bank (the "Mariner Health DIP
Financing"; together with the Company DIP Financing, the "DIP Financings").
The accompanying consolidated financial statements have been prepared on
the basis of accounting principles applicable to going concerns and
contemplate the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The financial statements do not
include adjustments, if any, to reflect the possible future effects on the
recoverability and classification of recorded assets or the amounts and
classifications of liabilities that may result from the outcome of these
uncertainties. In addition, since the Company filed for protection under the
Bankruptcy Code subsequent to September 30, 1999, the accompanying
consolidated financial statements have not been prepared in accordance with
SOP 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code," ("SOP 90-7") and do not include disclosures of liabilities
subject to compromise. Financial statements prepared subsequent to the filings
under Chapter 11 will be prepared reflecting such amounts subject to
compromise.
NOTE 3. RECAPITALIZATION MERGER
During 1997 the Company entered into the Recapitalization Merger which was
completed effective November 1, 1997 for accounting purposes. In connection
with the Recapitalization Merger, certain affiliates of Apollo and certain
other investors (the "Apollo Investors") invested $240 million to purchase
approximately 17.8 million shares (adjusted for the three-for-one stock split,
see Note 6) of newly issued common stock of LCA. Concurrent with the
Recapitalization Merger, LCA changed its name to Paragon Health Network, Inc.
62
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On November 4, 1997, the Company sold $275 million of its 9.5% Senior
Subordinated Notes due 2007, at a price of 99.5% of face value and $294
million of its 10.5% Senior Subordinated Discount Notes due 2007, at a price
of 59.6% of face value (collectively the "Notes"), in a private offering to
institutional investors. Concurrent with the private Notes offering, the
Company entered into a new Senior Credit Facility which is composed of $740
million in Term Loans and a Revolving Credit Facility which provides for
borrowings of up to an additional $150 million. See Note 12.
The Company used the $240 million invested by the Apollo Investors and the
$1.189 billion of net proceeds provided by the Notes offering and the Term
Loans to (i) purchase approximately 90.5% of the issued and outstanding common
stock of the Company for a per share price of $13.50 (adjusted for the three-
for-one stock split, see Note 6), (ii) to repay substantially all amounts
outstanding under the Company's and under GranCare's (see Note 4 for
description of the GranCare Merger) previous credit facilities and (iii) pay
for certain costs associated with the Apollo/LCA/GranCare Mergers.
NOTE 4. GRANCARE MERGER
Effective November 1, 1997 for accounting purposes, and subsequent to the
Company's recapitalization, the Company completed the merger acquisition of
GranCare pursuant to the GranCare Merger Agreement. In the GranCare Merger
approximately 17.4 million shares (adjusted for the three-for-one stock split,
see Note 6) of the Company's common stock were exchanged for GranCare common
stock and approximately 1.3 million options (adjusted for the three-for-one
stock split, see Note 6) to purchase shares of the Company's common stock were
exchanged for options to purchase GranCare common stock. The Company's total
purchase price of the acquisition was approximately $250.6 million including
legal, consulting and other direct costs. The acquisition was accounted for
under the purchase method of accounting and, accordingly, the results of
GranCare's operations are included in the Company's consolidated financial
statements since the date of acquisition. The assets and liabilities of
GranCare have been recorded at fair market value based on the total purchase
price allocation as follows (in thousands):
<TABLE>
<S> <C>
Current assets.................................................. $ 225,617
Property and equipment.......................................... 215,455
Goodwill........................................................ 368,741
Restricted investments.......................................... 40,987
Other long-term assets.......................................... 40,066
Current liabilities............................................. (117,669)
Long-term debt.................................................. (369,871)
Other non-current liabilities................................... (152,767)
---------
Total purchase price............................................ $ 250,559
=========
</TABLE>
In the quarter ended June 30, 1998, an adjustment was made to record
GranCare's property and equipment at its fair value, assign a purchase price
to unfavorable operating leases for property and equipment and other
unfavorable contract rights, and assign a value to identifiable intangible
assets. The unfavorable operating lease obligation in the amount of $36.4
million is amortized over the lives of the respective leases and is reflected
in the accompanying consolidated balance sheet as other liabilities. Goodwill
resulting from the GranCare Merger is being amortized on a straight-line basis
over 30 years. The Omega Note (see Note 12) assumed by the Company in the
GranCare Merger has been recorded at its fair value. Such amount is being
amortized using the effective interest method over the expected life of the
note. Amortization, which was approximately $3.9 million and $4.0 million for
the years ended September 30, 1999 and 1998, respectively, was recorded as a
reduction to interest expense.
63
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. MARINER MERGER
Effective July 31, 1998 the Company completed merger with Mariner Health
pursuant to the terms of the previously announced Mariner Merger Agreement. In
the Mariner Merger approximately 29.6 million shares of the Company's common
stock were exchanged for Mariner Health common stock. The Company's total
purchase price of the acquisition was approximately $542.7 million including
cash payments for options, legal, consulting and other direct costs. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of Mariner Health's operations are included in the
Company's consolidated financial statements since the date of acquisition. The
assets and liabilities of Mariner Health have been recorded at fair market
value based on the total purchase price allocation as follows (in thousands):
<TABLE>
<S> <C>
Current assets.................................................. $ 213,862
Property and equipment.......................................... 320,604
Goodwill........................................................ 677,737
Restricted investments.......................................... 3,227
Other long-term assets.......................................... 34,006
Current liabilities............................................. (55,853)
Long-term debt.................................................. (600,202)
Other non-current liabilities................................... (50,710)
---------
Total purchase price............................................ $ 542,671
=========
</TABLE>
In the quarter ended September 30, 1999, an adjustment was made to record
Mariner Health's property and equipment at its fair value, assign a purchase
price to unfavorable operating leases for property and equipment, and assign a
value to identifiable intangible assets. Goodwill resulting from the Mariner
Health Merger is being amortized on a straight-line basis over 30 years.
NOTE 6. STOCK SPLIT
On November 24, 1997, the Board of Directors of the Company declared a
three-for-one stock split in the form of a stock dividend to stockholders of
record as of December 15, 1997 that was paid on December 30, 1997. In all
instances throughout the financial statements and footnotes, common stock and
additional paid-in capital have been restated to reflect this split.
NOTE 7. RECAPITALIZATION, INDIRECT MERGER, AND OTHER EXPENSES
For the year ended September 30, 1999, recapitalization, indirect merger,
and other expenses total approximately $65.4 million and include approximately
$15.6 million of costs incurred and paid related to the Mariner Health Merger,
approximately $15.1 million of costs incurred to outside professionals related
to the Company's defaults in connection with its indebtedness and $34.7
million of other expenses. As of September 30, 1999, approximately $54.3
million of these expenses were paid.
For the year ended September 30, 1998, recapitalization, indirect merger,
and other expenses include approximately $66.2 million of costs related to the
Apollo/LCA/GranCare Mergers, approximately $12.0 million of costs related to
the Mariner Health Merger, and approximately $8.7 million of other expenses.
Approximately $9.7 million and $69.3 million of these costs were paid during
the years ended September 30, 1999 and 1998, respectively.
64
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information (in thousands,
except per share data) presents the consolidated results of operations of LCA,
GranCare, and Mariner Health as if the Apollo/LCA/GranCare Mergers and the
Mariner Merger had occurred effective October 1, 1996, after giving effect to
certain adjustments, including amortization of goodwill, increased interest
expense on debt related to the Mergers, and related income tax effects. Such
adjustments exclude a $12.0 million charge, net of a $7.0 million income tax
benefit, for termination fees paid by GranCare to Vitalink Pharmacy Services,
Inc. and Manor Care, Inc. in conjunction with the GranCare Merger. The results
of operations for the year ended September 30, 1997 include a $30.0 million
charge, net of a $6.0 million income tax benefit, recorded by GranCare in
February 1997 in connection with the spin-off of its institutional pharmacy
business. The pro forma financial information is not necessarily indicative of
the results of operations that would have been achieved had the
Apollo/LCA/GranCare Mergers and the Mariner Merger been consummated as of
those dates, nor are they necessarily indicative of future operating results.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net revenues...................................... $2,776,514 $2,732,372
========== ==========
Loss before extraordinary item.................... $ (229,768) $ (40,112)
Extraordinary item................................ (11,275) (4,831)
---------- ----------
Net (loss)........................................ $ (241,043) $ (44,943)
========== ==========
Basic loss per share:
Net loss before extraordinary item.............. $ (3.14) $ (0.55)
Extraordinary item.............................. (0.15) (0.06)
---------- ----------
Net loss........................................ $ (3.29) $ (0.61)
========== ==========
Diluted loss per share:
Net loss before extraordinary item.............. $ (3.14) $ (0.55)
Extraordinary item.............................. (0.15) (0.06)
---------- ----------
Net loss........................................ $ (3.29) $ (0.61)
========== ==========
</TABLE>
Pro forma information for 1997 and other 1998 acquisitions (see Note 9) is
not presented because their operating results, either individually or in the
aggregate, do not have a material effect on the pro forma operating results
presented above.
NOTE 9. ACQUISITIONS
FISCAL YEAR 1999 ACQUISITIONS
The Company made no acquisitions during fiscal year 1999.
FISCAL YEAR 1998 ACQUISITIONS
In addition to the Apollo/LCA/GranCare Mergers and Mariner Merger discussed
in Notes 3, 4, and 5 during fiscal year 1998 the Company acquired through
merger Professional Rehabilitation, Inc., a provider of rehabilitation
services, in a stock-for-stock transaction. Approximately 1.1 million shares
of the Company's common stock and $27.0 million in cash were exchanged for
Professional Rehabilitation, Inc.'s common stock. In connection with this
transaction, approximately $45.3 million was recorded as goodwill.
65
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company also acquired Summit Medical Holdings, Ltd., a provider of
long-term acute care services, during fiscal 1998 in exchange for $10.0
million in cash and approximately 1.0 million shares of the Company's common
stock. In connection with this transaction, $17.4 million was recorded as
goodwill.
In addition, the Company acquired several institutional pharmacies and
long-term care centers as part of several smaller transactions, primarily for
cash. All such acquisitions were recorded using the purchase method of
accounting.
FISCAL YEAR 1997 ACQUISITIONS
The Company acquired institutional pharmacies, home health agencies,
hospice and therapy operations as part of several smaller transactions,
primarily for cash. All such acquisitions were recorded using the purchase
method of accounting.
NOTE 10. DIVESTITURES
FISCAL YEAR 1999 DIVESTITURES
The Company terminated substantially all of its contracts to provide
therapy services to both unaffiliated third-parties and to the Company's
skilled nursing facilities effective May 31, 1999. As a result of the contract
terminations and the closure of the therapy business, the Company recorded a
loss on the disposal of the goodwill associated with the therapy business of
$228.5 million and a loss on disposal of related assets of $7.5 million.
On June 30, 1999 the Company completed the sale of the assets of its
outpatient rehabilitation clinics to HealthSouth Corporation which resulted in
a loss on sale of $2.5 million.
On July 29, 1999 the Company completed the sale of the hospital
rehabilitation management contract business to National Rehab Partners, Inc.
which resulted in a loss on sale of $4.9 million.
The Company also disposed of substantially all of its home health, contract
management operations, and approximately 15 skilled nursing facilities during
the year ended September 30, 1999 and recorded a net gain on disposal of $0.7
million.
FISCAL YEAR 1998 DIVESTITURES
In September 1998, the Company divested its Hospice operations, which
provided care for terminal patients, for a cash sales price of $6.0 million.
66
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. RESTRICTED INVESTMENTS
Restricted investments at September 30, 1999 and 1998 included the
following (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1999 COST GAINS LOSSES VALUE
- ------------------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Restricted by self insurance pro-
grams:
U.S. Treasury Notes............... $ 11,031 $ 3 $ (232) $10,802
Asset-backed securities........... 2,976 3 (37) 2,942
Corporate debt securities......... 23,078 9 (483) 22,604
Mortgage-backed securities........ 1,334 -- (36) 1,298
Repurchase Pooling Arrangement.... 64 -- -- 64
Cash.............................. 8,219 -- -- 8,219
-------- ------ ------- -------
TOTAL........................... 46,702 15 (788) 45,929
Restricted by bank agreements:
Cash Collateral Accounts.......... 12,009 -- -- 12,009
Restricted by lease agreements:
HRPT common stock................. 18,813 -- (7,563) 11,250
-------- ------ ------- -------
$ 77,524 $ 15 $(8,351) $69,188
======== ====== ======= =======
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1998 COST GAINS LOSSES VALUE
- ------------------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Restricted by self insurance pro-
grams:
U.S. Treasury Notes............... $ 24,596 $ 761 $ -- $25,357
Asset-backed securities........... 2,402 85 -- 2,487
Corporate debt securities......... 30,716 948 -- 31,664
Mortgage-backed securities........ 3,455 854 -- 4,309
Repurchase Pooling Arrangement.... 587 -- -- 587
Cash.............................. 7,250 -- -- 7,250
-------- ------ ------- -------
TOTAL........................... 69,006 2,648 -- 71,654
Restricted by lease agreements:
HRPT common stock................. 18,813 -- (2,000) 16,813
-------- ------ ------- -------
$ 87,819 $2,648 $(2,000) $88,467
======== ====== ======= =======
</TABLE>
Proceeds from the sale and maturities of investments were $32.3 million,
$95.4 million, and $19.1 million for the three years ended September 30, 1999,
1998 and 1997, respectively. Gross gains (losses) were not significant for all
periods presented.
67
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated fair value of debt securities and other
investments at September 30, 1999 by contractual maturity are shown below (in
thousands). Expected maturities may differ from contractual maturities because
borrowers may have the right to call or repay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less................................ $ 6,415 $ 6,412
Due after one year through five years.................. 13,416 13,186
Due after five years through ten years................. 13,780 13,316
Due after ten years.................................... 498 492
------- -------
34,109 33,406
Asset-backed securities................................ 2,976 2,942
Mortgage-backed securities............................. 1,334 1,298
Repurchase Pooling Arrangement......................... 64 64
HRPT Common Stock...................................... 18,813 11,250
Cash and Collateral Account............................ 20,228 20,228
------- -------
TOTAL.................................................. $77,524 $69,188
======= =======
</TABLE>
The Repurchase Pooling Arrangement is subject to market risk associated
with changes in the value of the underlying financial instruments as well as
the risk of loss of appreciation if a counter party fails to perform.
NOTE 12. DEBT
Long-term debt at September 30, 1999 and 1998 is summarized in the
following table (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Senior Debt:
Senior Credit Facilities:
Revolving Credit Facility................... $ 166,350 $ 21,000
Term Loans.................................. 746,440 815,000
Mariner Health Senior Credit Facility....... 223,000 356,000
Mariner Health Term Loan Facility........... 197,597 --
Deficiency Note............................... 26,486 --
Mortgage notes (6% to 11% due through 2014)... 49,864 55,918
Other notes payable (8% to 10% due through
2008)........................................ 81,665 91,346
Subordinated Debt:
Senior Subordinated Notes (due 2007).......... 274,009 274,287
Senior Subordinated Discount Notes (due 2007). 204,459 183,968
Mariner Health Senior Subordinated Notes (due
2006)........................................ 103,121 149,749
----------- ----------
2,073,248 1,947,268
Obligations under capital leases................ 68,853 76,847
----------- ----------
2,141,844 2,024,115
Less short-term notes payable and current por-
tion........................................... (2,028,226) (46,250)
----------- ----------
TOTAL LONG-TERM DEBT............................ $ 113,618 $1,977,865
=========== ==========
</TABLE>
68
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest paid on the above debt was $175.8 million, $74.5 million, and
$21.8 million during the years ended September 30, 1999, 1998, and 1997,
respectively.
SENIOR CREDIT FACILITY
The Senior Credit Facility consists of four components: a 6 1/2 year term
loan facility in an aggregate principal amount of $315 million (the "Tranche A
Term Loan Facility"); a 7 1/2 year term loan facility in an aggregate
principal amount of $250 million (the "Tranche B Term Loan Facility"); an 8
1/2 year term loan facility in an aggregate principal amount of $250 million
(the "Tranche C Term Loan Facility"); and a 6 1/2 year revolving credit
facility in the maximum amount of $175 million (the "Revolving Credit
Facility"). Loans made under the Tranche A Term Loan Facility ("Tranche A Term
Loans"), the Tranche B Term Loan Facility ("Tranche B Term Loans") and the
Tranche C Term Loan Facility ("Tranche C Term Loans") are collectively
referred to herein as "Term Loans." Advances under the Revolving Credit
Facility are sometimes referred to as "Revolving Loans." The proceeds from
borrowings under the Term Loans were used, along with the proceeds of the
Notes offering, to fund a portion of the Recapitalization Merger, refinance a
significant portion of LCA's and GranCare's pre-merger indebtedness, and to
pay costs and expenses associated with the Apollo/LCA/GranCare Mergers.
As of September 30, 1999, outstanding indebtedness under the Revolving
Credit Facility was $166.4 million (out of a possible $175.0 million) which
excluded $8.6 million of letters of credit. In addition, $272.7 million of the
Tranche A Term Loan Facility, $236.9 million of the Tranche B Term Loan
Facility, and $236.9 million of the Tranche C Term Loan Facility were
outstanding.
The aggregate principal amounts of the Tranche A Term Loans and the
Revolving Credit Facility reflect increases to those facilities of $75.0
million and $25.0 million, respectively, as part of the First Amendment to the
Senior Credit Facility effective on July 31, 1998 (the "July 1998
Amendments"), in connection with the consummation of the Mariner Merger. As a
result of the July 1998 Amendments, aggregate amortization of the Term Loans
increased to the following approximate quarterly amounts: $8.4 million
(formerly $6.6 million), $15.8 million (formerly $12.3 million), $16.6 million
(formerly $12.9 million), $16.6 million (formerly $12.9 million), $18.2
million (formerly $14.1 million), $48.5 million (formerly $46.5 million),
$59.8 million (unchanged) and $20.0 million (unchanged) in fiscal years 1999
through 2006, respectively. Principal amounts outstanding under the Revolving
Credit Facility will be due and payable in April 2005.
Interest on outstanding borrowings under the Revolving Credit Facility
accrue, at the option of the Company, at the Alternate Base Rate (the "ABR")
of The Chase Manhattan Bank ("Chase") or at a reserve adjusted Eurodollar Rate
(the "Eurodollar Rate") plus, in each case, an Applicable Margin. The term
"Applicable Margin" means a percentage that will vary in accordance with a
pricing matrix based upon the respective term loan tenor and the Company's
leverage ratio.
Prior to the effectiveness of the December 22, 1998 amendment to the Senior
Credit Facility (the "December 1998 Amendment"), the Applicable Margins for
the Revolving Credit Facility and the Tranche A Term Loan Facility in the
pricing matrix ranged from 0% to 1.25% for ABR loans and 0.08% to 1.25% for
loans under the Eurodollar rate. The applicable interest rate margin for
Tranche B Term Loans was 1.50% for loans under the ABR and 2.50% for
Eurodollar loans. The applicable interest rate margin for Tranche C Term Loans
was 1.75% for loans under the ABR and 2.75% for Eurodollar loans. Immediately
prior to the December 1998 Amendment, the Applicable Margins for ABR Loans and
Eurodollar Loans under the Revolving Credit Facility and the Tranche A Term
Loan Facility were 1.25% and 2.25%, respectively.
Following the December 1998 Amendment, the Applicable Margins in the
pricing matrix pertaining to the Revolving Credit Facility and Tranche A Term
Loans range from 0.25% to 1.25% for ABR loans and 1.75% to
69
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2.75% for loans under the Eurodollar. The applicable interest rate margin for
Tranche B Term Loans is 2.25% for loans under the ABR and 3.25% for Eurodollar
loans. The applicable interest rate margin for Tranche C Term Loans is 2.25%
for loans under the ABR and 3.50% for Eurodollar loans.
In connection with the May 11, 1999 amendment (the "May 1999 Amendment") to
the Senior Credit Facility, all of the Applicable Margins were increased by 50
basis points. Following the May 1999 Amendment, the Applicable Margins in the
pricing matrix pertaining to Revolving Loans and Tranche A Term Loans range
from 0.75% to 1.75% for ABR loans and 2.25% to 3.25% for loans under the
Eurodollar. The applicable interest rate margin for Tranche B Term Loans is
2.75% for loans under the ABR and 3.75% for Eurodollar loans. The applicable
interest rate margin for Tranche C Term Loans is 3.00% for loans under the ABR
and 4.00% for Eurodollar loans. The resultant interest rates under the Senior
Credit Facility (in each case first for ABR Loans and then for Eurodollar
Loans) as of September 30, 1999 were as follows: for Revolving Loans and
Tranche A Term Loans, 10.00% and 9.33%; for Tranche B Term Loans, 11.00% and
9.83%; and for Tranche C Term Loans, 11.25% and 10.08%.
The Senior Credit Facility contains customary covenants which, among other
things, require maintenance of certain financial ratios and limit amounts of
additional debt and repurchases of common stock. The Company obtained a waiver
under the Senior Credit Facility with respect to certain financial covenant
defaults existing at March 31, 1999. At September 30, 1999, the Company was in
violation of all financial covenants. In addition, in order to conserve its
liquidity, the Company did not make the November 1999 interest payments due on
the Senior Credit Facility. The lenders under the Senior Credit Facility
signed a forbearance agreement, pursuant to which they agreed not to take any
remedial action with respect to events of default (including acceleration of
their debt), subject to no new events of default occurring. The forbearance
agreement did not waive any events of default, and it expired on January 14,
2000. Based on the financial covenant defaults and the Company's current
projected operating results for the year ended September 30, 2000 indicating
continued non-compliance with certain financial covenants, the Senior Credit
Facility is classified as a current obligation at September 30, 1999. Due to
the covenant violations, the Company is not permitted to borrow additional
cash under the Senior Credit Facility. At September 30, 1999, the Company had
$50.4 million of invested cash for funding operations and satisfying
obligations under the Senior Credit Facility.
SENIOR SUBORDINATED NOTES
Also in connection with the Apollo/LCA/GranCare Mergers, on November 4,
1997 the Company completed a private offering to institutional investors of
$275 million of its 9.5% Senior Subordinated Notes due 2007, at a price of
99.5% of face value and $294 million of its 10.5% Senior Subordinated Discount
Notes due 2007, at a price of 59.6% of face value (collectively, the "Notes").
Interest on the Senior Subordinated Notes is payable semi-annually. Interest
on the Senior Subordinated Discount Notes will accrete until November 1, 2002
at a rate of 10.57% per annum, compounded semi-annually, and were to be cash
pay at a rate of 10.5% per annum thereafter. The Notes will mature on November
1, 2007. The net proceeds from these offerings, along with proceeds from the
Senior Credit Facility, were used to fund a portion of the Recapitalization
Merger, refinance a significant portion of LCA's and GranCare's pre-merger
indebtedness, and to pay costs and expenses associated with the
Apollo/LCA/GranCare Mergers. The Company did not make the scheduled interest
payment of approximately $13.2 million due on the Senior Subordinated Notes in
November 1999 and such default was not cured within the applicable grace
period. Certain holders of the Senior Subordinated Notes have formed an
unofficial committee of holders of the Senior Subordinated Notes, and have
engaged counsel to represent their interests in connection with the Company's
efforts to restructure the indebtedness evidenced by the Senior Subordinated
Notes. The Senior Subordinated Notes and Senior Subordinated Discount Notes
are classified as current obligations at September 30, 1999.
70
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARINER HEALTH SENIOR CREDIT FACILITY AND MARINER HEALTH TERM LOAN FACILITY
Mariner Health is the borrower under a $460.0 million senior secured
revolving loan facility (the "Mariner Health Senior Credit Facility"), by and
among Mariner Health, the lenders signatory thereto (the "Mariner Health
Lenders"), and PNC Bank, National Association, as agent for the Mariner Health
Lenders (the "Mariner Health Agent"). The Mariner Health Senior Credit
Facility terminated on January 3, 2000, without the scheduled maturity payment
being made. The borrowing availability and rate of interest varied depending
upon specified financial ratios, with applicable interest rate margins ranging
between 0% and 0.25% for prime-base borrowings, and between 0.50% and 1.75%
for Eurodollar-based advances. As of September 30, 1998, the applicable
margins were 0% for prime-based revolving loans and 1.25% for Eurodollar-based
loans.
Effective December 23, 1998, Mariner Health amended the Mariner Health
Senior Credit Facility (the "Mariner Health Senior Credit Facility Amendment")
to (a) reduce the amount of the revolving commitment from $460 million to $250
million, (b) to provide additional financial covenant flexibility for Mariner
Health and its subsidiaries, (c) to increase the applicable interest rate
margins so that they range from 0.25% to 1.25% for prime-based loans, and from
1.75% to 2.75% for Eurodollar-based advances, (d) to modify certain of the
operating covenants referred to in the immediately preceding paragraph, and
(e) to expand the amount and types of collateral pledged to secure the Mariner
Health Senior Credit Facility. Immediately after giving effect to the Mariner
Health Senior Credit Facility Amendment, the applicable interest rate margin
for prime-based advances increased to 0.75%, and the applicable interest rate
margin for Eurodollar-based borrowings increased to 2.25%. Accordingly, the
applicable interest rates on prime-based loans were initially 7.8%, and for
Eurodollar-based advances, 7.6%.
Mariner Health's obligations under the Mariner Health Senior Credit
Facility are guaranteed by substantially all of its subsidiaries. The Mariner
Health Senior Credit Facility and related guarantees are secured by pledges of
the stock of substantially all of Mariner Health's direct and indirect
subsidiary guarantors, by mortgages on all wholly owned, unencumbered
inpatient facilities of Mariner Health and its subsidiaries, by leasehold
mortgages on certain inpatient facilities leased by Mariner Health or its
subsidiaries, and by security interests in substantially all other property
and assets of Mariner Health and its subsidiaries. As the owner of 100% of the
capital stock of Mariner Health, the Company has pledged such capital stock to
Chase as additional collateral to secure the Company's obligations in
connection with the Senior Credit Facility and the Synthetic Lease.
Contemporaneously with the effectiveness of the Mariner Health Senior
Credit Facility Amendment, Mariner Health entered into a term loan agreement
dated as of the same date (the "Mariner Term Loan Agreement") with PNC Bank,
as administrative agent, First Union National Bank, as syndication agent, and
the financial institutions signatory thereto as lenders (the "Term Lenders"),
pursuant to which the Term Lenders made a $210 million senior secured term
loan to Mariner Health (the "Mariner Health Term Loan"). Proceeds of the
Mariner Health Term Loan were applied to reduce loan amounts under the Mariner
Health Senior Credit Facility in connection with the Mariner Health Senior
Credit Facility Amendment. The interest rate pricing and covenants contained
in the Mariner Health Term Loan Agreement are substantially similar to the
corresponding provisions of the Mariner Health Senior Credit Facility, as
amended by the Mariner Health Senior Credit Facility Amendment. The Mariner
Health Term Loan matured on January 3, 2000, is guaranteed by the same
subsidiary guarantors as the Mariner Health Senior Credit Facility, and is
cross-defaulted and cross-collateralized with the Mariner Health Senior Credit
Facility. As of September 30, 1999, approximately $223.0 million of loans and
$6.6 million of letters of credit were outstanding under the Mariner Health
Senior Credit Facility, and $197.6 million of the Mariner Health Term Loan was
outstanding. The Mariner Health Senior Credit Facility matured on January 3,
2000.
Mariner Health and its subsidiaries are treated as unrestricted
subsidiaries under the Senior Credit Facility. Unlike subsidiaries of the
Company other than Mariner Health and its subsidiaries (the "Non-Mariner
71
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MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Subsidiaries"), Mariner Health and its subsidiaries neither guarantee the
Company's obligations under the Senior Credit Facility nor pledge their assets
to secure such obligations. Correspondingly, the Company and the Non-Mariner
Subsidiaries do not guarantee or assume any obligations under the Mariner
Health Senior Credit Facility. Mariner Health and its subsidiaries are not
subject to the covenants contained in the Senior Credit Facility, and the
covenants contained in the Mariner Senior Credit Facility are not binding on
the Company and the Non-Mariner Subsidiaries. Mariner Health and the Mariner
Health subsidiaries are obligated to continue to comply with the covenants
contained in the Mariner Senior Credit Facility without taking into account
the revenues, expenses, net income, assets or liabilities of the Company and
the Non-Mariner Subsidiaries. The converse is true with respect to the
Company, which (together with its Non-Mariner Health Subsidiaries) must
continue to comply with the covenants contained in its Senior Credit Facility
without taking into account the revenues, expenses, net income, assets or
liabilities of Mariner Health and its subsidiaries.
Mariner Health was not in compliance with certain of the financial
covenants contained in the Mariner Health Senior Credit Facility and in the
Mariner Health Term Loan Facility as of March 31, 1999, and again as of June
30, 1999 and September 30, 1999. In addition, Mariner Health failed to make
its October 1, 1999 interest payments due on the Mariner Health Senior Credit
Facility and on the Mariner Health Term Loan Facility within the applicable
grace period, although it was ultimately able to satisfy such obligations
through amendments to those credit facilities which permitted cash collateral
held by the Collateral Agent to be applied for such purpose. Finally, Mariner
Health did not make the required payments with regard to the Mariner Health
Term Loan and Mariner Health Senior Credit Facility at their respective
January 3, 2000 maturity dates.
MARINER HEALTH SENIOR SUBORDINATED NOTES
Mariner Health is also the issuer of $150.0 million of 9 1/2% Senior
Subordinated Notes due 2006 (the "Mariner Notes") which were issued pursuant
to an indenture dated as of April 4, 1996 (the "Mariner Indenture") with
Mariner Health as issuer and State Street Bank and Trust Company as trustee
(the "Mariner Trustee"). The Mariner Notes are obligations solely of Mariner
Health and are not guaranteed by the Company or any of its subsidiaries (other
than Mariner Health). Because of the existing, unwaived financial covenant
defaults under the Mariner Health Senior Credit Facility and the Mariner
Health Term Loan Facility, the agents under such facilities gave notice to
Mariner Health and the Mariner Trustee that they were instituting a 179-day
payment blockage period, during which no payments of debt service on the
Mariner Notes could be made. Accordingly, Mariner Health did not make the
scheduled $7.1 million interest payment due on the Mariner Notes on October 1,
1999. The 30-day grace period having expired without such interest being paid,
an event of default exists under the Mariner Indenture. The Mariner Health
Senior Subordinated Notes are classified as current obligations at September
30, 1999. Two holders of substantially all of the Mariner Notes not owned by
the Company (see below) have formed an unofficial committee of holders of the
Mariner Notes, and have engaged counsel to represent their interests in
connection with Mariner Health's efforts to restructure the indebtedness
evidenced by the Mariner Notes.
DEFICIENCY NOTE
As a consequence of the Mariner Merger and the resulting change of control
at Mariner Health, the holders of the Mariner Notes had the right under the
Mariner Indenture to require that their Mariner Notes be purchased (the
"Change of Control Purchase") at a purchase price equal to 101% of the
outstanding principal amount of the Mariner Notes purchased. Effective on
September 11, 1998, Mariner Health and the Mariner Trustee entered into an
amendment to the Mariner Indenture which permitted Mariner Health to designate
a third-party to purchase any Mariner Notes tendered pursuant to the Change of
Control Purchase. Mariner Health designated NationsBank, N.A. (n/k/a Bank of
America, N.A., and herein referred to as "Bank of America") as a third-party
purchaser, and on September 21, 1998 Bank of America acquired all $40,661,000
of the Mariner Notes tendered
72
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MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in connection with the Change of Control Purchase (the "Tendered Mariner
Notes"). In agreeing to act as third-party purchaser, Bank of America required
the Company to enter into a total return swap agreement (the "Total Return
Swap"), with the financial institution as counterparty. See "Quantitative and
Qualitative Disclosures about Market Risk." The Company's obligations under
the Total Return Swap were guaranteed by Mariner Health and substantially all
of the subsidiaries of Mariner Health. During the quarter ended December 31,
1998, an additional $6.0 million of the Mariner Notes were acquired by Bank of
America and made a part of the Total Return Swap.
The Total Return Swap terminated by its terms on August 16, 1999. Based on
the bids for the Tendered Mariner Notes solicited by Bank of America pursuant
to the Total Return Swap Agreement, the market value of the Tendered Mariner
Notes for purposes of unwinding the Total Return Swap was determined to be
approximately $0.7 million, resulting in capital depreciation of approximately
$46.5 million being owed by the Company. The Company was the winning bidder in
the auction for the Tendered Mariner Notes. On the August 16, 1999 termination
date, Bank of America applied $15.0 million drawn by it under a letter of
credit issued pursuant to the Mariner Health Senior Credit Facility and
applied $5.0 million of cash collateral previously posted by Mariner Health,
to satisfy $20.0 million of the total amount owed to Bank of America under the
Total Return Swap, leaving a net deficiency of approximately $26.5 million
(the "Net Total Return Swap Deficiency").
Effective August 16, 1999, Bank of America and the Company incorporated the
Net Total Return Swap Deficiency into a promissory note (the "Deficiency
Note") which generally matures and is payable as to principal and interest on
the same terms as the notes evidencing the Revolving Loans. The guarantee of
the Total Return Swap obligations of the Company by Mariner Health and its
subsidiary guarantors remains in place. Bank of America also waived any
default arising from any failure to be paid the Net Deficiency on the
termination date of the Total Return Swap, in return for the lenders under the
Senior Credit Facility amending the Senior Credit Facility to acknowledge the
Deficiency Note as permitted indebtedness and as an "Obligation" that is
secured on a pari passu basis with the indebtedness outstanding under the
Senior Credit Facility. The $46.7 of Mariner Notes acquired by Mariner Post-
Acute Network, Inc. in connection with the unwinding of the Total Return Swap
remain outstanding as an obligation of Mariner Health.
The Company did not make the scheduled November 1999 interest payments due
under the Deficiency Note. The terms of the Deficiency Note provide that the
forbearance by the lenders under the Senior Credit Facility with respect to
the failure to pay interest and certain other defaults under the Senior Credit
Facility automatically bind the holder of the Deficiency Note as well. The
forbearance period expired on January 14, 2000. The Deficiency Note is
classified as a current obligation at September 30, 1999.
OTHER SIGNIFICANT INDEBTEDNESS
The Company and its GranCare, Inc. subsidiary are parties to an agreement
with Omega Healthcare Investors, Inc. ("Omega"). A wholly-owned subsidiary of
the Company, Professional Health Care Management, Inc. ("PHCMI"), is the
borrower under a $58.8 million mortgage note executed on August 14, 1992 (the
"Omega Note") in favor of Omega, and under a loan agreement dated as of June
7, 1992 as amended (the "Omega Loan Agreement"). All $58.8 million was
outstanding as of September 30, 1999.
The Omega Note bears interest at a rate which is adjusted annually based on
either (i) changes in the Consumer Price Index or (ii) a percentage of the
change in gross revenues of PHCMI and its subsidiaries from year to year,
divided by 58.8 million, whichever is higher, but in any event subject to a
maximum rate not to exceed 105% of the interest rate in effect for the Omega
Note for the prior calendar year. The current interest rate is 15.5% per annum
which is paid monthly. Additional interest accrues on the outstanding
principal of the
73
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Omega Note at the rate of 1% per annum and totaled $4.3 million at September
30, 1999. Such interest is compounded annually and is due and payable on a pro
rata basis at the time of each principal payment or prepayment.
In addition to the interest on the Omega Note described in the preceding
paragraph, and as a condition to obtaining Omega's consent to a February 1997
transaction between Vitalink Pharmacy Services, Inc. and GranCare, PHCMI
agreed to pay additional interest to Omega in the amount of $20,500 per month,
through and including July 1, 2002. If the principal balance of the Omega Note
for any reason becomes due and payable prior to that date, there will be added
to the indebtedness owed by PHCMI: (i) the sum of $1.0 million, plus
(ii) interest thereon at 11% per annum to the prepayment date; less (iii) the
amount of such additional interest paid to Omega prior to the prepayment date.
Beginning October 1, 2002, quarterly amortizing installments of principal
in the amount of $1.5 million will also become due and payable on the first
day of each calendar quarter. The entire outstanding principal amount of the
Omega Note is due and payable on August 13, 2007. The Omega Note may be
prepaid without penalty during the first 100 days following August 14, 2002.
The Omega Loan Agreement obligates PHCMI, among other things, to maintain a
minimum tangible net worth of at least $10 million, which may be increased or
decreased under certain circumstances but may not be less than $10 million.
The Company must contribute additional equity to PHCMI, if and when necessary,
to assure that such minimum tangible net worth test is met. Subsequent to
September 30, 1999, PHCMI and GranCare received notice from Omega asserting
that PHCMI was in default of its obligation to maintain its required minimum
tangible net worth. Omega demanded that such default be cured within 30 days,
either by PHCMI or by GranCare under its guaranty of PHCMI's compliance with
such minimum tangible net worth test, or else an event of default would exist
under the Omega loan documents. The Company received notice in late December,
1999, declaring an event of default as a result of the alleged breach of the
tangible net worth covenants contained in the Omega Loan Documents and
accelerating all amounts due under obligations to Omega. Effective January,
2000, PHCMI ceased making its monthly interest payments on the Omega Note.
Omega subsequently initiated foreclosure proceedings on three skilled nursing
facilities located in North Carolina. Hearings on the foreclosures are
scheduled for February 3, 2000. At September 30, 1999, the Omega Note is
classified as a current obligation.
The Company, through its GranCare subsidiaries, is a party to various
agreements between GranCare and Health and Retirement Properties Trust
("HRPT"). HRPT is the lessor with respect to certain facilities leased by two
subsidiaries of GranCare (the "Tenant Entities"). In 1999, HRPT spun off its
health care portfolio, including the Tenant Entities, into a new publicly-
traded company. HRPT has an unlimited guaranty by the Company and all
subsidiaries of the Company having an ownership interest in Tenant Entities
which guaranty is secured by a cash collateral deposit of $15 million, the
earned interest on which is retained by HRPT. The performance by the Tenant
Entities of their respective obligations to HRPT continues to be secured by a
pledge of one million shares of HRPT common stock beneficially owned by
GranCare. The Company does not have the ability to sell these shares to meet
any capital requirements. During the Fall of 1999, SPTMNR Properties Trust
("SPTMNR") succeeded to the interests of HRPT under the HRPT Agreements, and
references to HRPT herein are deemed to include SPTMNR in such capacity.
DEBTOR-IN-POSSESSION FINANCING FOR THE COMPANY
Among the orders entered by the Bankruptcy Court on the Petition Date in
the Company's Chapter 11 case were orders approving on an interim basis (i)
the use of cash collateral by the Company and those of its subsidiaries which
had filed petitions for reorganization under Chapter 11 of the Bankruptcy Code
(excluding
74
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Mariner Health and the direct and indirect subsidiaries of Mariner Health, the
"Company Debtors"), and (ii) the funding of up to $25.0 million in principal
amount at any time outstanding under a debtor-in-possession financing
arrangement (the "Company DIP Financing") established pursuant to that certain
Revolving Credit and Guaranty Agreement dated as of January 18, 2000 (the
"Petition Date") (as amended from time to time, the "Company DIP Credit
Agreement") by and among the Company, as borrower, the other Company Debtors,
as guarantors, the lenders signatory thereto as lenders (the "Company DIP
Lenders"), and The Chase Manhattan Bank, as Administrative Agent,
Documentation Agent and Collateral Agent (the "Company DIP Agent"). The
Bankruptcy Court set a hearing on January 28, 2000 for an interim order (the
"Company Interim DIP Order") to increase the approved portion of the Company
DIP Financing to $50.0 million, and another hearing on February 16, 2000 for
consideration of a final order (the "Final Company DIP Order,") approving the
full $100.0 million amount of the Company DIP Financing.
The Company DIP Credit Agreement establishes a one-year, $100.0 million
secured revolving credit facility to provide funds for working capital and
other lawful corporate purposes for use by the Company and the other Company
Debtors; provided, however, that amounts outstanding under the Company DIP
Financing may not at any time exceed the maximum borrowing amounts established
for the Company under the initial DIP order (the "Company Initial DIP Order"),
the Company Interim DIP Order or the Final Company DIP Order (collectively,
the "Company DIP Orders"), as the case may be, or the Company's borrowing base
of eligible accounts receivable (the "Company Borrowing Base"). Up to $10.0
million of the Company DIP Financing may be utilized for the issuance of
letters of credit as needed in the businesses of the Company Debtors. Interest
accrues on the principal amount outstanding under the Company DIP Financing at
a per annum rate of interest equal to the ABR of Chase, plus three percent
(3%) and is payable monthly in arrears. During the existence and continuation
of a default in the payment of any amount due and payable by the Company
Debtors under the Company DIP Credit Agreement, interest will accrue at the
default rate of ABR plus five percent (5%) per annum.
The outstanding principal of the Company DIP Financing, together with all
accrued and unpaid interest and all other obligations thereunder, are due and
payable one year from the Petition Date or, if earlier, on the Prepayment
Date. The term, "Prepayment Date," is defined as the first business day which
is at least 30 days after the entry of the Company First Day DIP Order, if the
Company Final DIP Order has not been entered. The Company must also prepay
principal to the extent that the principal amount outstanding under the
Company DIP Financing at any time exceeds the Company Borrowing Base then in
effect. To the extent proceeds of loans under the Company DIP Financing are
used to complete the construction of certain healthcare facilities that are
part of the Synthetic Lease (which proceeds are not permitted to exceed $8.8
million), proceeds from the sale of any such properties must be used first to
repay any portion of the loans made pursuant to the Company DIP Financing,
with 75% of any remaining net cash proceeds to be applied as an adequate
protection payment to the lenders under the Senior Credit Facility, and the
remaining 25% of such excess net cash proceeds to be retained by the Company
or its applicable subsidiary as additional working capital. Pursuant to the
terms of the Initial DIP Order, 75% of the net cash proceeds of other asset
sales approved by the Bankruptcy Court and the requisite Company DIP Lenders
are to be applied as an adequate protection payment to the lenders under the
prepetition Senior Credit Facility. The Company has the right to make optional
prepayments in increments of $1.0 million, and to reduce the commitment under
the Company DIP Credit Agreement in increments of $5.0 million.
The obligations of the Company under the Company DIP Credit Agreement are
jointly and severally guaranteed by each of the other Company Debtors pursuant
to the Company DIP Agreement. Under the terms of the Initial Company DIP
Order, the obligations of the Company Debtors under the Company DIP Credit
Agreement (the "Company DIP Obligations") constitute allowed superpriority
administrative expense claims pursuant to Section 364(c)(1) of the Bankruptcy
Code (subject to a carve-out for certain professional fees and expenses
incurred by the Company Debtors). The Company DIP Obligations will be secured
by perfected liens
75
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
on all or substantially all of the assets of the Company Debtors (excluding
bankruptcy causes of action), the priority of which liens (relative to
prepetition creditors having valid, non-avoidable, perfected liens in those
assets and to any "adequate protection" liens granted by the Bankruptcy Court)
is established in the Initial Company DIP Order and the related cash
collateral order entered by the Bankruptcy Court (the "Initial Company Cash
Collateral Order"). The Bankruptcy Court has also granted certain prepetition
creditors of the Company Debtors replacement liens and other rights as
"adequate protection" against any diminution of the value of their existing
collateral that may result from allowing the Company Debtors to use cash
collateral in which such creditors had valid, non-avoidable and perfected
liens as of the Petition Date. The discussion contained in this paragraph is
qualified in its entirety by reference to the Interim Company DIP Order and
the Initial Company Cash Collateral Order, and reference should be made to
such orders (which are available from the Bankruptcy Court) for a more
complete description of such terms.
The Company DIP Credit Agreement contains customary representations,
warranties and covenants of the Company Debtors, as well as certain financial
covenants relating to minimum EBITDA, maximum capital expenditures, and
minimum patient census. The breach of such representations, warranties or
covenants, to the extent not waived cured within any applicable grace or cure
periods, could result in the Company being unable to obtain further advances
under the Company DIP Financing and possibly the exercise of remedies by the
Company DIP Lenders, either of which events could materially impair the
ability of the Company to successfully reorganize in Chapter 11.
DEBTOR-IN-POSSESSION FINANCING FOR MARINER HEALTH
Among the orders entered by the Bankruptcy Court on the Petition Date in
the Chapter 11 cases of Mariner Health and its subsidiaries (the "Mariner
Health Debtors"), were orders approving (a) the use of cash collateral by the
Mariner Health Debtors, and (b) the funding of up to $15.0 million in
principal amount at any time outstanding under a debtor-in-possession
financing arrangement (the "Mariner Health DIP Financing" and together with
the Company DIP Financing, the "DIP Financings") pursuant to that certain
Debtor-in-Possession Credit Agreement dated as of January 20, 2000 (as amended
from time to time, the "Mariner Health DIP Credit Agreement") by and among
Mariner Health and each of the other Mariner Health Debtors, as co-borrowers
thereunder, the lenders signatory thereto as lenders (the "Mariner Health DIP
Lenders"), First Union National Bank, as syndication agent, PNC Capital
Markets, Inc. and First Union Securities, Inc., as co-arrangers, and PNC Bank,
National Association, as administrative Agent and collateral Agent. The
Bankruptcy Court set a hearing on February 16, 2000 to consider Mariner
Health's motion for final approval of the full $50.0 million of the Mariner
Health DIP Financing.
The Mariner Health DIP Credit Agreement establishes a one-year, $50.0
million secured revolving credit facility, which is divided into two
tranches--a $40.0 million tranche A commitment, and a $10.0 million tranche B
commitment. The tranche B loan commitment is not activated unless and until
the holders of at least 75% of the Mariner Health DIP Financing loans or
commitments so approve. Advances under the Mariner Health DIP Financing may be
used by the Mariner Health Debtors (and to a limited degree, by certain joint
venture subsidiaries of Mariner Health that are not debtors in the Mariner
Health Chapter 11 cases) for working capital and other lawful corporate
purposes. Amounts outstanding under the Mariner Health DIP Financing may not
at any time exceed the maximum borrowing amounts established for the Mariner
Health Debtors under the initial DIP order (the "Mariner Health Initial DIP
Order") or the final DIP order (the "Final Mariner Health DIP Order," and
collectively with the Initial Mariner Health DIP Order, the "Mariner Health
DIP Orders"), as the case may be. Up to $5.0 million of the Mariner Health DIP
Financing may be utilized for the issuance of letters of credit as needed in
the businesses of the Mariner Health Debtors.
Interest accrues on the principal amount outstanding under the Mariner
Health DIP Financing at a per annum rate of interest equal to the "base rate"
of PNC Bank (i.e., the higher of the PNC Bank prime rate or a
76
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
rate equal to the federal funds rate plus 50 basis points) plus the applicable
spread, which is 250 basis points for tranche A and 300 basis points for
tranche B. Such interest is due and payable monthly in arrears. During the
existence and continuation of any event of default under the Mariner Health
DIP Credit Agreement, the interest rates normally applicable to tranche A
loans and tranche B loans under the Mariner Health DIP Financing will be
increased by another 250 basis points per annum.
The outstanding principal of the Mariner Health DIP Financing, together
with all accrued and unpaid interest and all other obligations thereunder, are
due and payable in one year or, if earlier, on the Commitment Termination
Date. The term, "Commitment Termination Date," is defined as the first to
occur of the following: (i) the first anniversary of the Petition Date, (ii)
the effective date of a joint plan of reorganization for the Mariner Health
Debtors, (iii) the date of termination of the exclusivity rights of the
Mariner Health Debtors to file a plan of reorganization, (iv) the filing by
the Mariner Health Debtors of any plan of reorganization (or the modification
of any such plan previously filed with the Bankruptcy Court) no previously
approved by the holders of at least 66-2/3% of the outstanding loans or
commitments under the Mariner Health DIP Financing, (v) the date of
termination of the commitments under the Mariner Health DIP Credit Agreement
during the continuation of an event of default thereunder, (vi) 30 days after
the Petition Date if the Final Mariner Health DIP Order has not been entered
(which deadline is subject to extension at the discretion of the holders of at
least 66-2/3% of the outstanding loans or commitments under the Mariner Health
DIP Financing), or (vii) the date on which all or substantially all of the
assets or stock of the Mariner Health Debtors is sold or otherwise
transferred. The Mariner Health Debtors must also prepay principal to the
extent that the principal amount outstanding under the Mariner Health DIP
Financing at any time exceeds the Borrowing Base then in effect. The Mariner
Health Borrowing Base for any month is an amount equal to $7.5 million in
excess of the "Working Capital Facility" borrowings projected for such month
in Mariner Health's year 2000 DIP budget. The Mariner Health DIP Credit
Agreement also provides for mandatory prepayments under the following
circumstances: (i) with net cash proceeds from asset sales, the incurrence of
certain debt, the issuance of new equity, the receipt of tax refunds exceeding
$100,000 in the aggregate, and the receipt of casualty proceeds in excess of
$100,000 that are not applied within 60 days after receipt to the repair,
rebuilding, restoration or replacement of the assets damaged or condemned (or
committed within such period of time to be so applied); and (ii) on each
business day, the amount of cash held by the Mariner Health Debtors in excess
of the sum of $5.0 million plus the aggregate sum of the minimum amount
required by depositary banks to be kept in deposit accounts, concentration
accounts and other with such banks. Amounts prepaid pursuant to clause (i) of
the immediately preceding sentence will permanently reduce the amount of the
Mariner Health DIP Financing commitments on a dollar-for-dollar basis (first
tranche A, and then tranche B). Amounts prepaid pursuant to clause (ii) of the
same sentence will not permanently reduce such commitments. The Mariner Health
Debtors have the right to make optional prepayments in the minimum principal
amount of $1.0 million, and in increments of $100,000 in excess thereof, and,
on three business days' notice, to reduce the commitments under the Mariner
Health DIP Credit Agreement in the minimum amount of $5.0 million, or in
increments of $1.0 million in excess thereof.
Under the terms of the Initial Mariner Health DIP Order, the obligations of
the Mariner Health Debtors under the Mariner Health DIP Credit Agreement
(together with certain potential cash management system liabilities secured on
a pari passu basis therewith, the "Mariner Health DIP Obligations") constitute
allowed superpriority administrative expense claims pursuant to Section
364(c)(1) of the Bankruptcy Code (subject to a carve-out for certain
professional fees and expenses incurred by the Mariner Debtors). The Mariner
Health DIP Obligations will be secured by perfected liens on all or
substantially all of the assets of the Mariner Health Debtors (excluding
bankruptcy causes of action), the priority of which liens (relative to
prepetition creditors having valid, non-avoidable, perfected liens in those
assets and to any "adequate protection" liens granted by the Bankruptcy Court)
is established in the Initial Mariner Health DIP Order and the related cash
collateral order entered by the Bankruptcy Court (the "Initial Mariner Health
Cash Collateral Order"). The Bankruptcy Court has also granted certain
prepetition creditors of the Mariner Health Debtors replacement liens and
other rights as
77
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MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
"adequate protection" against any diminution of the value of their existing
collateral that may result from allowing the Mariner Health Debtors to use
cash collateral in which such creditors had valid, non-avoidable and perfected
liens as of the Petition Date. The discussion contained in this paragraph is
qualified in its entirety by reference to the Interim Mariner Health DIP Order
and the Initial Mariner Health Cash Collateral Order, and reference should be
made to such orders (which are available from the Bankruptcy Court) for a more
complete description of such terms.
The Mariner Health DIP Credit Agreement contains customary representations,
warranties and covenants of the Mariner Health Debtors, as well as certain
financial covenants relating to minimum EBITDAR, minimum patient census,
minimum eligible accounts receivable, maximum variations from Mariner Health's
year 2000 DIP budget and maximum capital expenditures. The breach of such
representations, warranties or covenants, to the extent not waived or cured
within any applicable grace or cure periods, could result in the Mariner
Health Debtors being unable to obtain further advances under the Mariner
Health DIP Financing and the possible exercise of remedies by the Mariner
Health DIP Lenders, either of which events could materially impair the ability
of the Mariner Health Debtors to successfully reorganize in Chapter 11.
Among its other restrictive covenants, the Mariner Health DIP Credit
Agreement limits affiliate transactions with the Company Debtors, but does
contemplate weekly overhead payments to the Company equal to 1.25% of
projected net inpatient revenues for such month, subject to a monthly "true-
up," such that the payments for such month equal 5% of actual net inpatient
revenues of the Mariner Health Debtors. Such payments may be suspended by the
Mariner Health Debtors if certain defaults specified in the Mariner Health
Credit Agreement occur and are continuing, though such fees will still accrue
and will become due and payable if and when the subject default has been cured
or waived.
Except as may be otherwise determined by the Bankruptcy Court overseeing
the Chapter 11 Filings, the automatic stay protection afforded by the Chapter
11 Filings prevents any lenders or other third parties from taking any action
in connection with any defaults under prepetition obligations of the Company
and those of its subsidiaries which are debtors in the Chapter 11 Filings. In
connection with the Chapter 11 Filings, the Company must develop a plan of
reorganization that will be approved by its creditors, including those
described above and confirmed by the Bankruptcy Court overseeing the Company's
Chapter 11 Filings.
Long-term debt, including capital lease obligations, maturing in the next
five fiscal years is presented below (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
------------
<S> <C>
2000......................................................... $2,028,226
2001......................................................... 18,079
2002......................................................... 7,915
2003......................................................... 7,706
2004 and thereafter.......................................... 79,918
----------
Total........................................................ $2,141,844
==========
</TABLE>
The Company periodically enters into interest rate swap agreements (the
"Swap Agreements") to manage its interest rate risk. The Swap Agreements
effectively convert a portion of the Company's floating interest rate debt to
fixed interest rate debt. Notional amounts of interest rate agreements are
used to measure interest to be paid or received relating to such agreements
and do not represent an amount of exposure to credit loss. Two Swap Agreements
with a notional amount of $40.0 million were terminated in fiscal year 1999 at
a cost of approximately $0.1 million. At September 30, 1999, the Company had
one Swap Agreements in effect totaling $20.0 million notional amount. Under
this Swap Agreement, the Company pays interest at an average fixed rate
78
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of 6.805% and receives interest at a rate of three-month LIBOR. At September
30, 1999, the fair market value of the remaining Swap Agreement would
represent a loss of approximately $0.3 million for the Company. The Swap
Agreement was terminated on October 27, 1999 at no cost to the Company.
During the quarter ended December 31, 1997, the Company recognized an
extraordinary charge of $11.3 million, net of a $6.0 million income tax
benefit, associated with prepayment penalties incurred on the early
extinguishment of debt and the write-off of certain deferred financing fees in
conjunction with the Apollo/LCA/GranCare Mergers.
NOTE 13. PROVISION FOR BAD DEBTS
The Company's provision for bad debts in fiscal 1999 was approximately
$142.5 million. The Company's collection experience for its services
deteriorated principally due to PPS. PPS reduced the cash flows of the
Company's pharmacy and therapy customers which resulted in increased aging and
uncollectable accounts in both pharmacy and therapy accounts receivable. The
Company's accounts receivable also continued to deteriorate during the year
due to the multiple complexities involved with the change to Medicare PPS
billing, system conversions and consolidation, and turnover of facility-level
billing and collection personnel. The Company's facilities were phased into
PPS based upon their cost report years (20 facilities on July 1, 1998; 105
facilities on October 1, 1998; 189 facilities on January 1, 1999; and 83
facilities on April 1, 1999). At September 30, 1999, all facilities are being
paid by Medicare under PPS, and as such, revenue recorded will consist of the
aggregate payments expected from Medicare for individual claims at the
appropriate payment rates. The PPS billing methodology is extremely complex
and its implementation is resource intensive.
NOTE 14. EMPLOYEE RETIREMENT PLANS
The Company's employees are eligible to participate in various defined
contribution retirement plans sponsored by the Company. Company contributions
to these plans represent a matching percentage of certain employee
contributions which for certain plans, is subject to management's discretion
based upon consolidated financial performance. Total combined expense
recognized by the Company under all its defined contribution retirement plans
was $4.6 million, $3.8 million, and $3.5 million for the years ended September
30, 1999, 1998, and 1997, respectively.
The Company does not provide post-retirement health care or life insurance
benefits to employees. Accordingly, the Company is not subject to the
requirements of Statement of Financial Accounting Standards No. 106,
"Employers Accounting for Post Retirement Benefits Other Than Pensions."
NOTE 15. IMPAIRMENT OF LONG-LIVED ASSETS
SFAS 121 requires impairment losses to be recognized for long-lived assets
when indicators of impairment are present and the undiscounted cash flows are
not sufficient to recover the assets' carrying amount. The revenues recorded
by the Company in its nursing facilities under PPS are substantially less than
the cost-based reimbursement it received previously. The implementation of PPS
resulted in a greater than expected decline in reimbursement for inpatient
services and in the demand and market rates for the Company's pharmacy
services. Approximately 272 of the Company's nursing facilities began
receiving PPS reimbursement on or after January 1, 1999. Management determined
that these revenue declines in its nursing facilities and pharmacy services
are other than temporary and are expected to have a material adverse effect on
future revenues and cash flow. As a result of these indicators, in the fourth
quarter of fiscal year 1999 a detailed analysis of the Company's long-lived
assets and their estimated future cash flows was completed. The analysis
resulted in the identification and measurement of an impairment loss of $995.9
million principally related to the Company's nursing facilities and pharmacies
with either cash flow losses or where projected cash flow was not sufficient
to recover the
79
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
carrying amount of their goodwill, property and equipment, and other
intangible assets which primarily include leasehold rights. The following is a
summary of the impairment loss by segment for the year ended September 30,
1999 (in thousands):
<TABLE>
<CAPTION>
OTHER
PROPERTY AND INTANGIBLE
GOODWILL EQUIPMENT ASSETS TOTAL
--------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Inpatient Nursing Home Services...... $ 526,411 $306,845 $38,073 $871,329
Pharmacy Services.................... 104,661 11,632 4,546 120,839
All Other............................ 3,764 -- -- 3,764
--------- -------- ------- --------
$ 634,836 $318,477 $42,619 $995,932
========= ======== ======= ========
</TABLE>
In the fourth quarter of fiscal year 1998 the Company recorded an
impairment charge based on a detailed analysis of the Company's long-lived
assets and their estimated future cash flows. The analysis resulted in the
identification and measurement of an impairment loss of $135.8 million related
to the Company's nursing facilities and home health agencies with either cash
flow losses or nursing facilities where management believed an impairment
existed.
Each analysis included management's estimate of the undiscounted cash flows
to be generated by these assets with a comparison to their carrying value. If
the undiscounted future cash flow estimates were less than the carrying value
of the asset then the carrying value was written down to estimated fair value.
Goodwill associated with an impaired asset was included with the carrying
value of that asset in performing both the impairment test and in measuring
the amount of impairment loss related to the asset. Fair value was estimated
based on either management's estimate of fair value, present value of future
cash flows, or market value less estimated cost to sell for certain facilities
to be disposed.
NOTE 16. INCOME TAXES
The provision (benefit) for income taxes is presented in the table below
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
------------------------
1999 1998 1997
------ -------- -------
<S> <C> <C> <C>
Current:
Federal........................................ -- $(10,266) $34,214
State & Local.................................. -- (772) 5,370
------ -------- -------
-- (11,038) 39,584
Deferred:
Federal........................................ -- 440 (4,922)
State & Local.................................. -- 39 (1,058)
------ -------- -------
-- 479 (5,980)
------ -------- -------
Total........................................ -- $(10,559) $33,604
====== ======== =======
</TABLE>
80
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MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes varies from the amount determined by
applying the Federal statutory rate to pre-tax income as a result of the
following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal statutory income tax rate......... (35.0%) (35.0%) 35.0%
Increase (decrease) in taxes resulting
from:
State & local taxes, net of federal tax
benefits............................... (1.0%) (0.2%) 3.6%
Permanent book/tax differences, primar-
ily resulting from Goodwill amortiza-
tion 0.6% 2.9% 2.4%
Goodwill disposal....................... 3.8% -- --
Impairment of assets.................... 12.3% 10.1% --
Non-deductible merger and acquisition
costs.................................. -- 2.2% 1.0%
Other, net................................ 0.1% 0.1% 1.3%
Change in valuation allowance............. 19.2% 14.8% --
-------- -------- -------
Effective tax rate........................ (0.0%) (5.1%) 43.3%
======== ======== =======
</TABLE>
The components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
--------- --------
<S> <C> <C>
Deferred tax liabilities:
Amounts relating to property and equipment......... -- $(25,457)
Insurance.......................................... -- (3,752)
--------- --------
Total deferred tax liabilities................... -- (29,209)
--------- --------
Deferred tax assets:
Asset valuation.................................... 17,930 35,993
Amounts related to property and equipment.......... 68,875 --
Payroll and benefits............................... 20,422 12,142
Intangibles........................................ 36,235 15,716
NOL carryforwards.................................. 270,558 35,282
Other miscellaneous................................ 10,672 4,226
Accrued expenses................................... 25,613 14,693
Tax credits........................................ 6,302 730
Insurance.......................................... 2,277 --
Medicare timing differences........................ 11,673 1,628
--------- --------
Total deferred tax assets........................ 470,557 120,410
Less valuation allowance............................. (470,557) (70,252)
--------- --------
Net deferred tax asset........................... $ -- $ 20,949
========= ========
</TABLE>
The Company has established a valuation allowance which completely offsets
all net deferred tax assets generated from the Company's net losses. The net
change in the valuation allowance for deferred tax assets was an increase of
$400.3 million and $68.4 million at September 30, 1999 and 1998, respectively.
The GranCare Merger and Mariner Merger resulted in the addition of deferred
taxes and a corresponding valuation allowance in the amount of $58.2 million
and $37.4 million during the years ended September 30, 1999 and 1998,
respectively.
81
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has net operating loss carryforwards of $714.4 million expiring
at various dates through 2019. The net operating losses are subject to various
limitations due to changes in ownership of the Company's subsidiary
corporations during the year the associated losses were generated.
NOTE 17. COMMITMENTS AND CONTINGENCIES
LEASES
Certain of the Company's facilities are held under operating or capital
leases. All capital leases will expire by 2009. Certain of these leases also
contain provisions allowing the Company to purchase the leased assets during
the term or at the expiration of the lease, at fair market value. Facilities
operating under capital leases are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1999 1998
-------- -------
<S> <C> <C>
Facilities operating under capital leases............... $ 63,797 $89,718
Less accumulated amortization........................... (10,419) (6,838)
-------- -------
$ 53,378 $82,880
======== =======
</TABLE>
The Company previously entered into a $100 million leasing program (the
"Synthetic Lease") 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 is an unconditional "triple net"
lease for a period of seven years (beginning in September 1996) with the
annual lease obligation a function of the amount spent by the lessor to
acquire or construct the project, a variable interest rate, and commitment and
other fees. The Company guarantees a minimum of approximately 83% of the
residual value of the leased property and also has an option to purchase the
properties at any time prior to the maturity date at a price sufficient to pay
the entire amount financed, accrued interest, and certain expenses. At
September 30, 1999 approximately $66.6 million of the Synthetic lease was
utilized. The Synthetic Lease is accounted for as an operating lease. The
Synthetic Lease was amended on December 23, 1998 to mirror certain changes
made to the Senior Credit Facility and subsequently amended in May 1999 to
reduce the commitment from $100 million to $80 million. The Synthetic Lease
Facility contains customary covenants which, among other things, require
maintenance of certain financial ratios and limit amounts of additional debt
and repurchases of common stock. At June 30, 1999 and September 30, 1999, the
Company was in violation of certain of these financial covenants and as a
result cannot currently make additional borrowings under the Synthetic Lease
Facility.
Rental expense, net of sublease rent income and amortization of unfavorable
lease obligation, for all operating leases was $103.8 million, $86.6 million
and $42.5 million for the years ended September 30, 1999, 1998 and 1997,
respectively. Certain of the capital and operating leases contain at least one
renewal option (which could extend the term of the leases by five to twenty
years), purchase options, and provisions for payments by the Company of real
state taxes, insurance and maintenance costs. Certain leases also contain
increases based on the Consumer Price Index, Medicaid reimbursement rates, or
at amounts specified in the lease agreement. Sublease rent income was $11.6
million, $7.1 million and $6.5 million for the years ended September 30, 1999,
1998 and 1997, respectively. Contingent rent based primarily on revenues was
$3.2 million, $2.3 million and $1.8 million for the years ended September 30,
1999, 1998 and 1997, respectively.
82
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The table below presents a schedule of the future minimum rental
commitments and sublease income under all noncancellable leases as of
September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
SUBLEASE
OPERATING INCOME CAPITAL
--------- -------- --------
<S> <C> <C> <C>
2000......................................... $ 70,548 $ (6,755) $ 9,512
2001......................................... 64,751 (6,731) 12,955
2002......................................... 59,044 (6,091) 10,566
2003......................................... 54,627 (5,892) 9,949
2004......................................... 49,065 (5,495) 27,565
Subsequent years............................. 313,341 (41,347) 17,963
-------- -------- --------
Total minimum rental obligations............. $611,376 $(72,311) 88,510
======== ========
Less amount representing interest............................... (19,657)
--------
Present value of capital leases................................. 68,853
Less current portion............................................ (5,060)
--------
Long-term obligations under capital leases...................... $ 63,793
========
</TABLE>
LITIGATION
As is typical in the healthcare industry, the Company is and will be
subject to claims that its services have resulted in resident injury or other
adverse effects, the risks of which will be greater for higher acuity
residents receiving services from the Company than for other long-term care
residents. The Company is, from time to time, subject to such negligence
claims and other litigation. In addition, resident, visitor, and employee
injuries will also subject the Company to the risk of litigation. The Company
has experienced an increasing trend in the number and severity of litigation
claims asserted against the Company. Management believes that this trend is
endemic to the long-term care industry and is a result of the increasing
number of large judgments, including large punitive damage awards, against
long-term care providers in recent years resulting in an increased awareness
by plaintiff's lawyers of potentially large recoveries. In certain states in
which the Company has significant operations, including California and
Florida, insurance coverage for the risk of punitive damages arising from
general and professional liability litigation is not available due to state
law public policy prohibitions. There can be no assurance that the Company
will not be liable for punitive damages awarded in litigation arising in
states for which punitive damage insurance coverage is not available. The
Company also believes that there has been, and will continue to be, an
increase in governmental investigations of long-term care providers,
particularly in the area of Medicare/Medicaid false claims as well as an
increase in enforcement actions resulting from the investigation. While the
Company believes that it provides quality care to the patients in its
facilities and materially complies with all applicable regulatory
requirements, given the Company's current financial difficulties and lack of
liquidity, an adverse determination in a legal proceeding or governmental
investigation, whether currently asserted or arising in the future, could have
a material adverse effect on the Company.
From time to time, the Company and its subsidiaries have been parties to
various legal proceedings in the ordinary course of their respective
businesses. In the opinion of management, except as described below, there are
currently no proceedings which, individually, if determined adversely to the
Company and after taking into account the insurance coverage maintained by the
Company, would have a material adverse effect on the Company's financial
position or results of operations. Although the Company believes that any of
the proceedings not discussed below will not individually have a material
adverse impact on the Company if determined adversely to the Company, given
the Company's current financial condition, lack of liquidity and change in the
Company's GL/PL insurance policy, settling a large number of cases within the
Company's $1 million self-insured retention limit could have a material
adverse effect on the Company.
83
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On August 26, 1996, a class action complaint was asserted against GranCare
in the Denver, Colorado District Court, Salas, et al v. GranCare, Inc. and AMS
Properties, Inc. d/b/a Cedars Healthcare Center, Inc., case no. 96-CV-4449. On
March 15, 1998, the Court entered an Order in which it certified a class
action in the matter. On June 10, 1998, the Company filed a Motion to Dismiss
all claims and Motion for Summary Judgment Precluding Recovery of Medicaid
Funds and these motions were partially granted by the Court on
October 30, 1998. Plaintiffs' Motion for Reconsideration was denied by the
Court on November 19, 1998, the Court's decision was certified as a final
judgment on December 10, 1998, and plaintiffs then filed a writ with the
Colorado Supreme Court and an appeal with the Colorado Court of Appeal. This
Supreme Court writ has been denied, the Court of Appeal matter has been
briefed and Oral Argument has been set for January 18, 2000. The Company will
continue in its opposition to all appeals and further intends to vigorously
contest the remaining allegations of class status.
The Company received a letter dated September 5, 1997 from an Assistant
United States Attorney ("AUSA") in the United States' Office for the Eastern
District of Texas (Beaumont) advising that the office was involved in an
investigation of allegations that services provided at some of the Company's
facilities may violate the Civil False Claims Act. The AUSA informed the
Company that the investigation was the result of a qui tam complaint filed
under seal against the Company. On May 3, 1999, the Government advised that it
has declined to intervene into this matter, but the case remains under seal.
The Company received a letter from the Court clerk informing the Company that
this case was closed as of September 15, 1999.
On March 18, 1998, a complaint was filed under seal by a former employee
against the Company, certain of its predecessor entities and affiliates in the
United States District Court for the Northern District of Alabama, alleging,
inter alia, employment discrimination, wrongful discharge, negligent hiring,
violation of the Federal False Claims Act, and retaliation under the False
Claims Act. The action is titled Powell, et al. v. Paragon Health Inc., et
al., and is civil action No. CV-98-0630-S. The complaint has been unsealed and
the Company has been advised that the government has declined to intervene in
this matter under the Federal False Claims Act. The Company is vigorously
contesting the alleged claims.
On May 18, 1998, a class action complaint was asserted against the Company,
certain of its predecessor entities and affiliates and certain other parties
in the Tampa, Florida Circuit Court, Wilson, et al, v. Mariner Post-Acute
Network, Inc., et al., case no. 98-03779, asserting seven claims for relief,
including breach of contract, breach of fiduciary duty, unjust enrichment,
violation of Florida Civil Remedies for Criminal Practices Act, violation of
Florida Racketeer and Corrupt Organization Act, false advertising and common-
law conspiracy arising out of quality of care issues at a health care facility
formerly operated by the Brian Center Health and Rehabilitation/Tampa, Inc.
and later by a subsidiary of LCA as a result of the Brian Center Corporation
merger. The Company removed this case to Federal Court on June 10, 1998 and
the matter was pending in the United States District Court for the Middle
District of Florida, Tampa division, case no. 98-1205-CIV-T23B. The plaintiff
voluntarily dismissed this case on April 16, 1999.
On August 25, 1998, a complaint was filed by the United States against the
Company's GranCare and International X-Ray subsidiaries and certain other
parties under the Civil False Claims Act and in common law and equity. The
lawsuit, U.S. v. Sentry X-Ray, Ltd., et al., civil action no. 98-73722, was
filed in United States District Court for the Eastern District of Michigan.
Valley X-Ray operates a mobile X-Ray company in Michigan. A Company
subsidiary, International X-Ray, owns a minority partnership interest in
defendant Valley X- Ray. The case asserts five claims for relief, including
two claims for violation of the Civil False Claims Act, two alternative claims
of common law fraud and unjust enrichment, and one request for application of
the Federal Debt Collection Procedures Act. The two primary allegations of the
complaint are: that the X-Ray company received Medicare overpayments for
transportation costs in the amount of $657,767; and that the X-Ray company
"upcoded" Medicare claims for EKG services in the amount of $631,090. The
United States has
84
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
requested treble damages as well as civil penalties of $5,000 to $10,000 for
each of the alleged 388 submitted Medicare claims. The total damages sought
varies from $5.3 to $7.2 million. The Company is vigorously contesting all
claims and filed two motions to dismiss on behalf of its subsidiaries on
November 23, 1998. The United States has agreed to the motion to dismiss
GranCare as a party. The court has heard a motion to dismiss the Civil False
Claims Act and other claims against International X-Ray. The Company is
awaiting the court's decision.
On October 1, 1998, a class action complaint was asserted against certain
of the Company's predecessor entities and affiliates and certain other parties
in the Tampa, Florida, Circuit Court, Ayres, et al v. Donald C. Beaver, et al,
case no. 98-7233. The complaint asserted three claims for relief, including
breach of fiduciary duty against one group of defendants, breach of fiduciary
duty against another group of defendants, and civil conspiracy arising out of
issues involving facilities previously operated by the Brian Center
Corporation or one of its subsidiaries, and later by a subsidiary of LCA, as a
result of the merger with Brian Center Corporation. All defendants submitted
Motions to Dismiss which were heard by the Court on September 15, 1999. The
Company is awaiting a decision from the Court and is not in a position to
evaluate the probability of a favorable outcome or the range of potential
loss. The Company intends to vigorously contest the request for class
certification, as well as all alleged claims made.
On November 16, 1998, a complaint was filed under seal by a former employee
against the Company, certain of its predecessor entities and affiliates in the
United States District Court for the Southern District of Texas, alleging
violation of the Federal False Claims Act. The action is titled United States
ex rel. Nelius, et al., v. Mariner Health Group, Inc., et al., and is civil
action No. H-98-3851. The complaint which was unsealed, has been recently
amended to add additional relators and allegations under the Federal False
Claims Act. The Company has been advised that the government is evaluating its
decision not to intervene with regard to the amended complaint and relators.
The Company will vigorously contest the alleged claims. In addition, a three
judge panel of the United States Court of Appeals for the Fifth Circuit
recently held that qui tam lawsuits in which the government does not intervene
are unconstitutional under the Take Care Clause of Article II of the United
States Constitution. The court declined to rule whether qui tam suits in which
the government does intervene are unconstitutional. The full bench of the U.S.
Court of Appeals for the Fifth Circuit agreed November 15, 1999, to review
this decision. Riley v. St. Luke's Episcopal Hospital, No. 97-20948, rehearing
en banc granted (5th Cir., 1999). A full court determination affirming the
court's decisions could favorably effect this outcome of this action, which is
currently before a United States District Court located in the Fifth Circuit.
On approximately June 8, 1999, OIG issued a subpoena duces tecum to Mariner
of Catonsville. The subpoena requests medical records pertaining to eighteen
residents. The subpoena also requests other broad categories of documents. The
Company has produced a substantial amount of documents responsive to the
Subpoena. The Company is cooperating with the investigation and has retained
experienced counsel to assist in responding to the subpoena and to advise it
with respect to this investigation. This investigation is still in its
preliminary stages; therefore, the Company is unable to predict the outcome of
this matter.
On October 27, 1999, the Company was served with a Complaint in United
States ex rel. Cindy Lee Anderson Rutledge and Partnership for Fraud Analysis
and State of Florida ex rel. Cindy Lee Anderson Rutledge Group, Inc., ARA
Living Centers, Inc. and Living Centers of America, Inc., No. 97-6801, filed
in the United States District Court for the Eastern District of Pennsylvania.
This action originally was filed under seal on November 5, 1997,, by relators
Cindy Lee Anderson Rutledge and the Partnership for Fraud Analysis under the
Federal False Claims Act and the Florida False Claims Act. The Complaint
alleges that the Company is liable under the Federal False Claims Act and the
Florida False Claims Act for alleged violations of regulations pertaining to
the training and certification of nurse aides at former Living Centers of
America, Inc. facilities. After conducting an investigation in which the
Company cooperated by producing documents
85
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
responsive to an administrative subpoena and allowing certain employee
interviews, the United States Department of Justice elected not to intervene.
The district court unsealed the Complaint on October 15, 1999. On December 14,
1999, the Company filed a motion to dismiss the relators' complaint. The
Company intends vigorously to defend this action.
On November 10, 1999, suit was filed in the United States District Court
for the Western District of Tennessee against the Company and its subsidiary,
National Heritage Realty, Inc. ("National Heritage") by Mid-South Healthcare
Associates, L.L.C. ("Mid-South"), civil action No. 99-299-MIA. Mid-South in
its complaint seeks declaratory judgment and injunctive relief related to Mid-
South's contention that two leases, currently held by National Heritage, for
twelve nursing home facilities in Tennessee and Mississippi expire on January
31, 2000, and Mid-South's contention that the nursing home facilities have not
been maintained to the levels required by the leases. Mid-South also seeks
unspecified damages. On December 16, 1999, the Company and National Heritage
answered the complaint and counterclaims were asserted on behalf of National
Heritage seeking a declaratory judgment that it properly exercised certain
options to extend the leases for five year periods (through January 31, 2005),
seeking injunctive relief to prevent interference with its right of possession
and seeking damages for Mid-South's breach of its duty of good faith and fair
dealing. The dispute involves the interpretation of language in certain lease
amendments and whether or not Mid-South, by failing to renew certain ground
leases upon which three of the twelve leased facilities are built, can
unilaterally extinguish National Heritage's options to extend the leases for
an additional five year term.
On January 13, 2000, the Company, National Heritage and Mid-South entered
into a Lease Amendment Agreement (the "Agreement") to settle and resolve all
of the claims pending in the subject litigation. The Agreement requires, inter
alia, all parties to release and dismiss their respective claims and
counterclaims. In addition, Mid-South will agree that the leases on the
Facilities have been extended through January 31, 2005 (with an option term
through January 31, 2010), will invest up to $3.0 million in capital
improvements to certain of the Facilities and will provide certain consulting
services in connection therewith. The Company will pay Mid-South a consulting
fee of $1.7 million per year and additional rent contingent on the level of
capital expenditures actually made by Mid-South. The Company will also make
certain capital improvements to the Facilities. The Company will file the
necessary motion with the Bankruptcy Court seeking approval to assume this
contract on a post-petition basis.
NOTE 18. INSURANCE COVERAGES
The Company insures automobile, general, and professional liability and
workers' compensation risks through insurance policies with third parties.
Some of these third-party policies are subject to reinsurance agreements
between the insurer and MPN Insurance Company, Ltd. (formerly LCA Insurance
Company, Ltd.), a wholly-owned subsidiary of the Company, and GCI Indemnity,
Ltd., a wholly-owned subsidiary of the Company. The business written by MPN
Insurance Company, Ltd. is the reinsurance of policies providing coverage for
nursing home professional liability, automobile liability, and workers'
compensation. All of these are occurrence policies which cover only portions
of the Company and its subsidiaries and their employees. Pursuant to the
reinsurance agreements, MPN Insurance Company, Ltd. is responsible to pay all
losses which are incurred by the company issuing the policies. The maximum
loss exposure with respect to these policies is $0.5 million per occurrence
(policy periods prior to July 1, 1996) and $1.0 million per occurrence (policy
periods subsequent to July 1, 1996) for nursing home professional liability;
$0.25 million per occurrence for automobile liability; and $0.5 million per
occurrence for workers' compensation liability. The business written by GCI
Indemnity, Ltd. is also the reinsurance of policies providing coverage for
nursing home professional liability, automobile liability, and workers'
compensation. All of these are occurrence policies which cover only portions
of the Company and its subsidiaries and their employees. Pursuant to the
reinsurance agreements, GCI Indemnity, Ltd. is responsible to pay all losses
which are incurred by the company issuing the policies. The maximum loss
exposure with
86
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respect to these policies is $0.10 million per occurrence for nursing home
professional liability; and $0.35 million per occurrence for workers'
compensation liability.
The liabilities for incurred losses are estimated by independent actuaries
on an undiscounted basis. The obligations of MPN Insurance Company, Ltd. and
GCI Indemnity, Ltd. under the reinsurance agreements are collateralized
through a security trust account which has been designated as restricted
investments to pay for future claims experience applicable to policy periods.
Restricted investments at September 30, 1999 and 1998 designated to pay such
claims had an estimated fair value of $40.9 million and $71.7 million,
respectively.
In 1998, the Company purchased a fully-insured workers' compensation policy
with no deductible or retention, except in the state of Texas where the
Company is a non-subscriber to workers' compensation, with a catastrophic
policy in place to cover any loss above $0.5 million per occurrence. In Texas,
the Company has in place an employee benefit plan providing for employer-paid
benefits comparable to those provided under the Texas workers' compensation
program. The Company has obtained insurance that limits the Company's exposure
for any individual injury under this benefit plan to $0.5 million. The Company
has a trust in which it funds the amount applicable to actuarially determined
claims to be incurred.
Additionally, in 1998 the Company purchased general and professional
liability insurance through a third party insurance company. The maximum loss
exposure with respect to this policy is $0.1 million per occurrence in every
state except for Texas, in which the maximum loss exposure is $1.0 million per
occurrence. For the policy year beginning March 31, 1998 the Company's total
exposure for general and professional liability claims is limited to $21.5
million. For the policy period beginning March 31, 1999 and ending July 31,
1999 the maximum loss exposure with respect to this policy was increased to
$0.5 million per occurrence in all states except Texas and Florida, in which
the maximum loss exposure is $1.0 million per occurrence. The Company's total
exposure for general and professional liability claims for the policy period
March 31, 1999 through July 31, 1999 is limited to $23.5 million. Restricted
investments designated to pay such claims had an estimated fair value of $5.0
million at September 30, 1999.
In June 1999, the Company received a 90-day cancellation notice from its
general and professional liability ("GL/PL") carrier, Royal Surplus Lines
("Royal"). In July 1999 the Company binded a replacement GL/PL policy with
AIG, which resulted in a $4.4 million increase in annual premium and
elimination of the Royal policy's aggregate retention limit. The elimination
of the aggregate retention limit increased the cost of GL/PL claims by
approximately $13.0 million for the period from March 31, 1999 through
September 30, 1999.
For pre-1998 workers' compensation claims, Mariner Health was insured under
various types of insurance and financial plans, certain of which are loss-
sensitive in nature and design, which subject Mariner Health to additional
future costs for losses incurred in a prior year, but paid in subsequent
fiscal periods, as losses develop. Mariner Health's prior workers'
compensation carriers hold letters of credit from Mariner Health totaling
$5.1 million and $5.5 million at September 30, 1999 and 1998, respectively.
Total insurance reserves at September 30, 1999 include short-term reserves
of $28.3 million which are included in accrued payroll and related expenses in
the accompanying consolidated balance sheet and, $80.9 million of long-term
insurance reserves.
87
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19. DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity
of those instruments.
NOTES RECEIVABLE
Fair value for each significant note receivable was estimated based on the
net present value of cash flows that would be received on each note over the
remaining note term using current market interest rates rather than stated
interest rates. The discount factor was the estimated rate for long-term debt
in effect at September 30, 1999 and 1998. Further adjustments were made to the
value of the notes based on management's opinion of the credit risk of the
note obligee.
RESTRICTED INVESTMENTS
Fair values for the Company's restricted investments were based on quoted
market rates.
LONG-TERM DEBT
Fair values for each significant fixed or variable rate debt instrument
were estimated based on market quotes, where available, or the net present
value of cash flows that would be paid on each note over the remaining note
term using the Company's current incremental borrowing rate rather than the
stated interest rates on the notes. See Note 12.
INTEREST RATE SWAP AGREEMENTS
Fair values for the Company's various interest rate swap agreements were
based on market quotes which would be required to terminate the agreement.
The estimated values of the Company's financial instruments as of September
30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------
1999 1998
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents... $ 71,817 $ 71,817 $ 3,314 $ 3,314
Notes receivable............ 20,051 15,767 30,517 32,160
Restricted investments...... 69,188 69,188 88,467 88,467
Long-term debt.............. 2,141,844 1,587,140 2,024,115 1,981,561
Interest rate swap agree-
ments...................... -- (269) -- (6,196)
</TABLE>
NOTE 20. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade receivables. There have been, and
the Company expects that there will continue to be, a number of proposals to
limit reimbursement allowable to skilled nursing facilities. In addition, the
pharmacy group provides
88
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
services to unaffiliated skilled nursing facilities, many of which receive
their revenue from the Medicare or Medicaid programs and have been impacted by
the implementation of PPS. Should the related government agencies suspend or
significantly reduce contributions to the Medicare or Medicaid programs, the
Company's ability to collect on its receivables would be adversely affected.
Management believes that the remaining receivable balances from various
payors, including individuals involved in diverse activities, subject to
differing economic conditions, do not represent a concentration of credit risk
to the Company. Management continually monitors and adjusts its allowance for
doubtful accounts and contractual allowances associated with its receivables.
See Note 13. Federal law limits the degree to which states are permitted to
alter Medicaid programs.
NOTE 21. RELATED PARTY TRANSACTIONS
The Company leases 14 facilities under operating and capital leases from
certain organizations in which a board member of the Company has a significant
interest. For the period from August 1, 1998 to September 30, 1998, the
Company made cash payments on such lease obligations of approximately $1.2
million. During the year ended September 30, 1999 the Company made cash
payments on such lease obligations of approximately $7.5 million. Lease
obligations include approximately $88.8 million of minimum lease payments due
over the remaining lease terms. At September 30, 1999 the Company had total
receivables due from these organizations of approximately $5.3 million,
primarily as a result of working capital advances and unpaid management fees.
In addition the Company had two promissory notes due from organizations
associated with the board member totaling $1.6 million, which were guaranteed
by the board member. On October 13, 1999 the Company presented a demand notice
to the board member for collection of the amount currently due, under one of
the promissory notes of approximately $1.0 million in principal plus accrued
interest. The board member is disputing all amounts owed.
89
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 22. EARNINGS PER COMMON SHARE
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 was designed to simplify the standards for computing earnings per
share and increase the comparability of earnings per share data on an
international basis. SFAS 128 replaces the presentation of primary earnings
per share with a presentation of basic earnings per share and requires dual
presentation of basic and diluted earnings per share on the face of the
statement of income of all entities with complex capital structures. The
Company adopted SFAS 128 during the first quarter of fiscal 1998 and,
accordingly, earnings per share for all prior periods presented have been
restated to conform to the requirements of this new standard. The following
table sets forth the computation of basic and diluted earnings (loss) per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1999 1998 1997
----------- --------- -------
<S> <C> <C> <C>
Numerator for Basic and Diluted Earnings
Per Share:
Net income (loss) before extraordinary
item................................... $(1,778,282) $(198,377) $43,917
Extraordinary item...................... -- (11,275) --
----------- --------- -------
Net income (loss)....................... $(1,778,282) $(209,652) $43,917
=========== ========= =======
Denominator:
Denominator for basic earnings per
share-weighted average shares.......... 73,459 48,601 58,613
Effect of dilutive securities--Stock op-
tions.................................. -- -- 1,195
----------- --------- -------
Denominator for diluted earnings per
share-adjusted weighted-average shares
and assumed conversions................ 73,459 48,601 59,808
=========== ========= =======
Basic Earnings (Loss) Per Share:
Net income (loss) before extraordinary
item................................... $ (24.21) $ (4.08) $ 0.75
Extraordinary item...................... -- (0.23) --
----------- --------- -------
Net income (loss) per common share...... $ (24.21) $ (4.31) $ 0.75
=========== ========= =======
Diluted Earnings (Loss) Per Share:
Net income (loss) before extraordinary
item................................... $ (24.21) $ (4.08) $ 0.73
Extraordinary item...................... -- (0.23) --
----------- --------- -------
Net income (loss) per common share...... $ (24.21) $ (4.31) $ 0.73
=========== ========= =======
</TABLE>
The effect of dilutive securities for the years ended September 30, 1999
and 1998 have been excluded because the effect is antidilutive as a result of
the net loss for the periods.
NOTE 23. EMPLOYEE STOCK OPTION AND STOCK PURCHASE PLANS
The Company established an Employee Stock Option Plan in 1997 which
authorizes the granting of incentive stock options, nonqualified options, or
any combination of the foregoing to purchase up to 6,000,000 shares (2,000,000
shares prior to the three-for-one stock split) of the Company's common stock.
An additional 4,000,000 shares were authorized in July, 1998 in connection
with the Mariner Merger. See Note 5. The exercise price per share of common
stock with respect to each incentive stock option is the fair market value of
a share of common stock (defined as the closing price per share of the common
stock on the New York Stock Exchange) on the date such option is granted while
the exercise price per share of common stock with respect to a nonqualified
option is the fair market value of a share of common stock on the date such
option is granted or on a subsequent date or as otherwise provided in any
agreement with the recipient, but in no event will the
90
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exercise price with respect to a nonqualified option be less than 50% of the
fair market value of a share of common stock on the date of the grant. The
options have a term as fixed by the Stock Option Committee, but, in no event,
longer than ten years after the date of grant. Options are exercisable only by
the optionee and only while the optionee is an employee or nonemployee
director of the Company or, unless such optionee's employment is terminated
for cause, within three months after the optionee ceases to be an employee or
director of the Company. Options are exercisable for 12 months after the death
or permanent disability of an optionee. The option exercise price must be paid
in cash or, at the discretion of the Stock Option Committee, may be paid in
whole or in part in shares of common stock valued at fair market value on the
date of exercise. As of September 30, 1999 and 1998, there were 4,624,264 and
7,091,957, respectively, options granted and outstanding. All shares
outstanding as of September 30, 1997 that were not exercised prior to November
4, 1997, were cancelled and reissued as applicable in conjunction with the new
Plan. Similarly, Mariner Health Plan options were converted as of July 31,
1998.
The following is a summary of the stock option activity and related
information which has been adjusted to reflect the three-for-one stock split:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------ -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of Year................ 7,091,957 $ 13.97 3,901,404 $ 8.95 3,778,644 $ 9.18
Granted................. 2,091,500 3.07 7,877,856 13.74 645,972 8.30
Exercised............... -- -- (4,423,153) 9.05 (21,831) 6.86
Forfeited............... (4,559,193) 13.87 (264,150) 16.15 (501,381) 9.95
------------ ------- ------------ ------ ------------ ------
Outstanding at end of
year................... 4,624,264 $ 9.14 7,091,957 $13.97 3,901,404 $ 8.95
============ ======= ============ ====== ============ ======
Exercisable at end of
year................... 1,329,014 $ 10.99 974,457 $ 9.63 1,567,092 $ 7.71
============ ======= ============ ====== ============ ======
Price range............. $0.75-$46.45 $0.84-$46.45 $4.42-$12.92
============ ============ ============
Weighted average fair
value of
options granted during
the year............... $ 2.12 $ 7.84 $ 5.00
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
AVERAGE REMAINING
EXERCISE CONTRACTUAL
RANGE OPTIONS PRICE LIFE (YEARS)
----- --------- -------- -----------
<S> <C> <C> <C>
$ 0.75-$ 0.84............................. 30,411 $ 0.75 9.68
$ 2.19-$ 2.50............................. 1,096,000 $ 2.30 9.57
$ 4.19-$ 5.40............................. 621,876 $ 4.68 9.17
$ 7.05-$ 9.91............................. 489,260 $ 7.82 8.16
$11.00-$16.35.............................. 2,228,191 $13.50 8.55
$17.88-$46.45.............................. 158,526 $18.48 8.48
---------
4,624,264
=========
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
91
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS 123. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1999, 1998 and 1997 risk-free interest rates
ranging from 4.61% to 6.11%; a dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock ranging from 0.42 to 1.21;
and a weighted-average expected life of the options ranging from three to
eight years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for earnings per
share information):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1999 1998 1997
----------- --------- -------
<S> <C> <C> <C>
Pro forma net income (loss).................... $(1,778,494) $(212,251) $42,489
Pro forma earnings per share--basic............ $ (24.21) $ (4.37) $ 0.72
Pro forma earnings per share--diluted.......... $ (24.21) $ (4.37) $ 0.71
</TABLE>
The Company established an Employee Stock Purchase Plan effective October
1998 which was suspended effective April 1, 1999. A total of 4,000,000 shares
of the Company's common stock are authorized for purchase by eligible
employees. The provisions of the plan include eligibility for all full time
employees regularly working 20 or more hours per week, employee contributions
up to 15% of base pay, the purchase price being equal to 85% of the stock
price at the end of each semi-annual offering period, and an option to
purchase shares of stock or withdraw all payroll deductions at the end of the
purchase period. As of September 30, 1999 a total of 369,298 shares had been
issued under the plan and an additional 3,630,702 shares had been reserved for
future issuance.
NOTE 24. SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") requires
certain descriptive information to be provided about an enterprise's
reportable segments. This information includes the factors that management
uses to identify the reportable segments of an enterprise, the types of
products and services from which each reportable segment derives its revenues,
and how management measures segment profit and loss and segment assets. The
following paragraphs provide these disclosures for the Company.
DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH OPERATING
SEGMENT DERIVES ITS REVENUES
At September 30, 1999, the Company was organized into three reportable
segments: inpatient nursing services, pharmacy services and other. Prior to
the year ended September 30, 1999, the Company operated a therapy segment. The
operations relating to the therapy segment were divested or closed in 1999.
The Company's inpatient nursing home services business unit provides post-
acute care services to the public from its various nursing home sites in the
United States. The Company's pharmacy services business unit provides
pharmaceutical goods and services to affiliated and unaffiliated long-term and
post-acute care facilities from various pharmacy sites in the United States.
92
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
The Company evaluates the performance and allocates resources based on
profit or loss from operations before income taxes. The accounting policies of
the reportable segments are the same as those described in the summary of
significant accounting policies in Note 1. The Company accounts for
intersegment revenues at market prices.
FACTORS MANAGEMENT USED TO IDENTIFY THE ENTERPRISE'S REPORTABLE SEGMENTS
The Company's reportable segments are business units that offer different
services and products. The reportable segments are each managed separately
because they provide distinct services and products using different service
and production processes.
The following tables exhibit the segment reporting of the Company for the
years ended September 30, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
INPATIENT THERAPY
NURSING HOME PHARMACY ALL (SEGMENT
1999 SERVICES SERVICES OTHER DISPOSED OF) TOTAL
---- ------------ --------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers.............. $1,697,029 $ 281,717 $ 80,851 $ 205,367 $ 2,264,964
Intersegment revenues... -- 52,654 -- 101,265 153,919
Depreciation and amorti-
zation expense......... 55,619 13,020 1,476 10,364 80,479
Impairment of long-lived
assets................. 871,329 120,839 -- 3,764 995,932
Loss on disposal of as-
sets................... 3,518 -- -- 108,868 112,386
Recapitalization, indi-
rect merger, and other
expenses............... 80 3,516 -- 18,674 22,270
Interest expense (in-
come), net............. 19,111 89 (3,309) (39) 15,852
Segment net income
(loss)................. (928,610) (160,296) 1,521 (154,631) (1,242,016)
Segment total assets.... 728,807 94,808 111,109 73,628 1,008,352
</TABLE>
<TABLE>
<CAPTION>
INPATIENT THERAPY
NURSING HOME PHARMACY ALL (SEGMENT
1998 SERVICES SERVICES OTHER DISPOSED OF) TOTAL
---- ------------ -------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers.............. $1,503,415 $230,313 $ 35,508 $267,484 $2,036,720
Intersegment revenues... -- 34,617 14,799 103,144 152,560
Depreciation and amorti-
zation expense......... 42,492 8,785 615 11,964 63,856
Impairment of long-lived
assets................. 102,617 28 -- 32,611 135,256
Recapitalization, indi-
rect merger, and other
expenses............... 8 8,700 -- 41 8,749
Interest expense (in-
come), net............. 9,379 15 (5,756) 37 3,675
Segment net income
(loss)................. 9,584 21,279 (7,600) (7,921) 15,342
Segment total assets.... 1,708,866 254,918 126,116 382,889 2,469,289
</TABLE>
<TABLE>
<CAPTION>
INPATIENT THERAPY
NURSING HOME PHARMACY ALL (SEGMENT
1997 SERVICES SERVICES OTHER DISPOSED OF) TOTAL
---- ------------ -------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers.............. $751,549 $196,748 $ 121 $195,368 $1,143,786
Intersegment revenues... -- 24,369 29,592 66,786 120,747
Depreciation and amorti-
zation expense......... 23,646 6,714 26 7,862 38,248
Interest expense (in-
come), net............. (729) 66 (3,087) 151 (3,599)
Segment net income...... 86,347 26,261 3,570 14,661 130,839
Segment total assets.... 458,869 175,665 84,088 179,143 897,765
</TABLE>
93
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following tables reconcile the Company's segment reporting to the
totals on the Company's consolidated financial statements for the years ended
September 30, 1999, 1998, and 1997 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
External revenues for reportable seg-
ments................................. $ 2,264,964 $ 2,036,720 $1,143,786
Intersegment revenues for reportable
segments.............................. 153,919 152,560 120,747
Corporate overhead..................... 7,616 5,226 (3,498)
Elimination of intersegment revenue.... (153,919) (158,977) (120,747)
----------- ----------- ----------
Consolidated revenues................... $ 2,272,580 $ 2,035,529 $1,140,288
=========== =========== ==========
Net income (loss):
Net income for reportable segments..... $(1,242,016) $ 15,342 $ 130,839
Corporate overhead..................... (536,266) (224,994) (86,922)
----------- ----------- ----------
Consolidated net income (loss).......... $(1,778,282) $ (209,652) $ 43,917
=========== =========== ==========
<CAPTION>
SEPTEMBER 30,
------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Assets:
Assets for reportable segments......... $ 1,008,352 $ 2,469,289 $ 897,765
Corporate overhead assets.............. 1,525,942 1,836,279 578,219
Elimination of intersegment assets..... (1,259,323) (1,268,917) (601,617)
----------- ----------- ----------
Consolidated assets..................... $ 1,274,971 $ 3,036,651 $ 874,367
=========== =========== ==========
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Depreciation and amortization expense:
Reportable segments.................... $ 80,479 $ 63,856 $ 38,248
Corporate overhead..................... 40,047 11,188 1,061
----------- ----------- ----------
Consolidated depreciation and amortiza-
tion expense........................... $ 120,526 $ 75,044 $ 39,309
=========== =========== ==========
Impairment of long-lived assets:
Reportable segments.................... $ 995,932 $ 135,256 --
Corporate overhead..................... -- 527 --
----------- ----------- ----------
Consolidated impairment of long-lived
assets................................. $ 995,932 $ 135,783 --
=========== =========== ==========
Loss on disposal of assets:
Reportable segments.................... $ 112,386 -- --
Corporate overhead..................... 130,349 -- --
----------- ----------- ----------
Consolidated loss on disposal of assets. $ 242,735 -- --
=========== =========== ==========
Recapitalization, indirect merger, and
other expenses:
Reportable segments.................... $ 22,270 $ 8,749 --
Corporate overhead..................... 43,147 78,587 $ 2,588
----------- ----------- ----------
Consolidated recapitalization, indirect
merger, and other expenses............. $ 65,417 $ 87,336 $ 2,588
=========== =========== ==========
Interest expense (income), net:
Reportable segments.................... $ 15,852 $ 3,675 $ (3,599)
Corporate overhead..................... 179,409 110,627 20,451
----------- ----------- ----------
Consolidated interest expense (income),
net.................................... $ 195,261 $ 114,302 $ 16,852
=========== =========== ==========
Purchases of property and equipment:
Inpatient nursing home services........ $ 51,539 $ 46,243 $ 21,492
Pharmacy services...................... 10,978 13,367 9,445
All other.............................. 81 4,167 5,377
Corporate overhead..................... 10,653 1,391 647
----------- ----------- ----------
Consolidated purchases of property and
equipment.............................. $ 73,251 $ 65,168 $ 36,961
=========== =========== ==========
</TABLE>
94
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 25. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The table below sets forth summarized quarterly financial data for the
years ended September 30, 1999 and 1998 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
1999 QUARTER QUARTER QUARTER QUARTER
---- ----------- --------- -------- --------
<S> <C> <C> <C> <C>
Net revenues............ $ 498,055 $ 487,135 (b) $614,710 $672,680
Income (loss) from oper-
ations................. (1,199,096)(a) (358,641)(c) (31,786)(d) 6,388 (e)
Loss before income taxes
and minority interest.. (1,255,181) (406,604) (78,713) (37,898)
Minority interest....... (601) 880 460 (625)
Net loss................ $(1,254,782) $(405,724) $(78,753) $(39,023)
=========== ========= ======== ========
Loss per share:
Basic and diluted..... $ (17.03) $ (5.51) $ (1.07) $ (0.53)
=========== ========= ======== ========
Weighted average common
and common equivalent
shares outstanding:
Basic and diluted..... 73,695 73,581 73,333 73,277
=========== ========= ======== ========
</TABLE>
- --------
(a) Includes $65.4 million indirect merger and other expenses; $995.9 million
impairment charge; $11.2 million loss on disposal of assets; $24.6 million
additional provision for bad debts; and $27.6 million for change in
estimate and adjustments related to reduction in Medicare reimbursement
revenue.
(b) Includes $94.4 million adjustment for change in estimate related to
reduction in Medicare reimbursement revenue.
(c) Includes $231.5 million for loss on disposal of assets and $25.0 million
in indirect merger and other expenses.
(d) Includes $5.1 million for indirect merger and other expenses and $29.6
provision for bad debts.
(e) Includes $2.0 million for indirect merger and other expenses and $24.3
provision for bad debts.
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
1998 QUARTER QUARTER QUARTER QUARTER
---- --------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues...................... $ 632,697 $494,065 $487,161 $421,606
Income (loss) from operations (132,570)(a) 29,728 22,591 (13,821)
Income (loss) before income taxes
and minority interest............ (171,455) 1,601 (5,371) (33,149)
Minority interest................. (16) (247) (127) (172)
Loss before extraordinary loss.... (164,144) (242) (4,473) (29,518)
Extraordinary loss on early extin-
guishment of debt................ -- -- -- (11,275)
Net Loss.......................... $(164,144) $ (242) $ (4,473) $(40,793)
========= ======== ======== ========
Loss per share:
Basic........................... $ (2.60) $ (0.01) $ (0.11) $ (0.86)
========= ======== ======== ========
Diluted......................... $ (2.60) $ (0.01) $ (0.11) $ (0.86)
========= ======== ======== ========
Weighted average common and common
equivalent shares outstanding:
Basic........................... 63,150 42,223 41,208 47,590
========= ======== ======== ========
Diluted......................... 63,150 42,223 41,208 47,590
========= ======== ======== ========
</TABLE>
- --------
(a) Includes $21.5 million recapitalization, indirect merger and other
expenses and $135.8 million impairment charge.
95
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MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 26. SUBSEQUENT EVENTS
On October 1, 1999 the Company announced that Mariner Health did not make
the interest payments due October 1, 1999 on the Mariner Health Senior Credit
Facility, the Mariner Health Term Loan Facility or the Mariner Health Senior
Subordinated Notes. The Company also announced that it would not make the
interest payment due November 1, 1999 on the Senior Subordinated Notes.
Also on October 1, 1999 the Company announced that it was notified by the
New York Stock Exchange ("NYSE") that it had fallen below its continued
listing criteria and would be delisted. The Company ceased trading on the NYSE
on November 2, 1999 and commenced trading on the over-the-counter bulletin
board.
On October 13, 1999 the Company presented a demand notice to a board member
for non-payment of a promissory note. The board member is disputing all
amounts owed as presented on the demand notice.
On November 19, 1999 the Company announced that it did not make the
interest payments due on its Senior Credit Facility. The lenders under the
Senior Credit Facility signed a forbearance agreement, pursuant to which they
have agreed not to take any remedial action with respect to such events of
default (including acceleration of their debt), subject to no new events of
default occurring. The forbearance agreement did not waive any events of
default and expired on January 14, 2000.
Subsequent to September 30, 1999, PHCMI and GranCare received notice from
Omega asserting that PHCMI was in default of its obligation to maintain its
required minimum tangible net worth. Omega demanded that such default be cured
within 30 days, either by PHCMI or by GranCare under its guaranty of PHCMI's
compliance with such minimum tangible net worth test, or else an event of
default would exist under the Omega loan documents. The Company received
notice in late December, 1999, declaring an event of default as a result of
the alleged breach of the tangible net worth covenants contained in the Omega
Loan Documents and accelerating all amounts due under obligations to Omega.
Effective January, 2000, PHCMI ceased making its monthly interest payments on
the Omega Note. Omega subsequently initiated foreclosure proceedings on three
skilled nursing facilities located in North Carolina. Hearings on the
foreclosures are scheduled for February 3, 2000.
On January 18, 2000, the Company and substantially all of its subsidiaries,
including Mariner Health and its subsidiaries, filed voluntary petitions in
the United States Bankruptcy Court for the District of Delaware under Title 11
of the United States Code, 11 U.S.C. (S)(S) 101, et seq. (the "Bankruptcy
Code"). While this action will likely constitute a default under the Company's
and such subsidiaries various financing arrangements, Section 362 of the
Bankruptcy Code imposes an automatic stay that will generally preclude the
creditors and other interested parties under such arrangements from taking any
remedial action in response to any such resulting default without prior
Bankruptcy Court approval. The Company's need to seek relief afforded by the
Bankruptcy Code is due, in part, to the significant financial pressure created
by the Balanced Budget Act of 1997 and its implementation, which reduced the
Company's Medicare reimbursement rate by approximately $115 per resident, per
day.
In connection with the Chapter 11 Filings, the Company obtained a
commitment for $100 million in debtor-in-possession financing from a group of
banks led by The Chase Manhattan Bank. Mariner Health also obtained a
commitment for $50 million in DIP financing from a group of banks led by PNC
Bank.
On December 20, 1999, Apollo Management, LP and its affiliates sold
substantially all the Company's common stock, par value $.01 per share,
beneficially owned by Apollo. In connection with this action, all five of the
Apollo designees to the Company's Board of Directors resigned as Directors
effective January 2, 2000. The right to designate members of the Company's
Board of Directors was not assigned to the purchaser of the Common Stock sold
by Apollo.
96
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth information concerning the executive management
and directors of the Company, including each person's name, age as of December
1, 1999 and principal occupation or employment during the past five years.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Francis W. Cash......... 57 Chairman of the Board, Chief Executive Officer, President and Director
George D. Morgan........ 47 Executive Vice President and Chief Financial Officer
C. Christian Winkle..... 36 Executive Vice President
Susan Thomas Whittle.... 52 Senior Vice President, General Counsel and Secretary
Gene E. Burleson........ 59 Director
Joel S. Kanter.......... 43 Director
Samuel B. Kellett....... 54 Director
William G. Petty, Jr.... 54 Director
</TABLE>
Francis W. Cash is Chairman of the Board, Chief Executive Officer,
President and a director of the Company and has served in this capacity since
September 8, 1999. From July 1995 to August 1999, Mr. Cash served as President
and Chief Executive of Officer of Red Roof Inns, Inc. ("Red Roof Inns"). He
also served as Chairman of the Board of Red Roof Inns from June 1996 to August
1999. Prior to his service at Red Roof Inns, Mr. Cash served as President and
Chief Operating Officer of NovaCare, Inc. from October 1992 to June 1995.
Prior to that, Mr. Cash served in a number of senior executive positions for
18 years at Marriott Corporation, most recently as President, Marriott Service
Group.
George D. Morgan is Executive Vice President and Chief Financial Officer of
the Company and has served in this capacity since January 25, 1999. From
September 1994 to January 1999, Mr. Morgan served as a senior operating and
senior corporate officer with Columbia/HCA Healthcare Corporation. His
positions of responsibility included Chief Financial Officer, then Chief
Operating Officer of the Western Group from September 1994 through April 1996;
President of the Ambulatory Surgery Division from April 1996 through June
1998; and Senior Vice President--Managed Care from July 1998 until January
1999. Prior to Columbia/HCA, Mr. Morgan was a regional CFO, then VP of
Financial Operations for Republic/OrNda Healthcorp from December 1989 through
September 1994.
C. Christian Winkle is Executive Vice President of the Company and has
served in such capacity since January 27, 1999. Prior to that, Mr. Winkle
served as Executive Vice President and Chief Operating Officer of Integrated
Health Services, Inc. ("IHS"). From November 1995 to April 1997, he served as
Executive Vice President--Field Operations of IHS' owned and leased
facilities, and from March 1994 to November 1995, he served as Senior Vice
President--Operations of IHS. Prior to serving as Senior Vice President--
Operations of IHS, Mr. Winkle served as Regional Vice President of Operations
and President--MSU Product Development of IHS from September 1992 to March
1994.
Susan Thomas Whittle is Senior Vice President, General Counsel and
Secretary of the Company and has served in such capacity since November 4,
1997. Prior to that, Ms. Whittle served as Vice President, General Counsel and
Secretary of LCA from September 1993 to November 4, 1997. Before joining LCA,
Ms. Whittle was a partner with the law firms of Clark, Thomas & Winters of
Austin, Texas since February 1992, and Wood, Lucksinger & Epstein, a national
healthcare law firm from May 1981 through February 1992.
97
<PAGE>
Gene E. Burleson has served as a director of the Company since November 4,
1997. Mr. Burleson currently serves as Chairman of the Board of Argonne
Properties, Inc., a private investment company. Prior to that, Mr. Burleson
served as the Chairman of the Board of GranCare, Inc., a Delaware corporation,
and its predecessor, GranCare, Inc., a California corporation ("GranCare-
California") from 1988 to November 4, 1997. Additionally, Mr. Burleson served
as President and Chief Executive Officer of GranCare-California from December
1990 to February 1997. Upon completion of the merger between GranCare-
California and Vitalink Pharmacy Services, Inc. ("Vitalink") in February 1997,
Mr. Burleson became Chief Executive Officer and a director of Vitalink. Mr.
Burleson resigned as Chief Executive Officer and as a director of Vitalink in
August 1997. Mr. Burleson currently serves on the boards of directors of three
other public companies: Alternative Living Services, Inc. ("ALS"), a developer
and manager of assisted living facilities; Decker Outdoor Corp., a footwear
manufacturer; and Tower Hill Capital Group, a provider of small business
financial and consulting services.
Joel S. Kanter has served as a director of the Company since November 4,
1997. From February 1995 to the present, Mr. Kanter has served as the Chief
Executive Officer of Walnut Financial Services, Inc., a provider of small
business financial and consulting services, including venture capital and
other financing. From 1986 to the present, Mr. Kanter has been the President
of Windy City, Inc., a private investment company, and from 1988 to February
1995, he served as a consultant to Walnut Capital Corporation, a closely-held
investment management and advisory firm. Mr. Kanter also serves on the boards
of directors of four other publicly held companies: I-Flow Corporation, a home
infusion pump manufacturer; Encore Medical Corporation, a manufacturer of
implant devices; Magna Labs, Inc., a manufacturer of resonance imaging
systems; and THCG, Inc., a provider of investment banking services to Internet
and e-commerce concerns.
Samuel B. Kellett has served as a director of the Company since July 31,
1998. Prior to this, Mr. Kellett served as a director of Mariner Health since
July 21, 1997. Mr. Kellett has been owner and president of Samuel B. Kellett
Investments since January 1996. Mr. Kellett was President of Convalescent
Services, Inc., a company engaged in the long-term healthcare business, from
1978 to January 1996.
William G. Petty, Jr. has served as a director of the Company since
November 4, 1997. Mr. Petty served as a director of GranCare from July 1995 by
virtue of GranCare's merger with Evergreen Healthcare, Inc., a publicly held
long-term care provider ("Evergreen"). Since July 1996, Mr. Petty has been a
Managing Director of Beecken, Petty & Company. Beecken Petty & Company is the
general partner of Healthcare Equity Partners, LP, a venture capital
partnership. Mr. Petty served as Chairman of the Board of Directors, President
and Chief Executive Officer of Evergreen from June 1993 to July 1995 and
served as President and Chief Executive Officer of Evergreen Healthcare Ltd.,
L.P., an affiliate of Evergreen, from 1988 to 1992. Mr. Petty also served as
Chairman of the Board, Chief Executive Officer and President of National
Heritage, Inc. from October 1992 to June 1993. Mr. Petty has been the Chairman
of the Board of Alterra Healthcare, Inc., a provider of assisted living
services, since 1993. Mr. Petty also served as the Chief Executive Officer of
ALS from 1993 until February 1996.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the federal securities laws, the Company's directors and executive
officers, and any persons holding more than 10% of the Common Stock
outstanding, are required to report their initial ownership of Common Stock
and any subsequent changes in that ownership to the Securities and Exchange
Commission and the exchange upon which the Company's securities are traded.
Specific due dates for these reports have been established and the Company is
required to disclose any failure to file by these dates during the Company's
most recent fiscal year. To the Company's knowledge, all of these filing
requirements were satisfied. In making these disclosures, the Company has
relied solely on its review of copies of the reports that have been submitted
to the Company with respect to its most recent fiscal year.
98
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation will appear in the Company's Proxy
Statement for the 2000 annual meeting of stockholders, which will be filed
with the Securities and Exchange Commission and is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on security ownership of certain beneficial owners will appear
in the Company's Proxy Statement for the 2000 annual meeting of stockholders,
which will be filed with the Securities and Exchange Commission and is
incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will
appear in the Company's Proxy Statement for the 2000 annual meeting of
stockholders, which will be filed with the Securities and Exchange Commission
and is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)DOCUMENTS FILED AS PART OF THIS REPORT:
1. FINANCIAL STATEMENTS
The following reports and financial statements are filed herewith on the
pages indicated:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors......................................... 50
Consolidated Balance Sheets at September 30, 1998 and 1999............. 51
Consolidated Statements of Operations for Fiscal Years 1997, 1998 and
1999.................................................................. 52
Consolidated Statements of Stockholders' (Deficit) Equity for Fiscal
Years 1997, 1998 and 1999............................................. 53
Consolidated Statements of Cash Flows for Fiscal Years 1997, 1998 and
1999.................................................................. 54
Notes to Consolidated Financial Statements............................. 55
</TABLE>
2. FINANCIAL STATEMENT SCHEDULE
The following schedule is filed herewith:
Schedule II--Valuation and Qualifying Accounts and Reserves
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and, therefore,
have been omitted.
99
<PAGE>
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
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<C> <S>
*2.1 Agreement and Plan of Merger, dated as of April 13, 1998, among the
Registrant, Mariner Health Group, Inc. ("Mariner Health") and Paragon
Acquisition Sub, Inc. ("Merger Sub") (Annex I to Registrant's
Registration Statement on Form S-4, Registration No. 333-57339, and
incorporated herein by reference).
*2.2 Amended and Restated Agreement and Plan of Merger dated September 17,
1997 among Apollo Management, L.P. ("Apollo"), Apollo LCA Acquisition
Corp. and Living Centers of America, Inc. ("LCA") (filed as Annex I
to Registrant's Registration Statement on Form S-4, Registration
No. 333-36525, and incorporated herein by reference).
*2.3 Amended and Restated Agreement and Plan of Merger dated September 17,
1997 among LCA, GranCare, Inc.("GranCare"), Apollo and LCA
Acquisition Sub, Inc. (filed as Annex II to Registrant's Registration
Statement on Form S-4, Registration No. 333-36525, and incorporated
herein by reference).
*3.1 Second Amended and Restated Certificate of Incorporation of the
Registrant (filed as Annex VIII to Registrant's Registration
Statement on Form S-4, Registration No. 333-57339, and incorporated
herein by reference).
*3.2 Second Amended and Restated Bylaws of the Registrant (filed as Annex
IX to Registrant's Registration Statement on Form S-4, Registration
No. 333-57339, and incorporated herein by reference).
*4.1 Form of Common Stock Certificate of the Registrant (filed as Exhibit
4.1 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998, and incorporated herein by reference).
*4.2 Amended and Restated Stockholders' Agreement dated as of November 25,
1998 by and among the Registrant, Apollo and certain other investors
(filed as Exhibit 4.2 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1998, and incorporated herein
by reference).
*4.3 Registration Rights Agreement dated as of November 4, 1997 among the
Registrant, Apollo and certain other investors (filed as Exhibit 4.7
to Registrant's Registration Statement on Form S-4, Registration No.
333-36525, and incorporated herein by reference).
*4.4 Registration Rights Agreement dated as of May 1, 1998 between the
Registrant and Daniel G. Schmidt III (filed as Exhibit 4.4 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference).
*4.5 Registration Rights Agreement dated as of July 13, 1998 by and among
the Registrant, Rembert T. Cribb and Michael E. Fitzgerald (filed as
Exhibit 4.5 to the Registrant's Annual Report on Form 10 K for the
fiscal year ended September 30, 1998, and incorporated herein by
reference).
*4.6 Indenture dated as of November 4, 1997, between the Registrant and
IBJ Schroder Bank & Trust Company (the "Company Indenture") (filed as
Exhibit 4.5 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997, and incorporated herein by
reference).
*4.7 10 1/2% Senior Subordinated Discount Note Due 2007 pertaining to the
Company Indenture (filed as Exhibit 4.6 to the Registrant's
Registration Statement on Form S-4, Registration No. 333-43663, and
incorporated herein by reference).
*4.8 9 1/2% Senior Subordinated Note Due 2007 pertaining to the Company
Indenture (filed as Exhibit 4.5 to the Registrant's Registration
Statement on Form S-4, Registration No. 333-43663, and incorporated
herein by reference).
*4.9 Indenture dated as of April 4, 1996 between Mariner Health and State
Street Bank and Trust Company, as trustee (the "Mariner Health
Indenture"), including (i) the form of 9% Senior Subordinated Note
due 2006, Series A and (ii) the form of 9% Senior Subordinated Note
due 2006, Series B (Incorporated by reference to Exhibits 4.1, 4.2,
and 10.1 to Mariner Health's Current Report on Form 8-K dated April
4, 1996).
</TABLE>
100
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<TABLE>
<CAPTION>
EXHIBITS
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<C> <S>
*4.10 Amendment No. 1 to Mariner Health Indenture, dated September 11, 1998
(filed as Exhibit 4.10 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1998, and incorporated herein
by reference).
*10.1 Agreement Regarding Certain Kellett Issues dated June 19, 1998 by and
among Mariner Health, Mariner Health Care of Nashville, Inc., Stiles
A. Kellett, Jr., Samuel B. Kellett, certain partnerships controlled
by the Kelletts, and the Registrant (filed as Exhibit 10.8 to the
Registrant's Registration Statement on Form S-4, Registration No.
333-57339, and incorporated herein by reference).
*10.2 Second Amendment of Amended and Restated Operating Lease dated June
19, 1998, by and between Belleair East Medical Investors, Ltd. (L.P.)
and Mariner Health Care of Nashville, Inc. (filed as Exhibit 10.2 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference).
*10.3 Second Amendment of Amended and Restated Operating Lease dated June
19, 1998, by and between Port Charlotte Health Care Associates, Ltd.
(L.P.) and Mariner Health Care of Nashville, Inc. (filed as Exhibit
10.3 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998, and incorporated herein by reference).
*10.4 First Amendment of Amended and Restated Operating Lease dated June
19, 1998, by and between Denver Medical Investors, Ltd. (L.P.) and
Mariner Health Care of Nashville, Inc. (filed as Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference).
*10.5 +Employment Agreement between the Registrant and Susan Thomas Whittle
(filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997 and incorporated herein
by reference).
*10.6 +Form of Employment Agreement entered into between the Registrant and
its Senior Vice Presidents (filed as Exhibit 10.14 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference).
*10.7 +Form of Employment Agreement entered into between the Registrant and
its Vice Presidents (filed as Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30,
1997 and incorporated herein by reference).
*10.8 +Paragon Health Network, Inc. 1997 Long-Term Incentive Plan (filed as
Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997 and incorporated herein by
reference).
*10.9 +First Amendment to Paragon Health Network, Inc. 1997 Long-Term
Incentive Plan (filed as Exhibit 10.17 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998, and
incorporated herein by reference).
*10.10 +Paragon Health Network, Inc. Incentive Compensation Plan (filed as
Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997 and incorporated herein by
Reference).
*10.11 +New GranCare, Inc. 1996 Stock Incentive Plan (filed with Amendment
No. 1 to GranCare's Registration Statement on Form S-1, Registration
No. 333-19097, and incorporated herein by Reference).
*10.12 First Amendment to the New GranCare, Inc. 1996 Stock Incentive Plan
(filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-
K for the fiscal year ended September 30, 1998, and incorporated
herein by reference).
*10.13 +New GranCare, Inc. 1996 Replacement Stock Option Plan (filed with
Amendment No. 1 to GranCare's Registration Statement on Form S-1,
Registration No. 333-19097, and incorporated herein by reference).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBITS
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<C> <S>
*10.14 +First Amendment to the New GranCare, Inc. 1996 Replacement Stock
Option Plan (filed as Exhibit 10.22 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended September 30, 1998, and
incorporated herein by reference).
*10.15 +New GranCare, Inc. Outside Directors' Stock Incentive Plan (filed
with Amendment No. 1 to GranCare's Registration Statement on Form S-
1, Registration No. 333-19097, and incorporated herein by reference).
*10.16 +First Amendment to the New GranCare, Inc. Outside Directors Stock
Incentive Plan (filed as Exhibit 10.24 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998, and
incorporated herein by reference).
*10.17 +Second Amendment to the New GranCare, Inc. Outside Directors Stock
Incentive Plan (filed as Exhibit 10.25 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998, and
incorporated herein by reference).
*10.18 Indemnification Agreement dated as of February 21, 1992 between LCA
and the ARA Group, Inc. (filed as Exhibit 10.4 to Registrant's
Registration Statement on Form S-1, Registration No. 33-44726, and
incorporated herein by reference).
*10.19 Assignment Agreement dated as of February 21, 1992 between LCA and
the ARA Group, Inc. (filed as Exhibit 10.6 to Registrant's
Registration Statement on Form S-1, Registration No. 33-44726, and
Incorporated herein by reference).
*10.20 Termination and Release Agreement dated as of September 3, 1997, by
and among GranCare, Manor Care, Inc. ("Manor Care") and Vitalink
Pharmacy Services, Inc. ("Vitalink"), Apollo and LCA (filed as
Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997 and incorporated herein by
reference).
*10.21 Letter Agreement Regarding Liquidated Damages Calculation in
Pharmaceutical Supply Agreements Dated September 3, 1997, by and
among GranCare, TeamCare, Inc. and Vitalink (filed as Exhibit 10.29
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 and incorporated herein by reference).
*10.22 Letter Agreement Regarding Preferred Provider Arrangement dated
August 29, 1997, by and among Vitalink and GranCare (filed as Exhibit
10.30 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 and incorporated herein by reference).
*10.23 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") (filed as Exhibit 10.31 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 and incorporated herein by reference).
*10.24 Collateral Pledge Agreement dated as of October 31, 1997 by and
between the Registrant and HRPT (filed as Exhibit 10.32 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 and incorporated herein by reference).
*10.25 Guaranty by GranCare dated as of October 31, 1997 in favor of HRPT
(filed as Exhibit 10.33 to the Registrant's Annual Report on Form 10-
K for the fiscal year ended September 30, 1997 and Incorporated
herein by reference).
*10.26 Guaranty by the Registrant dated as of October 31, 1997 in favor of
HRPT (filed as Exhibit 10.34 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1997 and
incorporated herein by reference).
*10.27 Restructure and Asset Exchange Agreement dated as of October 31, 1997
among HRPT, GranCare, AMS and GCI Health Care Centers, Inc. ("GCI
Health Care") (filed as Exhibit 10.35 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1997 and
incorporated herein by reference).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
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<C> <S>
*10.28 Subordination Agreement dated as of October 31, 1997 by and among HRPT
and the corporations listed on the signature page thereto (filed as
Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997 and incorporated herein by
reference).
*10.29 Amendment to GCI Health Care Centers, Inc. Facility Leases dated as of
October 31, 1997 (filed as Exhibit 10.37 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1997 and
incorporated herein by reference).
*10.30 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 (filed with GranCare's Current Report on Form 8-K
filed January 13, 1994, and incorporated herein by reference).
*10.31 Master Lease Document dated December 28, 1990, between HRPT and AMS
(filed with GranCare's Registration Statement on Form S-1,
Registration No. 33-42595, and incorporated herein by reference).
*10.32 Form of Guaranty dated December 28, 1990, by American Medical
Services, Inc. and each of its subsidiaries in favor of HRPT (filed
with GranCare's Registration Statement on Form S-1, Registration No.
33-42595, and incorporated herein by reference).
*10.33 Amendment to Master Lease between HRPT and AMS dated as of December
29, 1993 (filed with GranCare's Current Report on Form 8-K filed
January 13, 1994, and incorporated herein by reference).
*10.34 Amendment to Master Lease Document and Facility Lease between GCI
Health Care and HRPT dated as of October 31, 1994 (filed with
GranCare's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 and incorporated herein by reference).
*10.35 Amendment to Master Lease Document and Facility Lease between AMS and
HRPT dated as of October 31, 1994 (filed with GranCare's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference).
*10.36 Mortgage and Security Agreement from AMS to HRPT for the Northwest and
River Hills West Health Care Centers dated as of March 31, 1995 (filed
with GranCare's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 and incorporated herein by reference).
*10.37 Assumption Agreement by GranCare in favor of HRPT (filed with
GranCare's Amendment No. 1 to Registration Statement on Form S-1,
Registration No. 333-19097, and incorporated herein by reference).
*10.38 Consent and Amendment to Transaction Documents dated as of December
31, 1996 (the "Consent and Amendment") among GCI Health Care,
GranCare, Vitalink, HRPT and AMS (filed with GranCare's Amendment No.
1 to Registration Statement on Form S-1, Registration No. 333-19097,
and incorporated herein by reference).
*10.39 Credit Agreement for $890,000,000 dated as of November 4, 1997, by and
among the Registrant, 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 (filed as
Exhibit 10.48 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997 and incorporated herein by
reference).
*10.40 First Amendment, dated as of July 8, 1998, by and among the
Registrant, The Chase Manhattan Bank, as Administrative Agent,
NationsBank, N.A., as Documentation Agent, and the several lenders
parties thereto, relating to the Credit Agreement identified in Item
10.47 above (filed as Exhibit 10.48 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended September 30, 1998, and
incorporated herein by reference).
*10.41 Second Amendment, dated as of December 22, 1998, by and among the
Registrant, The Chase Manhattan Bank, as Administrative Agent,
NationsBank, N.A., as Documentation Agent, and the several lender
parties thereto, relating to the Credit Agreement identified in Item
10.47 above (filed as Exhibit 10.49 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended September 30, 1998, and
incorporated herein by reference).
</TABLE>
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<TABLE>
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EXHIBIT
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<C> <S>
*10.42 Guarantee and Collateral Agreement dated as of November 4, 1997, by
and among the Registrant and certain of its subsidiaries in favor of
The Chase Manhattan Bank, as Collateral Agent (filed as Exhibit 10.49
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 and incorporated herein by reference).
*10.43 Amended and Restated Participation Agreement ("FBTC Participation
Agreement") dated November 4, 1997, by and among LCA, as Lessee, FBTC
Leasing Corp. ("FBTC"), 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 (filed as Exhibit 10.50 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 and incorporated herein by reference).
*10.44 First Amendment to FBTC Participation Agreement dated July 8, 1998
(filed as Exhibit 10.52 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1998, and incorporated herein
by reference).
*10.45 Second Amendment to FBTC Participation Agreement dated December 22,
1998 (filed as Exhibit 10.53 to the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1998, and incorporated
herein by reference).
*10.46 Amended and Restated Guaranty ("FBTC Guarantee") dated November 4,
1997, by and among the Registrant and certain other guarantors
signatory thereto in favor of The Chase Manhattan Bank, as
Administrative Agent (filed as Exhibit 10.51 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30,
1997 and incorporated herein by reference).
*10.47 First Amendment to FBTC Guarantee dated July 8, 1998 (filed as Exhibit
10.55 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998, and incorporated herein by reference).
*10.48 Second Amendment to FBTC Guarantee dated December 22, 1998 (filed as
Exhibit 10.56 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998, and incorporated herein by
reference).
*10.49 Lease dated October 10, 1996, between FBTC, as Lessor, and LCA, as
Lessee (filed as Exhibit 10.52 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1997 and
incorporated herein by reference).
*10.50 Amendment to Lease dated as of November 4, 1997 between FBTC and LCA
(filed as Exhibit 10.53 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997 and incorporated herein
by reference).
*10.51 Form of Mortgage and Security Agreement with respect to five of
GranCare's facilities located in the State of Illinois to secure a
loan in the aggregate principal amount of $16.5 million from Health
Care Capital Finance, Inc., each agreement dated as of March 23, 1995
(filed with GranCare's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 and incorporated herein by reference).
*10.52 Credit Agreement dated as of May 18, 1994 by and among Mariner Health,
PNC Bank, N.A. ("PNC Bank") and the other banks party thereto. (filed
as Exhibit 10.1 to Mariner Health's Quarterly Report on Form 10-Q/A
for the quarter ended June 30, 1994 and incorporated herein by
reference).
*10.53 +1995 Non-Employee Director Stock Option Plan (filed as Exhibit 4.4 to
Mariner Health's Form S-8, filed November 21, 1995, and incorporated
herein by reference).
*10.54 +Defined Care Partner Agreement, dated as of January 5, 1996, by and
among AmHS Purchasing Partners, L.P. ("AmHSPP"), Mariner Health Care,
Inc. and Mariner Health, including: Exhibit A, Warrant to Purchase
210,000 Shares of Mariner Health's Common Stock by and among AmHSPP
and Mariner Health; and Exhibit B, Warrant to Purchase 1,890,000
Shares of Mariner Health's Common Stock by and among AmHSPP and
Mariner Health (filed as Exhibit 10.36 to Mariner Health's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference).
</TABLE>
104
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<TABLE>
<CAPTION>
EXHIBIT
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<C> <S>
*10.55 Amended and Restated $250,000,000 Revolving Credit Facility Credit
Agreement (through Amendment No. 18) dated December 23, 1998, by and
among Mariner Health, PNC Bank, as Administrative Agent, First Union,
as Syndication Agent, and the financial institutions referred to
therein as "Banks" (filed as Exhibit 10.63 to the Registrant's Form
10-K for the fiscal year ended September 30, 1998 and incorporated
herein by reference).
*10.56 +Mariner Savings Plan (filed as Exhibit 10.64 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30,
1998 and incorporated herein by reference).
*10.57 +First Amendment to Mariner Savings Plan (filed as Exhibit 10.65 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and incorporated herein by reference).
*10.58 Guaranty and Suretyship Agreement dated as of May 18, 1994, from
various subsidiaries of Mariner Health signatory thereto in favor of
PNC Bank, as Agent (filed as Exhibit 10.66 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998 and
incorporated herein by reference).
*10.59 Collateral Agency and Sharing Agreement dated as of December 23, 1998,
by and among Mariner Health, its subsidiary guarantors and PNC Bank as
Collateral Agent, revolving credit facility Administrative Agent and
term loan Administrative Agent (filed as Exhibit 10.67 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and incorporated herein by reference).
*10.60 $210,000,000 Term Loan Facility Credit Agreement, dated as of December
23, 1998, by and among Mariner Health, PNC Bank, as Administrative
Agent, First Union, as Syndication Agent, and the financial
institutions referred to therein as "Banks" (filed as Exhibit 10.68 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and incorporated herein by reference).
*10.61 Amended and Restated Pledge Agreement (Borrower Pledging Stock) dated
as of December 23, 1998, from various subsidiaries of Mariner Health
signatory thereto in favor of PNC Bank, as Collateral Agent, relating
to the pledge of stock of subsidiaries of Mariner Health (filed as
Exhibit 10.69 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998 and incorporated herein by
reference).
*10.62 Amended and Restated Pledge Agreement (Pledging Stock) dated as of
December 23, 1998, from various subsidiaries of Mariner Health
signatory thereto in favor of PNC Bank, as Collateral Agent, relating
to the pledge of stock of subsidiaries of Mariner Health held by the
subsidiary pledgors (filed as Exhibit 10.70 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998 and
incorporated herein by reference).
*10.63 Amended and Restated Pledge Agreement (Pledging Partnership Interests)
dated as of December 23, 1998, from various subsidiaries of Mariner
Health signatory thereto in favor of PNC Bank, as Collateral Agent,
relating to the pledge of certain partnership interests held by such
subsidiaries (filed as Exhibit 10.71 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended September 30, 1998 and
incorporated herein by reference).
*10.64 Amended and Restated Pledge Agreement (Pledging Limited Liability
Company Interests) dated as of December 23, 1998, from various
subsidiaries of Mariner Health signatory thereto in favor of PNC Bank,
as Collateral Agent, relating to the pledge of certain limited
liability company membership interests held by such subsidiaries
(filed as Exhibit 10.72 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1998, and incorporated herein
by reference).
*10.65 Amended and Restated Pledge Agreement (Tri-State Pledging Partnership
Interests) dated as of December 23, 1998, from Tri-State Health Care,
Inc. ("Tri-State") in favor of PNC Bank, as Collateral Agent, relating
to the pledge of certain partnership interests held by Tri-State
(filed as Exhibit 10.73 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1998, and incorporated herein
by reference).
</TABLE>
105
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<TABLE>
<CAPTION>
EXHIBIT
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<C> <S>
*10.66 Security Agreement dated as of December 23, 1998 from Mariner Health
and its subsidiary guarantors in favor of PNC Bank, as Collateral
Agent (filed as Exhibit 10.74 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1998, and
incorporated herein by reference).
*10.67 Continuing Agreement of Guaranty and Suretyship dated as of December
23, 1998 from various subsidiaries of Mariner Health in favor of the
Collateral Agent relating to the $210,000,000 term loan facility of
Mariner Health (filed as Exhibit 10.75 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998, and
incorporated herein by reference).
*10.68 Confirmation for U.S. Dollar Total Return Swap Transaction dated
September 21, 1998, between NationsBank, N.A. and the Registrant in
connection with the ISDA Master Agreement (1992 form) dated as of
October 31, 1997 between NationsBank, N.A. and the Registrant (filed
as Exhibit 10.76 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1998, and incorporated herein by
reference).
*10.69 Guaranty dated as of September 21, 1998, from Mariner Health and the
subsidiaries of Mariner Health signatory thereto, in favor of
NationsBank, N.A. relating to the total return swap referred to in
Item 10.76 above (filed as Exhibit 10.77 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998, and
incorporated herein by reference).
*10.70 +Paragon Health Network, Inc. Employee Stock Purchase Plan (filed as
Exhibit 10.78 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998, and incorporated herein by
reference).
*10.71 +First Amendment to Mariner Post-Acute Network, Inc. Employee Stock
Purchase Plan (formerly the Paragon Health Network, Inc. Employee
Stock Purchase Plan) (filed as Exhibit 10.79 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30,
1998, and incorporated herein by reference).
*10.72 Amended and Restated Purchase Option Agreement dated as of May 24,
1995 by and among Convalescent Services, Inc. ("CSI"), Mariner Health
and the Lessors (filed as Exhibits 2.5 and 10.5 to Mariner Health's
Form 10-Q for the quarter ended June 30, 1995, as amended, and
incorporated herein by reference).
*10.73 Form of Lease by and between CSI and each of the following lessors:
(i) Houston-Northwest Medical Investors, Ltd., (ii) Fort Bend Medical
Investors, Ltd., (iii) Northwest Healthcare L.P., (iv) Dallas Medical
Investors, Ltd., (v) Creek Forest Limited, (vi) Denver Medical
Investors, Ltd., (vii) South Denver Healthcare Associates, Ltd.,
(viii) Belleair East Medical Investors, Ltd., (ix) Tallahassee
Healthcare Associates, Ltd., (x) Port Charlotte Healthcare Associates,
Ltd., (xi) Melbourne Healthcare Associates, Ltd., (xii) Pinellas III
Healthcare Associates, Ltd., (xiii) Polk Healthcare L.P., and
(xiv) Orange Healthcare Ltd. (filed as Exhibit 10.37 to Mariner Health
s Annual Report on Form 10-K for the fiscal year ended December 31,
1995 and incorporated herein by reference).
*10.74 +Employment Agreement between the Registrant and George Morgan, dated
January 25, 1999 (filed as Exhibit 10.1 to the Registrant's Form 10-Q
for the quarter ended December 31, 1998, and incorporated herein by
reference).
*10.75 +Employment Agreement between the Registrant and C. Christian Winkle,
dated January 20, 1999 (filed as Exhibit 10.2 to the Registrant's Form
10-Q for the quarter ended December 31, 1998, and incorporated herein
by reference).
*10.76 Amended and restated $250,000,000 Revolving Credit Facility Credit
Agreement (the "Mariner Health Credit Agreement") (through Amendment
No. 19) dated, as amended, as of January 19, 1999, by and among
Mariner Health, PNC Bank, as Administrative Agent, First Union, as
Syndication Agent, and the financial institutions referred to therein
(filed as Exhibit 10.3 to the Registrant's Form 10-Q for the quarter
ended December 31, 1998, and incorporated herein by reference).
</TABLE>
106
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
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<C> <S>
*10.77 Amendment No. 19 to Mariner Health Credit Agreement dated as of
January 19, 1999 (filed as Exhibit 10.4 to the Registrant's Form 10-Q
for the quarter ended December 31, 1998, and incorporated herein by
reference).
*10.78 Amended and Restated $210,000,000 Term Loan Facility Credit Agreement
(the "Mariner Health Term Loan Agreement"), dated, as amended, as of
January 19, 19999, by and among Mariner Health, PNC Bank, as
Administrative Agent, First Union, as Syndication Agent, and the
financial institutions referred to therein (filed as Exhibit 10.5 to
the Registrant's Form 10-Q for the quarter ended December 31, 1998,
and incorporated herein by reference).
*10.79 Amendment No. 1 to Mariner Term Loan Agreement dated as of January 19,
1999 (filed as Exhibit 10.6 to the Registrant's Form 10-Q for the
quarter ended December 31, 1998, and incorporated herein by
reference).
*10.80 Third Amendment to Credit Agreement dated as of May 11, 1999, by and
among the Company, The Chase Manhattan Bank, as Administrative Agent,
and the lenders signatory thereto, amending the Senior Credit Facility
(filed as Exhibit 10.1 to the Registrant's Form 10-Q for the quarter
ended March 31, 1999, and incorporated herein by reference).
*10.81 Third Amendment to Guarantee dated as of May 11, 1999, by and among
the Company, its subsidiaries signatory thereto, and The Chase
Manhattan Bank, as Administrative Agent, amending the Amended and
Restated Guarantee dated as of November 4, 1997 (filed as Exhibit 10.2
to the Registrant's Form 10-Q for the quarter ended March 31, 1999,
and incorporated herein by reference).
*10.82 Third Amendment to Participation Agreement dated as of May 11, 1999,
by and among Living Centers Holding Company, FBTC Leasing Corp., The
Chase Manhattan Bank, as Agent, and The Fuji Bank, Limited (Houston
Agency), amending the Amended and Restated Participation Agreement
dated as of November 4, 1997 (filed as Exhibit 10.3 to the
Registrant's Form 10-Q for the quarter ended March 31, 1999, and
incorporated herein by reference).
*10.83 Amendment No. 19 to Revolving Credit Facility Credit Agreement, dated
as of January 19, 1999, by and among Mariner Health, PNC Bank, as
Administrative Agent, First Union National Bank, as Syndication Agent,
and the financial institutions referred to therein, to which is
attached as an exhibit an amended and restated $250,000,000 Revolving
Credit Facility Credit Agreement, by and among Mariner Health, PNC
Bank, as Administrative Agent, First Union National Bank, as
Syndication Agent, and the financial institutions referred to therein,
as "Banks" (filed as Exhibit 10.4 to the Registrant's Form 10-Q for
the quarter ended March 31, 1999, and incorporated herein by
reference).
10.84 Amendment No. 20 to Revolving Credit Facility Credit Agreement, dated
as of September 2, 1999, by and among Mariner Health, PNC Bank, as
Administrative Agent, First Union National Bank, as Syndication Agent,
and the financial institutions referred to therein, to which is
attached as an exhibit an amended and restated $250,000,000 Revolving
Credit Facility Credit Agreement, by and among Mariner Health, PNC
Bank, as Administrative Agent, First Union National Bank, as
Syndication Agent, and the financial institutions referred to therein,
as "Banks".
10.85 Amendment No. 21 to Revolving Credit Facility Credit Agreement, dated
as of October 29, 1999, by and among Mariner Health, PNC Bank, as
Administrative Agent, First Union National Bank, as Syndication Agent,
and the financial institutions referred to therein, to which is
attached as an exhibit an amended and restated $250,000,000 Revolving
Credit Facility Credit Agreement, by and among Mariner Health, PNC
Bank, as Administrative Agent, First Union National Bank, as
Syndication Agent, and the financial institutions referred to therein,
as "Banks".
*10.86 Amendment No. 1 to Term Loan Facility Credit Agreement, dated as of
January 19, 1999, by and among Mariner Health, PNC Bank, as
Administrative Agent, First Union National Bank, as Syndication Agent,
and the financial institutions referred to therein, to which is
attached as an exhibit an amended and restated $210,000,000 Term Loan
Facility Credit Administrative Agent, First Union National Bank, as
Syndication Agent, and the financial institutions referred to therein,
as "Banks" (filed as Exhibit 10.5 to the Registrant's Form 10-Q for
the quarter ended March 31, 1999, and incorporated herein by
reference).
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
10.87 Amendment No. 2 to Term Loan Facility Credit Agreement, dated as of
October 29, 1999, by and among Mariner Health, PNC Bank, as
Administrative Agent, First Union National Bank, as Syndication Agent,
and the financial institutions referred to therein, to which is
attached as an exhibit an amended and restated $210,000,000 Term Loan
Facility Credit Administrative Agent, First Union National Bank, as
Syndication Agent, and the financial institutions referred to therein,
as "Banks".
*10.88 Letter agreement between Mariner Health and Empire Medical Services
dated July 20, 1999 regarding Medicare extended repayment plan (filed
as Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended
June 30, 1999, and incorporated herein by reference).
10.89 Acknowledgement and Amendment, dated August 16, 1999, to the Credit
Agreement, dated November 4, 1997 (as amended by the First Amendment,
dated as of July 8, 1998, the Second Amendment, dated as of December
22, 1998, the Third Amendment, dated as of May 11, 1999), among
Mariner Post-Acute Network, Inc., as the Borrower, the several banks
and other financial institutions or entities from time to time parties
thereto, as the Lenders, Bank of America, N.A., as Documentation
Agent, and The Chase Manhattan Bank, as the Administrative Agent.
10.90 Promissory Note, dated August 16, 1999, by Mariner Post-Acute Network,
Inc., as the Maker, to Bank of America, N.A., as the Holder, in the
principal amount of $26,485,562.79.
10.91 Forbearance agreement, dated as of November 9, 1999, to the Credit
Agreement, dated as of November 4, 1997 (as amended by the First
Amendment, dated as of July 8, 1998, the Second Amendment, dated as of
December 22, 1998, the Third Amendment, dated as of May 11, 1999, and
the Acknowledgement and Amendment, dated as of August 16, 1999, and as
the same may be amended, supplemented or otherwise amended from time
to time), among Mariner Post-Acute Network, Inc., the several banks
and other financial institutions or entities from time to time parties
thereto, Bank of America, N.A., as documentation agent, and The Chase
Manhattan Bank, as administrative agent.
10.92 Forbearance agreement, dated as of November 9, 1999, to the Amended
and Restated Credit Agreement, dated as of November 4, 1997 (as
amended by the First Amendment, dated as of July 8, 1998, the Second
Amendment, dated as of December 22, 1998, the Third Amendment, dated
as of May 11, 1999, and the Acknowledgement and Amendment, dated as of
August 16, 1999, and as the same may be amended, supplemented or
otherwise amended from time to time), among FBTC Leasing Corp., the
lenders party thereto, The Chase Manhattan Bank, as agent, and the
Fuji Bank, Limited (Houston Agency), as co-agent; the Amended and
Restated Guarantee, dated as of November 4, 1997 (as amended by the
First Amendment to Guarantee, dated as of July 8, 1998, the Second
Amendment to Guarantee, dated as of December 22, 1998, the Third
Amendment to Guarantee, dated as of May 11, 1999, and the
Acknowledgement and Amendment to Guarantee, dated as of August 16,
1999, and as the same may be amended, supplemented or otherwise
amended from time to time), made by Mariner Post-Acute Network, Inc.,
and the other guarantors which are signatories thereto; and the Lease,
dated as of October 10, 1996 (as amended) between the Company and
Living Centers Holding Company.
10.93 Termination of Amended and Restated Stockholders Agreement and Proxy
and Voting Agreement, dated December 20, 1999, by and among Apollo
Management L.P., Mariner Post-Acute Network, Inc. and the stockholders
listed on the signature page, terminating the Stockholders Agreement,
dated as of November 4, 1997, amended as of April 13, 1998 and amended
and restated as of November 25, 1998 and the Proxy and Voting
Agreement, dated as of November 4, 1997.
10.94 +Employment Agreement between the Registrant and Francis W. Cash dated
September 18, 1999.
10.95 Debtor-In-Possession Credit Agreement dated as of January 20, 2000, by
and among Mariner Health, certain subsidiaries of Mariner Health,
First Union National Bank, N.A., as Syndication Agent, PNC Capital
Markets, Inc. and First Union Securities, Inc., as Co-Arrangers, PNC
Bank, National Association, as Collateral and Administrative Agent,
and certain other lenders.
</TABLE>
108
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<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
10.96 Revolving Credit and Guaranty Agreement between dated as of January
18, 2000, by and among the Registrant, certain subsidiaries of the
Registrant, the Chase Manhattan Bank, as Agent, and certain other
lenders.
10.97 Security and Pledge Agreement dated January 18, 2000, by and among the
Registrant, certain subsidiaries of the Registrant and The Chase
Manhattan Bank, as Agent, and certain other lenders.
10.98 Security Agreement dated January 20, 2000, by and among Mariner
Health, First Union National Bank, N.A., PNC Bank, National
Association and certain other lenders.
21 Subsidiaries of Mariner Post-Acute Network, Inc.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference as indicated.
+ Represents management contracts or compensatory plans or arrangements
required to be filed as exhibits to this Annual Report by Item
601(d)(10)(iii) of Regulation S-K.
Mariner Post-Acute Network, Inc. will furnish a copy of any exhibit
described above to any beneficial holder of its securities upon receipt of a
written request therefor, provided that such holder pays to Mariner Post-Acute
Network, Inc. a fee compensating it for its reasonable expenses in furnishing
such exhibits.
(B)REPORTS ON FORM 8-K
Not applicable
(C)EXHIBITS
The response to this portion of Item 14 is contained in Item 14(a)(3) of
this report.
(D)FINANCIAL STATEMENTS SCHEDULE
The response to this portion of Item 14 is contained in Item 8 of this
report.
109
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MARINER POST-ACUTE NETWORK, INC.
(Registrant)
/s/ Susan Thomas Whittle
By: _________________________________
Susan Thomas Whittle
Senior Vice President, General
Counsel
and Secretary
Date: January 24, 2000
110
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Francis W. Cash Chairman of the Board, January 24, 2000
______________________________________ Chief Executive Officer,
Francis W. Cash President and Director
(Principal Executive
Officer)
/s/ George D. Morgan Executive Vice President January 24, 2000
______________________________________ and Chief Financial
George D. Morgan Officer (Principal
Financial and Accounting
Officer)
/s/ Gene E. Burleson Director January 24, 2000
______________________________________
Gene E. Burleson
/s/ Samuel B. Kellett Director January 24, 2000
______________________________________
Samuel B. Kellett
/s/ Joel S. Kanter Director January 24, 2000
______________________________________
Joel S. Kanter
/s/ William G. Petty, Jr. Director January 24, 2000
______________________________________
William G. Petty, Jr.
</TABLE>
111
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
MARINER POST-ACUTE NETWORK, INC.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE DEDUCTION ADDITIONS BALANCE
BEGINNING CHARGED FROM FROM END OF
OF PERIOD TO INCOME RESERVE ACQUISITIONS PERIOD
--------- --------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Fiscal Year 1999:
Allowance for doubtful
accounts............... $68,581 142,474 (123,989) -- $ 87,066
======= ======= ======== ====== ========
Notes receivable re-
serves................. $ 4,017 3,454 -- -- $ 7,471
======= ======= ======== ====== ========
Valuation allowance..... $70,252 400,305 -- -- $470,557
======= ======= ======== ====== ========
Fiscal Year 1998:
Allowance for doubtful
accounts............... $33,138 29,544 (24,990) 30,889 $ 68,581
======= ======= ======== ====== ========
Notes receivable re-
serves................. $ 1,188 -- (300) 3,129 $ 4,017
======= ======= ======== ====== ========
Valuation allowance..... $ 1,844 31,028 -- 37,380 $ 70,252
======= ======= ======== ====== ========
Fiscal Year 1997:
Allowance for doubtful
accounts............... $17,405 27,760 (12,027) -- $ 33,138
======= ======= ======== ====== ========
Notes receivable re-
serves................. $ 3,516 (1,478)(a) (850) -- $ 1,188
======= ======= ======== ====== ========
Valuation allowance..... $ 1,785 59 -- -- $ 1,844
======= ======= ======== ====== ========
</TABLE>
- --------
(a) Includes reversal of reserves based on collections of notes previously
considered doubtful.
112
<PAGE>
EXHIBIT 10.84
AMENDMENT NO. 20 TO CREDIT AGREEMENT AND CONSENT
THIS AMENDMENT NO. 20 TO CREDIT AGREEMENT AND CONSENT (the
"Amendment") dated as of September 2, 1999 by and among Mariner Health Group,
Inc., a Delaware corporation (the "Borrower"), each other Loan Party, PNC Bank,
National Association; Bank Austria Creditanstalt Corporate Finance, Inc.,
(formerly known as Creditanstalt AG, formerly known as Creditanstalt
Bankverein); First Union National Bank (as successor by merger to First Union
National Bank of North Carolina); Mellon Bank, N.A.; Toronto Dominion (New
York), Inc.; Bankers Trust Company; Credit Lyonnais New York Branch; AmSouth
Bank; Bank of Tokyo-Mitsubishi Trust Company; The Fuji Bank, Limited New York
Branch; SunTrust Bank, Central Florida, N.A.; Bank One Kentucky, NA; Fleet
National Bank; Comerica Bank; The First National Bank of Chicago; The Industrial
Bank of Japan, Limited, New York Branch; General Electric Capital Corporation;
and Riggs Bank N.A. (collectively, the "Banks"), First Union National Bank, in
its capacity as syndication agent for the Banks and PNC Bank, National
Association, in its capacity as administrative agent for the Banks (the
"Administrative Agent").
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to that certain Credit
Agreement dated as of May 18, 1994, as amended (the "Credit Agreement"),
pursuant to which the Banks provided a $250,000,000 revolving credit facility to
the Borrower;
WHEREAS, Amwest Surety Insurance Company and Far West Insurance
Company ("Amwest") have agreed to issue surety bonds in connection with the
operations of the Borrower and its Subsidiaries in connection solely with that
certain Commercial Surety General Indemnity Agreement executed by the Borrower
for the purpose of indemnifying Amwest dated August 16, 1999 attached hereto as
Exhibit A (the "Surety Agreement");
- ---------
WHEREAS, as a condition to entering into the Surety Agreement, Amwest
has required the Borrower to provide, as security for obligations of the
Borrower under the Surety Agreement, a letter of credit with an initial expiry
date of up to twelve months after the date of issuance, subject to renewal, with
such letter of credit to be in the form of Exhibit B hereto (the "Surety Bond
---------
Letter of Credit"); and
WHEREAS, the Borrower, the Banks, the Administrative Agent and the
Syndication Agent desire to amend the Credit Agreement as hereinafter provided
to permit the issuance on a cash collateralized basis of the Surety Bond Letter
of Credit which shall expire after the Expiration Date of the Commitments and to
permit extensions, amendments and renewals of the Surety Bond Letter of Credit
upon the consent of the Required Banks on the terms as hereinafter provided.
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements hereinafter set forth and intending to be legally bound
hereby, covenant and agree as follows:
<PAGE>
1. Definitions.
-----------
Defined terms used herein unless otherwise defined herein shall have
the meanings ascribed to them in the Credit Agreement as amended by this
Amendment.
2. Amendments to Credit Agreement.
------------------------------
(a) Section 1.01 [Certain Definitions] of the Credit Agreement is
hereby amended by the addition of the following new definitions:
"Amendment No. 20 shall mean that certain Amendment No. 20 to Credit
----------------
Agreement dated September 2, 1999 among Borrower, the other Loan Parties,
the Banks and Administrative Agent, together with schedules and exhibits
thereto."
"Fund for Certain Fees shall have the meaning assigned to such term in
---------------------
Section 8.01(s)."
"Surety Bond Letter of Credit" shall mean that certain Letter of
----------------------------
Credit to be issued by the Administrative Agent for the benefit of Amwest
Surety Insurance Company and Far West Insurance Company in the amount of
$7,850,000 with an initial expiry date of September 2, 2000 in the form of
Exhibit B attached to Amendment No. 20, as amended, extended or renewed
---------
from time to time as provided herein."
"Twentieth Amendment Effective Date shall mean September 2, 1999."
----------------------------------
(b) Subsection (a) of Section 2.09 [Letter of Credit Subfacility] is
amended and restated in its entirety to read as follows:
"(a) Borrower may request the issuance of, on the terms and
conditions hereinafter set forth, standby letters of credit (each a "Letter
of Credit" and collectively, "Letters of Credit") by delivering to the
Administrative Agent a completed application and agreement for letters of
credit in such form as the Administrative Agent may specify from time to
time by no later than 10:00 a.m., Pittsburgh time, at least three (3)
Business Days, or such shorter period as may be agreed to by the
Administrative Agent, in advance of the proposed date of issuance. Subject
to the terms and conditions hereof and in reliance on the agreements of the
other Banks set forth in this Section 2.09, the Administrative Agent will
issue (i) a Letter of Credit provided that each Letter of Credit (other
than the Surety Bond Letter of Credit) shall have a maximum maturity of
twelve (12) months from the date of issuance and expire no later than ten
(10) Business Days prior to the Expiration Date and (ii) the Surety Bond
Letter of Credit which shall expire no later than September 2, 2000
provided that the Surety Bond Letter of Credit may be extended, amended or
renewed (A) for one additional period expiring not later than September 2,
2001 with the prior written approval of the Required Banks and (B) beyond
September 2, 2001 with the prior written approval of all Banks. In no
event shall (i) the Letters of Credit Outstanding exceed, at any one time,
$35,000,000 or (ii) the Revolving Facility Usage exceed, at any one time,
the Revolving Credit Commitments. Schedule 2.09(a) hereto lists letters of
----------------
credit which PNC Bank issued for the accounts of
-2-
<PAGE>
certain of the Loan Parties prior to the date hereof pursuant to the Prior
Credit Agreement and which shall remain outstanding after the Closing Date
(the "Existing Letters of Credit"). Each Existing Letter of Credit shall be
a Letter of Credit hereunder on and after the Closing Date and the
provisions of this Section 2.09 shall apply to such Existing Letter of
Credit. On or before the Twentieth Amendment Effective Date (the "Cash
Collateralization Date") the Loan Parties shall deposit cash, as cash
collateral, to an account owned by the Administrative Agent for the benefit
of the Banks from which account the Administrative Agent alone shall have
sole power of withdrawal (the "Letter of Credit Cash Collateral Account")
in an amount equal to 100% of the maximum amount available to be drawn
under the Surety Bond Letter of Credit. Each Loan Party hereby agrees and
directs the Administrative Agent to apply, from the Letter of Credit Cash
Collateral Account, the amount of the Surety Bond Letter of Credit upon
presentation thereof for draw on any date on or after the Cash
Collateralization Date. Each of the Loan Parties, to secure the
Reimbursement Obligations and all of the other obligations of the Loan
Parties under the Loan Documents and under the Term Loan Documents, hereby
pledges all of its rights and interests in and grants a first priority
perfected lien on the Letter of Credit Cash Collateral Account and all
proceeds arising therefrom to the Collateral Agent for the benefit of the
Banks and the Term Loan Banks.
(c) The third sentence of Subsection (d) of Section 2.09 [Letter of
Credit Subfacility] is amended and restated in its entirety to read as follows:
"In the event the Borrower fails to reimburse the Administrative
Agent for the full amount of any drawing under any Letter of Credit by
11:00 a.m., Pittsburgh time, on the Drawing Date, the Administrative Agent
will promptly notify each Bank thereof, and with respect to any Letter of
Credit other than the Surety Bond Letter of Credit, the Borrower shall be
deemed to have requested that Revolving Credit Loans be made by the Banks
under the Base Rate Option to be disbursed on the Drawing Date under such
Letter of Credit, subject to the amount of the unutilized portion of the
Revolving Credit Commitment and subject to the conditions set forth in
Section 7.1 [Each Additional Loan] other than any notice requirements."
(d) The first sentence of Subsection (e) of Section 2.09 [Letter of
Credit Subfacility] is amended and restated in its entirety to read as follows:
"Each Bank shall upon any notice pursuant to Section 2.09(d) make
available to the Administrative Agent an amount in immediately available
funds equal to its Ratable Share of the amount of the drawing
(notwithstanding the passing of the Expiration Date or the termination of
the Commitments), whereupon the participating Banks shall (subject to
Section 2.09(f)) each be deemed to have made a Revolving Credit Loan under
the Base Rate Option to the Borrower in that amount."
(e) The first sentence of Subsection (f) of Section 2.09 [Letter of
Credit Subfacility] is amended and restated in its entirety to read as follows:
"With respect to any unreimbursed drawing that is not converted
into Revolving Credit Loans under the Base Rate Option to the Borrower in
whole or in part
-3-
<PAGE>
as contemplated by Section 2.09(d), because of the Borrower's failure to
satisfy the conditions set forth in Section 7.1 [Each Additional Loan]
other than any notice requirements or for any other reason, and with
respect to any unreimbursed drawing under the Surety Bond Letter of Credit,
notwithstanding the passing of the Expiration Date or the termination of
the Commitments, the Borrower shall be deemed to have incurred from the
Administrative Agent a Letter of Credit Borrowing in the amount of such
drawing."
(f) Section 8.01 [Affirmative Covenants] is hereby amended by adding
after clause (r) thereof, the following new clause (s):
"(s) Deposit of Funds with Administrative Agent for payment of
---------------------------------------------------------
Certain Fees and Expenses. On or before the Twentieth Amendment Effective
-------------------------
Date, the Borrower shall deposit with the Administrative Agent $500,000
(the "Fund for Certain Fees") to be held as cash collateral and used at the
discretion of the Agents from time to time to pay for legal and other
advisor fees incurred by the Agents, the Banks, the Term Loan Banks and the
agents under the Term Loan Agreement, including, but not limited to, the
fees of Buchanan Ingersoll, P.C., counsel to the Administrative Agent and
Collateral Agent, Kennedy Covington Lobdel & Hickman, L.L.P. counsel to the
Syndication Agent, O'Melveny & Myers LLP, special counsel to the Banks, and
Houlihan Lokey Howard & Zukin or any other financial advisors and other
experts engaged by the Agents or the Banks, and to the extent that such
fees are not paid by the Borrower within 30 days of receipt of invoices
therefor by the Borrower. To the extent that the amount of the Fund for
Certain Fees is at any time less than $500,000, the Borrower, upon the
request of the Administrative Agent shall deposit with the Administrative
Agent an additional amount so that after giving effect to such additional
deposit the Fund for Certain Fees is not less than $500,000.
Notwithstanding the establishment of the Fund for Certain Fees or the
balance thereof at any time, the Borrower shall promptly pay, from funds
other than the Fund for Certain Fees, promptly upon receipt of invoices and
in any event, within 30 days after such receipt, the fees and expenses of
the legal counsel, financial advisors and other experts that are listed in
more detail in the preceding sentence."
3. Conditions of Effectiveness of Amendment of Credit Agreement;
-------------------------------------------------------------
Consent and Related Matters. The effectiveness of the Amendment of the Credit
- ---------------------------
Agreement set forth in Section 2 hereof is expressly conditioned upon
satisfaction of each of the following conditions precedent:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Borrower contained in Article VI of the Credit Agreement shall
be true and accurate on the date hereof (taking into account this Amendment)
with the same effect as though such representations and warranties had been made
on and as of such date (except representations and warranties which relate
solely to an earlier date or time or which relate to the financial condition of
the Loan Parties, which representations and warranties shall be true and correct
on and as of the specific dates or times referred to therein).
-4-
<PAGE>
(b) Consents. Each Bank consents to the issuance of the Surety Bond
--------
Letter of Credit notwithstanding the existence of any Events of Default or
Potential Default. Other than solely with respect to the issuance of the Surety
Bond Letter of Credit as provided in the previous sentence, none of the Agents
nor any Bank waives any rights against any Loan Party including, without any
limitation, with respect to any Event of Default or Potential Default.
(c) Fees and Expenses. The Borrower shall have paid (i) to the
-----------------
Administrative Agent on the effective date hereof, the Fund for Certain Fees to
be utilized in accordance with Section 8.01(s) of the Credit Agreement after
giving effect to this Amendment (ii) legal and other advisor fees incurred by
the Agents and the Banks, including, but not limited to, the fees of Buchanan
Ingersoll, P.C., counsel to the Administrative Agent and the Collateral Agent,
Kennedy Covington Lobdel & Hickman L.L.P. counsel to the Syndication Agent,
O'Melveny & Myers LLP, special counsel to the Banks, and Houlihan Lokey Howard &
Zukin or any other financial advisors and other experts engaged by the Agents or
the Banks and (iii) all other out-of-pocket costs, expense and disbursements
accrued through the date hereof and the out-of-pocket costs, expenses and
disbursements of the Agents and the Banks including, without limitation,
reasonable fees of the forgoing counsel in connection with this Amendment.
(d) Legal Details; Counterparts. All legal details and proceedings in
---------------------------
connection with the transactions contemplated by this Amendment shall be in form
and substance satisfactory to the Agents, the Administrative Agent shall have
received from the Borrower and the Banks an executed original of this Amendment
and the Administrative Agent shall have received all such other counterpart
originals or certified or other copies of such documents and proceedings in
connection with such transactions, in form and substance satisfactory to the
Agents.
4. Force and Effect. Except as otherwise expressly modified by this
----------------
Amendment, the Credit Agreement and the other Loan Documents are hereby ratified
and confirmed and shall remain in full force and effect after the date hereof.
5. Governing Law. This Amendment shall be deemed to be a contract
-------------
under the laws of the Commonwealth of Pennsylvania and for all purposes shall be
governed by and construed and enforced in accordance with the internal laws of
the Commonwealth of Pennsylvania without regard to its conflict of laws
principles.
6. Effective Date; Certification of the Loan Parties. This Amendment
-------------------------------------------------
shall be dated as of and shall be binding, effective and enforceable upon the
date of (i) satisfaction of all conditions set forth in Section 3 hereof and
(ii) receipt by the Administrative Agent of duly executed telecopied counterpart
signature pages of this Amendment from the Loan Parties, the Agents and all of
the Banks, and from and after such date this Amendment shall be binding upon the
Loan Parties, each Bank and the Agents, and their respective successors and
assigns permitted by the Credit Agreement. Each of the Loan Parties by executing
this Amendment, hereby certifies that this Amendment has been duly executed.
[INTENTIONALLY BLANK]
-5-
<PAGE>
[SIGNATURE PAGE 1 OF 19 TO AMENDMENT NO. 20]
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
MARINER HEALTH GROUP, INC.
By:______________________________________________
Name:____________________________________________
Title:___________________________________________
GUARANTORS:
EACH GUARANTOR LISTED ON
SCHEDULE A ATTACHED HERETO
By:______________________________________________
Name:____________________________________________
Title:_______________________of each Guarantor
listed on Schedule A attached hereto which is a
corporation and of each corporation listed on
Schedule A attached hereto which is the general
partner or member of a Guarantor
<PAGE>
[SIGNATURE PAGE 2 OF 19 TO AMENDMENT NO. 20]
PNC BANK, NATIONAL ASSOCIATION,
individually and as Administrative Agent
By:______________________________________________
Name:____________________________________________
Title:___________________________________________
<PAGE>
[SIGNATURE PAGE 3 OF 19 TO AMENDMENT NO. 20]
FIRST UNION NATIONAL BANK
individually and as Syndication Agent
By:______________________________________________
Name:____________________________________________
Title:___________________________________________
<PAGE>
[SIGNATURE PAGE 4 OF 19 TO AMENDMENT NO. 20]
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By:______________________________________________
Name:____________________________________________
Title:___________________________________________
By:______________________________________________
Name:____________________________________________
Title:___________________________________________
<PAGE>
[SIGNATURE PAGE 5 OF 19 TO AMENDMENT NO. 20]
MELLON BANK, N.A.
By:______________________________________________
Name:____________________________________________
Title:___________________________________________
<PAGE>
[SIGNATURE PAGE 6 OF 19 TO AMENDMENT NO. 20]
TORONTO DOMINION (NEW YORK), INC.
By:______________________________________________
Name:____________________________________________
Title:___________________________________________
<PAGE>
[SIGNATURE PAGE 7 OF 19 TO AMENDMENT NO. 20]
BANKERS TRUST COMPANY
By:______________________________________________
Name:____________________________________________
Title:___________________________________________
<PAGE>
[SIGNATURE PAGE 8 OF 19 TO AMENDMENT NO. 20]
CREDIT LYONNAIS NEW YORK BRANCH
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
[SIGNATURE PAGE 9 OF 19 TO AMENDMENT NO. 20]
AMSOUTH BANK
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
[SIGNATURE PAGE 10 OF 19 TO AMENDMENT NO. 20]
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
[SIGNATURE PAGE 11 OF 19 TO AMENDMENT NO. 20]
THE FUJI BANK, LIMITED NEW YORK
BRANCH
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
[SIGNATURE PAGE 12 OF 19 TO AMENDMENT NO. 20]
SUNTRUST BANK, CENTRAL FLORIDA, N.A.
By:_________________________________
Name:_______________________________
Title:______________________________
<PAGE>
[SIGNATURE PAGE 13 OF 19 TO AMENDMENT NO. 20]
BANK ONE, KENTUCKY, NA
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
[SIGNATURE PAGE 14 OF 19 TO AMENDMENT NO. 20]
FLEET NATIONAL BANK
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
[SIGNATURE PAGE 15 OF 19 TO AMENDMENT NO. 20]
COMERICA BANK
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
[SIGNATURE PAGE 16 OF 19 TO AMENDMENT NO. 20]
THE FIRST NATIONAL BANK OF CHICAGO
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
[SIGNATURE PAGE 17 OF 19 TO AMENDMENT NO. 20]
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
[SIGNATURE PAGE 18 OF 19 TO AMENDMENT NO. 20]
GENERAL ELECTRIC CAPITAL
CORPORATION
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
[SIGNATURE PAGE 19 OF 19 TO AMENDMENT NO. 20]
RIGGS BANK N.A.
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
STATE OF TENNESSEE
COUNTY OF DAVIDSON
On the _____ day of ___________, 1999 personally appeared _______________,
as the __________ President of SunTrust Bank, Central Florida, N.A., and before
me executed the attached AMENDMENT NO. 20 dated as of _____________, 1999 to
the Credit Agreement between Mariner Health Group, Inc., with SunTrust Bank,
Central Florida, N.A., as Lender.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal, in the
state and county aforesaid.
______________________________________________________________
Signature of Notary Public, State of__________________________
______________________________________________________________
(Print, Type or Stamp Commissioned Name of Notary Public)
Personally known ________; OR Produced Identification_________
Type of identification produced:______________________________
______________________________________________________________
<PAGE>
SCHEDULE A
----------
GUARANTORS
----------
Bride Brook Nursing & Rehabilitation Center, Inc.
Compass Pharmacy Services, Inc.
Compass Pharmacy Services of Maryland, Inc.
Compass Pharmacy Services of Texas, Inc.
Long Ridge Nursing & Rehabilitation Center, Inc.
Longwood Rehabilitation Center, Inc.
Mansfield Nursing & Rehabilitation Center, Inc.
Mariner Health Care, Inc.
Mariner Health Care of Baltimore, Inc.
Mariner Health Care of Fort Wayne, Inc.
Mariner Health Care of Greater Laurel, Inc.
Mariner Health Care of Lake Worth, Inc.
Mariner Health Care of Nashville, Inc.
Mariner Health Care of North Hills, Inc.
Mariner Health Care of Orange City, Inc.
Mariner Health Care of Palm City, Inc.
Mariner Health Care of Pinellas Point, Inc.
Mariner Health Care of Port Orange, Inc.
Mariner Health Care of Southern Connecticut, Inc.
Mariner Health Care of Toledo, Inc.
Mariner Health Care of West Hills, Inc.
Mariner Health Care of Atlantic Shores, Inc.
Mariner Health Care of Deland, Inc.
Mariner Health of Florida, Inc.
Mariner Health Care of Inverness, Inc.
Mariner Health of Jacksonville, Inc.
Mariner Health Care of MacClenny, Inc.
Mariner Health of Maryland, Inc.
Mariner Health Care of MetroWest, Inc.
Mariner Health of Orlando, Inc.
Mariner Health of Tampa, Inc.
Mariner Health Care of Tuskawilla, Inc.
Mariner Health Resources, Inc.
Mariner Practice Corporation
Mariner Physician Services, Inc.
Mariner Supply Services, Inc.
Merrimack Valley Nursing & Rehabilitation Center, Inc.
Methuen Nursing & Rehabilitation Center, Inc.
MHC Rehab. Corp.
Mystic Nursing & Rehabilitation Center, Inc.
<PAGE>
Park Terrace Nursing & Rehabilitation Center, Inc.
Pendleton Nursing & Rehabilitation Center, Inc.
Pinnacle Care Corporation
Prism Health Group, Inc.
Sassaquin Nursing & Rehabilitation Center, Inc.
Windward Health Care, Inc.
Acme Repackaging, Inc.
MarinerSelect Staffing Solutions, Inc.
MedRehab, Inc.
Pinnacle Care Corporation of Huntington
Pinnacle Care Corporation of Hutchinson
Pinnacle Care Corporation of Lexington
Pinnacle Care Corporation of Louisville
Pinnacle Care Corporation of Marion
Pinnacle Care Corporation of McMurray
Pinnacle Care Corporation of Michigan
Pinnacle Care Corporation of Morganton
Pinnacle Care Corporation of Nashville
Pinnacle Care Corporation of North Carolina
Pinnacle Care Corporation of Salina
Pinnacle Care Corporation of Seneca
Pinnacle Care Corporation of Sumter
Pinnacle Care Corporation of Williams Bay
Pinnacle Care Corporation of Wilmington
Pinnacle Care Management Corporation
Pinnacle Pharmaceutical Services, Inc.
Pinnacle Rehabilitation of Georgia, Inc.
Pinnacle Rehabilitation, Inc. [a Tennessee corporation]
Pinnacle Rehabilitation, Inc. [a Massachusetts corporation]
Pinnacle Rehabilitation of Texas, Inc.
Tennessee Occupational Medicine, Inc.
Cypress Nursing Facility, Inc.
Tri-State Health Care, Inc.
Aid & Assistance, Inc.
The Ocean Pharmacy, Inc.
MHC Transportation, Inc.
Mid-America Professional Services, Inc.
Pinnacle Rehabilitation of Illinois, Inc.
Pinnacle Rehabilitation of Missouri, Inc.
Seventeenth Street Associates Limited Partnership (By: Tri-State Health Care,
Inc., its general partner)
Pinnacle Rehabilitation of Florida, Inc.
IHS Rehab Partnership, Ltd. (By: Mariner Health Care of Nashville, Inc., its
general partner)
MedRehab of Florida, Inc.
MedRehab of Illinois, Inc.
<PAGE>
MedRehab of Indiana, Inc.
MedRehab of Louisiana, Inc.
MedRehab of Missouri, Inc.
MedRehab of Texas, Inc.
MedRehab of Wisconsin, Inc.
Functional Enhancements, Inc.
Mariner Health at Bonifay, Inc.
Mariner Health of Palmetto, Inc.
Mariner Health Properties IV, Ltd. (By: Mariner Health of Florida, Inc., its
general partner)
Mariner Health Properties VI, Ltd. (By: Mariner Health of Florida, Inc., its
general partner)
Beechwood Heritage Retirement Community, Inc.
National Health Strategies, Inc.
PHG Ventures, Inc.
Prism Care Centers, Inc.
Prism Home Care Company, Inc.
Prism Rehab Systems, Inc.
Prism Hospital Ventures, Inc.
Prism Home Care, Inc.
Prism Home Health Services, Inc.
Mariner Health of Seminole County, Inc.
Mariner - Regency Health Partners, Inc.
Regency Health Care Center of Seminole County, Inc.
Tampa Medical Associates, Inc.
Allegis Health and Living Center at Heritage Harbour, L.L.C. (By: Mariner
Health of Maryland, Inc., member)
<PAGE>
EXHIBIT 10.85
AMENDMENT NO. 21 TO CREDIT AGREEMENT AND CONSENT
THIS AMENDMENT NO. 21 TO CREDIT AGREEMENT AND CONSENT (the
"Amendment") dated as of October 29, 1999 by and among Mariner Health Group,
Inc., a Delaware corporation (the "Borrower"), each other Loan Party, PNC Bank,
National Association; Bank Austria Creditanstalt Corporate Finance, Inc.,
(formerly known as Creditanstalt AG, formerly known as Creditanstalt
Bankverein); First Union National Bank (as successor by merger to First Union
National Bank of North Carolina); Mellon Bank, N.A.; Toronto Dominion (New
York), Inc.; Bankers Trust Company; Credit Lyonnais New York Branch; AmSouth
Bank; Bank of Tokyo-Mitsubishi Trust Company; The Fuji Bank, Limited New York
Branch; SunTrust Bank, Central Florida, N.A.; Bank One Kentucky, NA; Fleet
National Bank; Comerica Bank; Bank One, NA (formerly known as The First National
Bank of Chicago); The Industrial Bank of Japan, Limited, New York Branch;
General Electric Capital Corporation; and Riggs Bank N.A. (collectively, the
"Banks"), First Union National Bank, in its capacity as syndication agent for
the Banks and PNC Bank, National Association, in its capacity as administrative
agent for the Banks (the "Administrative Agent").
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to that certain Credit
Agreement dated as of May 18, 1994, as amended (the "Credit Agreement"),
pursuant to which the Banks provided a $250,000,000 revolving credit facility to
the Borrower;
WHEREAS, the Loan Parties have deposited cash proceeds of Collateral,
as cash collateral, to the Letter of Credit Cash Collateral Account as defined
in the Credit Agreement;
WHEREAS, there are the Commitment Fee payment under the Credit
Agreement, the Letter of Credit Fee payment under the Credit Agreement and
quarterly interest payments due under the Credit Agreement and the Term Loan
Agreement on October 1, 1999; and
WHEREAS, the Borrower and its Subsidiaries have requested that the
cash in the Letter of Credit Cash Collateral Account be used only to the extent
necessary to make the Commitment Fee payment under the Credit Agreement, the
Letter of Credit Fee payment under the Credit Agreement and the quarterly
interest payments on the Credit Agreement and the Term Loan Agreement each due
October 1, 1999 in the ordinary course, to pay any mortgage taxes, recording
taxes or similar taxes, and all recording and filing fees, in connection with
the additional documents required by paragraph 4(b) hereof, and to pay fees and
expenses required to be paid by the Borrower pursuant to paragraph 4(e) hereof,
all on the terms as hereinafter provided.
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements hereinafter set forth and intending to be legally bound
hereby, covenant and agree as follows:
<PAGE>
1. Definitions.
-----------
Defined terms used herein unless otherwise defined herein shall have
the meanings ascribed to them in the Credit Agreement as amended by this
Amendment.
2. Amendments to Credit Agreement.
------------------------------
(a) Section 1.01 [Certain Definitions] of the Credit Agreement is
hereby amended by the addition of the following new definitions:
"Amendment No. 21 shall mean that certain Amendment No. 21 to Credit
----------------
Agreement dated October 29, 1999 among Borrower, the other Loan Parties,
the Banks and Administrative Agent, together with schedules and exhibits
thereto."
"Cash Deposit Agreement" shall mean that certain agreement dated
----------------------
October 29, 1999 among the Borrower, First Union and the Administrative
Agent attached to Amendment No. 21 as Exhibit A.
----------
"First Union" shall mean First Union National Bank."
-----------
"Healthcare Facility" means any of the following that are from time to
-------------------
time owned or operated by a Loan Party: (i) a hospital, outpatient clinic,
nursing home 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 (as defined in clause
(i)) or (iii) any business related or ancillary to the provision of
healthcare services or the operation of a Healthcare Facility (as defined
in clause (i)) including, but not limited to, contract therapy services, as
well as hospice and home care services; and "Healthcare Facilities" means
----------------------------
more than one Healthcare Facility.
---------------------------------
"Medicaid" means the medical assistance program established by Title
--------
XIX of the Social Security Act (42 U.S.C. (S)(S) 1396 et seq.) and any
-- ---
statutes succeeding thereto.
"Medicare" means the health insurance program for the aged and
--------
disabled established by Title XVIII of the Social Security Act (42 U.S.C.
(S)(S) 1995 et seq.) and any statutes succeeding thereto.
-- ---
"Twenty-First Amendment Effective Date shall mean October 29, 1999."
-------------------------------------
(b) Section 1.01 [Certain Definitions] of the Credit Agreement is
hereby amended by restating in its entirety the definition of the term
Collateral Agent to read as follows:
"Collateral Agent shall mean, as the context requires, (i) PNC Bank,
----------------
National Association in its capacity as the collateral agent under the
Collateral Sharing Agreement and its successors, and its assigns in such
capacity or (ii) First Union in its capacity as collateral agent under the
Cash Deposit Agreement attached to Amendment No. 21 as Exhibit A and its
---------
successors, and its assigns in such capacity."
-2-
<PAGE>
(c) Section 8.03 [Reporting Requirements] of the Credit Agreement is
hereby amended by adding a new subsection (k) which reads as follows:
"(k) Notices Regarding Certain Healthcare Reporting Events. Promptly
------------------------------------------------------
upon a Responsible Officer, any responsible person of any Loan Party, in-
house general counsel of MPN or in-house general counsel of the Borrower
receiving notice of the occurrence or threatened occurrence of (i) the
termination of any Medicare or Medicaid contracts or conditional
accreditation, (ii) denial of payment for new Medicare or Medicaid
admissions, (iii) operation under involuntary receivership or involuntary
management, (iv) any Healthcare Facilities which are subject to terminated
Medicare or Medicaid contracts, an admissions hold or current civil money
penalties in excess of $2,000 per day or are operating under involuntary
receivership or involuntary management (any of the foregoing events
required to be disclosed thereon being a "Reporting Event") or (v) a
material change in status with respect to any Reporting Event or any
Healthcare Facility becoming subject to an additional Reporting Event,
written notice thereof setting forth the nature of such Reporting Event and
what action the Borrower has taken, is taking or proposes to take with
respect thereto, written notice to the Administrative Agent setting forth
the details of such occurrence."
3. Use of Cash Collateral to Make Interest Payment. On October 29,
-----------------------------------------------
1999 the Collateral Agent shall deliver from the Letter of Credit Cash
Collateral Account to the Administrative Agent under the Credit Agreement and
the administrative agent under the Term Loan Agreement such amount of available
funds as is necessary to make the Commitment Fee payment under the Credit
Agreement, the Letter of Credit Fee payment under the Credit Agreement and the
quarterly interest payments under the Credit Agreement and the Term Loan
Agreement each due on October 1, 1999 in the ordinary course, as well as to pay
any mortgage taxes, recording taxes or similar taxes, and all recording and
filing fees, in connection with the additional documents required by paragraph
4(b) hereof, and to pay fees and expenses required to be paid by the Borrower
pursuant to paragraph 4(e) hereof. Notwithstanding anything to the contrary
contained in the Credit Agreement, the Term Loan Agreement or any of the other
Loan Documents, the next Interest Payment Date will be January 3, 2000.
4. Other Matters.
-------------
(a) Updated Schedules. The Borrower covenants and agrees that it
-----------------
shall deliver to the Administrative Agent, in form and substance satisfactory to
the Agents, the following amended and restated Schedules on the Twenty-First
Amendment Effective Date: Schedule 1.01(P) [Permitted Liens], Schedules 6.01(a)
---------------- -----------------
and (c) [Qualification to do Business, Subsidiaries and Excluded Entities],
- -------
Schedule 6.01(aa) [Owned and Leased Real Property of the Loan Parties; Matters
- -----------------
Regarding Certain Leased Facilities and Indebtedness of Certain Subsidiaries],
Schedule 8.02(c) [Guaranties] and Schedule 8.02(d) [Restricted Investments],
- ---------------- ----------------
provided that the Borrower shall not be obligated to cause new Lien searches or
title examinations to be performed in connection therewith.
(b) Execution of Mortgages and Joinder Documents. On or before the
--------------------------------------------
date hereof the Borrower and each applicable Subsidiary of the Borrower shall
have executed and delivered to the Collateral Agent, in form and substance
acceptable to the Collateral Agent, the
-3-
<PAGE>
following the documents: First Mortgages for Mariner Health Care of Greater
Laurel Facility (Mariner Health Care of Greater Laurel Facility), Seventeenth
St. Associates Limited Partnership (Mariner Health Care of Huntington Facility),
Beechwood Heritage Retirement Community, Inc. (Heritage Harbour Health &
Retirement Center Facility) and Pinnacle Care Corporation of North Carolina
(Mariner Health Care of Wilmington Facility). On or before the date hereof the
Borrower and each applicable Subsidiary of the Borrower shall have executed and
delivered to the Collateral Agent, in form and substance acceptable to the
Collateral Agent, the joinder documents, financing statements, stock powers,
stock certificates and the other documents listed on Schedule B attached hereto.
----------
(c) Delivery of Requested Information. The Borrower shall and shall
---------------------------------
cause each Subsidiary of the Borrower to use its best efforts to deliver to the
Administrative Agent and the Administrative Agent's legal and other advisors all
information on the attached Schedule C by the date indicated thereon with
----------
respect to the Borrower and its Subsidiaries and such other information that is
requested by the Agents and the Banks and their legal and other advisors,
including, but not limited to, Buchanan Ingersoll, P.C., counsel to the
Administrative Agent and the Collateral Agent, Kennedy Covington Lobdell &
Hickman L.L.P. counsel to the Syndication Agent, O'Melveny & Myers LLP, special
counsel to the Banks, and Houlihan Lokey Howard & Zukin or any other financial
advisors and other experts engaged by the Agents or the Banks.
(d) Consents. Each Bank consents to the appointment of First Union as
--------
collateral agent with respect to the cash deposited in the deposit accounts
pursuant to the Cash Deposit Agreement attached hereto as Exhibit A. All
---------
deposit accounts held by First Union for the benefit of the Banks, the Agents,
the Term Loan Banks and the agents under the Term Loan Agreement shall be deemed
to be Collateral under the Credit Agreement and Collateral as such term is
defined in and for the purpose of the Term Loan Agreement and shall be deemed to
be Shared Collateral as such term is defined in and for the purpose of the
Collateral Sharing Agreement and any distributions following a Foreclosure
Action (as defined in the Collateral Sharing Agreement) with respect to the Cash
Deposit Agreement shall be distributed as Shared Collateral in accordance with
the Collateral Sharing Agreement.
(e) Fees and Expenses. The Borrower shall have paid (i) legal and
-----------------
other advisor fees of Buchanan Ingersoll, P.C., counsel to the Administrative
Agent and the Collateral Agent, Kennedy Covington Lobdell & Hickman L.L.P.
counsel to the Syndication Agent, O'Melveny & Myers LLP, special counsel to the
Banks, and Houlihan Lokey Howard & Zukin or any other financial advisors and
other experts engaged by the Agents or the Banks as a group for which bills have
been rendered, and (ii) all other out-of-pocket costs, expense and disbursements
accrued and unpaid for which bills have been rendered and the out-of-pocket
costs, expenses and disbursements of the Agents including, without limitation,
reasonable fees of the foregoing counsel and advisors, including, without
limitation, those incurred in connection with this Amendment for which bills
have been rendered.
(f) Legal Details; Counterparts. All legal details and proceedings in
---------------------------
connection with the transactions contemplated by this Amendment shall be in form
and substance satisfactory to the Agents, the Administrative Agent shall have
received from the Borrower and the requisite Banks an executed original of this
Amendment and the
-4-
<PAGE>
the Administrative Agent shall have received all such other counterpart
originals or certified or other copies of such documents and proceedings in
connection with such transactions, in form and substance satisfactory to the
Agents.
5. Conditions of Effectiveness of Amendment of Credit Agreement; and
-----------------------------------------------------------------
Related Matters. The effectiveness of this Amendment is expressly conditioned
- ---------------
upon satisfaction of each of the following conditions precedent unless waived by
the Agents:
(a) Execution of Cash Deposit Agreement. The Borrower and each
-----------------------------------
Subsidiary of the Borrower shall have executed and satisfied the conditions of
the Cash Deposit Agreement attached hereto as Exhibit A, including, without
---------
limitation, the provisions of paragraph 2 thereof (with the exception of those
provisions which relate to future acts).
(b) DIP Projections. The Borrower and each Subsidiary of the Borrower
---------------
shall have delivered to the Administrative Agent projections regarding debtor-
in-possession financing.
(c) Representations and Warranties. The representations and
------------------------------
warranties of the Borrower contained in Article VI of the Credit Agreement shall
be true and accurate on the date hereof (taking into account this Amendment)
with the same effect as though such representations and warranties had been made
on and as of such date (except representations and warranties which relate
solely to an earlier date or time which representations and warranties shall be
true and correct on and as of the specific dates or times referred to therein or
which relate to the financial condition of the Loan Parties).
(d) Interest, Fees and Expenses. To the extent the cash in the
---------------------------
Letter of Credit Cash Collateral Account is insufficient to pay interest, fees
and expenses required to be paid by the Borrower pursuant to paragraph 3 hereof,
the Borrower shall have paid (i) the Commitment Fee payment under the Credit
Agreement, the Letter of Credit Fee payment under the Credit Agreement and the
quarterly interest payments under the Credit Agreement and the Term Loan
Agreement each due on October 1, 1999 in the ordinary course, (ii) any mortgage
taxes, recording taxes or similar taxes, and all recording and filing fees, in
connection with the additional documents required by paragraph 4(b) hereof,
(iii) legal and other advisor fees of Buchanan Ingersoll, P.C., counsel to the
Administrative Agent and the Collateral Agent, Kennedy Covington Lobdell &
Hickman L.L.P. counsel to the Syndication Agent, O'Melveny & Myers LLP, special
counsel to the Banks, and Houlihan Lokey Howard & Zukin or any other financial
advisors and other experts engaged by the Agents or the Banks as a group for
which bills have been rendered, and (iv) all other out-of-pocket costs, expense
and disbursements accrued and unpaid for which bills have been rendered and the
out-of-pocket costs, expenses and disbursements of the Agents including, without
limitation, reasonable fees of the foregoing counsel and advisors, including,
without limitation, those incurred in connection with this Amendment for which
bills have been rendered.
6. Force and Effect. Except as otherwise expressly modified by this
----------------
Amendment, the Credit Agreement and the other Loan Documents are hereby ratified
and confirmed and shall remain in full force and effect after the date hereof.
-5-
<PAGE>
7. Governing Law. This Amendment shall be deemed to be a contract
-------------
under the laws of the Commonwealth of Pennsylvania and for all purposes shall be
governed by and construed and enforced in accordance with the internal laws of
the Commonwealth of Pennsylvania without regard to its conflict of laws
principles.
8. Effective Date; Certification of the Loan Parties. This
-------------------------------------------------
Amendment shall be dated as of and shall be binding, effective and enforceable
upon the date of (i) satisfaction of all conditions set forth in Section 5
hereof and (ii) receipt by the Administrative Agent of duly executed counterpart
signature pages of this Amendment from the Loan Parties, the Agents and the
requisite Banks, and from and after such date this Amendment shall be binding
upon the Loan Parties, each Bank and the Agents, and their respective
successors and assigns permitted by the Credit Agreement. Each of the Loan
Parties, by executing this Amendment, hereby certifies that this Amendment has
been duly executed.
[INTENTIONALLY BLANK]
-6-
<PAGE>
[SIGNATURE PAGE 1 OF 19 TO AMENDMENT NO. 21]
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
MARINER HEALTH GROUP, INC.
By:____________________________
Name:__________________________
Title:_________________________
GUARANTORS:
EACH GUARANTOR LISTED ON
SCHEDULE A ATTACHED HERETO
By:____________________________
Name:__________________________
Title:__________________of each
Guarantor listed on Schedule A attached
hereto which is a corporation and of each
corporation listed on Schedule A attached
hereto which is the general partner or
member of a Guarantor
<PAGE>
[SIGNATURE PAGE 2 OF 19 TO AMENDMENT NO. 21]
PNC BANK, NATIONAL ASSOCIATION,
individually and as Administrative Agent
By:____________________________
Name:__________________________
Title:_________________________
<PAGE>
[SIGNATURE PAGE 3 OF 19 TO AMENDMENT NO. 21]
FIRST UNION NATIONAL BANK
individually and as Syndication Agent
By:___________________________
Name:_________________________
Title:________________________
<PAGE>
[SIGNATURE PAGE 4 OF 19 TO AMENDMENT NO. 21]
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By:___________________________
Name:_________________________
Title:________________________
By:___________________________
Name:_________________________
Title:________________________
<PAGE>
[SIGNATURE PAGE 5 OF 19 TO AMENDMENT NO. 21]
MELLON BANK, N.A.
By:___________________________
Name:_________________________
Title:________________________
<PAGE>
[SIGNATURE PAGE 6 OF 19 TO AMENDMENT NO. 21]
TORONTO DOMINION (NEW YORK), INC.
By:___________________________
Name:_________________________
Title:________________________
<PAGE>
[SIGNATURE PAGE 7 OF 19 TO AMENDMENT NO. 21]
BANKERS TRUST COMPANY
By:___________________________
Name:_________________________
Title:________________________
<PAGE>
[SIGNATURE PAGE 8 OF 19 TO AMENDMENT NO. 21]
CREDIT LYONNAIS NEW YORK BRANCH
By:___________________________
Name:_________________________
Title:________________________
<PAGE>
[SIGNATURE PAGE 9 OF 19 TO AMENDMENT NO. 21]
AMSOUTH BANK
By:___________________________
Name:_________________________
Title:________________________
<PAGE>
[SIGNATURE PAGE 10 OF 19 TO AMENDMENT NO. 21]
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY
By:_____________________________
Name:___________________________
Title:__________________________
<PAGE>
[SIGNATURE PAGE 11 OF 19 TO AMENDMENT NO. 21]
THE FUJI BANK, LIMITED NEW YORK
BRANCH
By:____________________________
Name:__________________________
Title:_________________________
<PAGE>
[SIGNATURE PAGE 12 OF 19 TO AMENDMENT NO. 21]
SUNTRUST BANK, CENTRAL FLORIDA, N.A.
By:____________________________
Name:__________________________
Title:_________________________
<PAGE>
[SIGNATURE PAGE 13 OF 19 TO AMENDMENT NO. 21]
BANK ONE, KENTUCKY, NA
By:____________________________
Name:__________________________
Title:_________________________
<PAGE>
[SIGNATURE PAGE 14 OF 19 TO AMENDMENT NO. 21]
FLEET NATIONAL BANK
By:____________________________
Name:__________________________
Title:_________________________
<PAGE>
[SIGNATURE PAGE 15 OF 19 TO AMENDMENT NO. 21]
COMERICA BANK
By:____________________________
Name:__________________________
Title:_________________________
<PAGE>
[SIGNATURE PAGE 16 OF 19 TO AMENDMENT NO. 21]
BANK ONE, NA
By:____________________________
Name:__________________________
Title:_________________________
<PAGE>
[SIGNATURE PAGE 17 OF 19 TO AMENDMENT NO. 21]
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By:____________________________
Name:__________________________
Title:_________________________
<PAGE>
[SIGNATURE PAGE 18 OF 19 TO AMENDMENT NO. 21]
GENERAL ELECTRIC CAPITAL
CORPORATION
By:____________________________
Name:__________________________
Title:_________________________
<PAGE>
[SIGNATURE PAGE 19 OF 19 TO AMENDMENT NO. 21]
RIGGS BANK N.A.
By:____________________________
Name:__________________________
Title:_________________________
<PAGE>
STATE OF TENNESSEE
COUNTY OF DAVIDSON
On the _____ day of ___________, 1999 personally appeared _______________,
as the __________ President of SunTrust Bank, Central Florida, N.A., and before
me executed the attached AMENDMENT NO. 21 dated as of _____________, 1999 to the
Credit Agreement between Mariner Health Group, Inc., with SunTrust Bank, Central
Florida, N.A., as Lender.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal, in the
state and county aforesaid.
_________________________________________________________________
Signature of Notary Public, State of ____________________________
_________________________________________________________________
(Print, Type or Stamp Commissioned Name of Notary Public)
Personally known __________; OR Produced Identification__________
Type of identification produced:_________________________________
_________________________________________________________________
<PAGE>
SCHEDULE A
----------
GUARANTORS
----------
Bride Brook Nursing & Rehabilitation Center, Inc.
Compass Pharmacy Services,Inc.
Compass Pharmacy Services of Maryland, Inc.
Compass Pharmacy Services of Texas, Inc.
Long Ridge Nursing & Rehabilitation Center, Inc.
Longwood Rehabilitation Center, Inc.
Mariner Health Care, Inc.
Mariner Health Care of Fort Wayne, Inc.
Mariner Health Care of Greater Laurel, Inc.
Mariner Health Care of Lake Worth, Inc.
Mariner Health Care of Nashville, Inc.
Mariner Health Care of North Hills, Inc.
Mariner Health Care of Orange City, Inc.
Mariner Health Care of Palm City, Inc.
Mariner Health Care of Pinellas Point, Inc.
Mariner Health Care of Port Orange, Inc.
Mariner Health Care of Southern Connecticut, Inc.
Mariner Health Care of Toledo, Inc.
Mariner Health Care of West Hills, Inc.
Mariner Health Care of Atlantic Shores, Inc.
Mariner Health Care of Deland, Inc.
Mariner Health of Florida, Inc.
Mariner Health Care of Inverness, Inc.
Mariner Health of Jacksonville, Inc.
Mariner Health Care of MacClenny, Inc.
Mariner Health of Maryland, Inc.
Mariner Health Care of MetroWest, Inc.
Mariner Health of Orlando, Inc.
Mariner Health of Tampa, Inc.
Mariner Health Care of Tuskawilla, Inc.
Mariner Health Resources, Inc.
Mariner Practice Corporation
Mariner Physician Services, Inc.
Mariner Supply Services, Inc.
Merrimack Valley Nursing & Rehabilitation Center, Inc.
Methuen Nursing & Rehabilitation Center, Inc.
MHC Rehab. Corp.
Mystic Nursing & Rehabilitation Center, Inc.
Park Terrace Nursing & Rehabilitation Center, Inc.
Pendleton Nursing & Rehabilitation Center, Inc.
<PAGE>
Pinnacle Care Corporation
Prism Health Group, Inc.
Sassaquin Nursing & Rehabilitation Center, Inc.
Windward Health Care, Inc.
MarinerSelect Staffing Solutions, Inc.
MedRehab, Inc.
Pinnacle Care Corporation of Huntington
Pinnacle Care Corporation of Nashville
Pinnacle Care Corporation of Seneca
Pinnacle Care Corporation of Sumter
Pinnacle Care Corporation of Williams Bay
Pinnacle Care Corporation of Wilmington
Pinnacle Care Management Corporation
Pinnacle Pharmaceutical Services, Inc.
Pinnacle Rehabilitation, Inc. [a Tennessee corporation]
Cypress Nursing Facility, Inc.
Tri-State Health Care, Inc.
Aid & Assistance, Inc.
The Ocean Pharmacy, Inc.
MHC Transportation, Inc.
Pinnacle Rehabilitation of Missouri, Inc.
Seventeenth Street Associates Limited Partnership (By: Tri-State Health Care,
Inc., its general partner)
IHS Rehab Partnership, Ltd. (By: Mariner Health Care of Nashville, Inc., its
general partner)
MedRehab of Indiana, Inc.
MedRehab of Louisiana, Inc.
MedRehab of Missouri, Inc.
Mariner Health at Bonifay, Inc.
Mariner Health of Palmetto, Inc.
Mariner Health Properties IV, Ltd. (By: Mariner Health of Florida, Inc., its
general partner)
Mariner Health Properties VI, Ltd. (By: Mariner Health of Florida, Inc., its
general partner)
Beechwood Heritage Retirement Community, Inc.
National Health Strategies, Inc.
Prism Care Centers, Inc.
Prism Home Care Company, Inc.
Prism Rehab Systems, Inc.
Prism Hospital Ventures, Inc.
Prism Home Care, Inc.
Prism Home Health Services, Inc.
Mariner Health of Seminole County, Inc.
Mariner - Regency Health Partners, Inc.
Regency Health Care Center of Seminole County, Inc.
Tampa Medical Associates, Inc.
Allegis Health and Living Center at Heritage Harbour, L.L.C. (By: Mariner
Health of Maryland, Inc., member)
<PAGE>
EXHIBIT 10.87
AMENDMENT NO. 2 TO CREDIT AGREEMENT AND CONSENT
THIS AMENDMENT NO. 2 TO CREDIT AGREEMENT AND CONSENT (the "Amendment")
dated as of October 29, 1999 by and among Mariner Health Group, Inc., a Delaware
corporation (the "Borrower"), each other Loan Party, PNC Bank, National
Association; Bank Austria Creditanstalt Corporate Finance, Inc., (formerly known
as Creditanstalt AG, formerly known as Creditanstalt Bankverein); First Union
National Bank (as successor by merger to First Union National Bank of North
Carolina); Mellon Bank, N.A.; Toronto Dominion (New York), Inc.; Bankers Trust
Company; Credit Lyonnais New York Branch; AmSouth Bank; Bank of Tokyo-Mitsubishi
Trust Company; The Fuji Bank, Limited New York Branch; SunTrust Bank, Central
Florida, N.A.; Bank One Kentucky, NA; Fleet National Bank; Comerica Bank; Bank
One, NA (formerly known as The First National Bank of Chicago); The Industrial
Bank of Japan, Limited, New York Branch; General Electric Capital Corporation;
and Riggs Bank N.A. (collectively, the "Banks"), First Union National Bank, in
its capacity as syndication agent for the Banks and PNC Bank, National
Association, in its capacity as administrative agent for the Banks (the
"Administrative Agent").
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to that certain Credit
Agreement dated as of December 23, 1998, as amended (the "Credit Agreement"),
pursuant to which the Banks provided a $210,000,000 term loan facility to the
Borrower;
WHEREAS, the Loan Parties have deposited cash proceeds of Collateral,
as cash collateral, to the Letter of Credit Cash Collateral Account as defined
in the Revolving Credit Agreement;
WHEREAS, there are the Commitment Fee payment under the Revolving
Credit Agreement, the Letter of Credit Fee payment under the Revolving Credit
Agreement and quarterly interest payments due under the Revolving Credit
Agreement and the Credit Agreement on October 1, 1999; and
WHEREAS, the Borrower and its Subsidiaries have requested that the
cash in the Letter of Credit Cash Collateral Account as defined in the Revolving
Credit Agreement be used only to the extent necessary to make the Commitment Fee
(as defined in the Revolving Credit Agreement) payment under the Revolving
Credit Agreement, the Letter of Credit Fee (as defined in the Revolving Credit
Agreement) payment under the Revolving Credit Agreement and the quarterly
interest payments on the Revolving Credit Agreement and the Credit Agreement
each due October 1, 1999 in the ordinary course, to pay any mortgage taxes,
recording taxes or similar taxes, and all recording and filing fees, in
connection with the additional documents required by paragraph 4(b) hereof, and
to pay fees and expenses required to be paid by the Borrower pursuant to
paragraph 4(e) hereof, all on the terms as hereinafter provided.
<PAGE>
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements hereinafter set forth and intending to be legally bound
hereby, covenant and agree as follows:
1. Definitions.
-----------
Defined terms used herein unless otherwise defined herein shall have
the meanings ascribed to them in the Credit Agreement as amended by this
Amendment.
2. Amendments to Credit Agreement.
------------------------------
(a) Section 1.01 [Certain Definitions] of the Credit Agreement is
hereby amended by the addition of the following new definitions:
"Amendment No. 2 shall mean that certain Amendment No. 2 to Credit
---------------
Agreement dated October 29, 1999 among Borrower, the other Loan Parties,
the Banks and Administrative Agent, together with schedules and exhibits
thereto."
"Cash Deposit Agreement" shall mean that certain agreement dated
October 29, 1999 among the Borrower, First Union and the Administrative
Agent attached to Amendment No. 2 as Exhibit A.
---------
"First Union" shall mean First Union National Bank."
-----------
"Healthcare Facility" means any of the following that are from time to
-------------------
time owned or operated by a Loan Party: (i) a hospital, outpatient clinic,
nursing home 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 (as defined in clause
(i)) or (iii) any business related or ancillary to the provision of
healthcare services or the operation of a Healthcare Facility (as defined
in clause (i)) including, but not limited to, contract therapy services, as
well as hospice and home care services; and "Healthcare Facilities" means
---------------------
more than one Healthcare Facility.
"Medicaid" means the medical assistance program established by Title
--------
XIX of the Social Security Act (42 U.S.C. (S)(S) 1396 et seq.) and any
-- ---
statutes succeeding thereto.
"Medicare" means the health insurance program for the aged and
--------
disabled established by Title XVIII of the Social Security Act (42 U.S.C.
(S)(S) 1995 et seq.) and any statutes succeeding thereto.
-- ---
"Second Amendment Effective Date shall mean October 29, 1999."
-------------------------------
-2-
<PAGE>
(b) Section 1.01 [Certain Definitions] of the Credit Agreement is
hereby amended by restating in its entirety the definition of the term
Collateral Agent to read as follows:
"Collateral Agent shall mean, as the context requires, (i) PNC Bank,
----------------
National Association in its capacity as the collateral agent under the
Collateral Sharing Agreement and its successors, and its assigns in such
capacity or (ii) First Union in its capacity as collateral agent under the
Cash Deposit Agreement attached to Amendment No. 2 as Exhibit A and its
---------
successors, and its assigns in such capacity."
(c) Section 8.03 [Reporting Requirements] of the Credit Agreement is
hereby amended by adding a new subsection (k) which reads as follows:
"(k) Notices Regarding Certain Healthcare Reporting Events. Promptly
-----------------------------------------------------
upon a Responsible Officer, any responsible person of any Loan Party, in-
house general counsel of MPN or in-house general counsel of the Borrower
receiving notice of the occurrence or threatened occurrence of (i) the
termination of any Medicare or Medicaid contracts or conditional
accreditation, (ii) denial of payment for new Medicare or Medicaid
admissions, (iii) operation under involuntary receivership or involuntary
management, (iv) any Healthcare Facilities which are subject to terminated
Medicare or Medicaid contracts, an admissions hold or current civil money
penalties in excess of $2,000 per day or are operating under involuntary
receivership or involuntary management (any of the foregoing events
required to be disclosed thereon being a "Reporting Event") or (v) a
material change in status with respect to any Reporting Event or any
Healthcare Facility becoming subject to an additional Reporting Event,
written notice thereof setting forth the nature of such Reporting Event and
what action the Borrower has taken, is taking or proposes to take with
respect thereto, written notice to the Administrative Agent setting forth
the details of such occurrence."
3. Use of Cash Collateral to Make Interest Payment. On October 29,
-----------------------------------------------
1999 the Collateral Agent shall deliver from the Letter of Credit Cash
Collateral Account (as defined in the Revolving Credit Agreement) to the
administrative agent under the Revolving Credit Agreement and the Administrative
Agent under the Credit Agreement such amount of available funds as is necessary
to make the Commitment Fee payment under the Revolving Credit Agreement, the
Letter of Credit Fee payment under the Revolving Credit Agreement and the
quarterly interest payments under the Revolving Credit Agreement and the Credit
Agreement each due on October 1, 1999 in the ordinary course, as well as to pay
any mortgage taxes, recording taxes or similar taxes, and all recording and
filing fees, in connection with the additional documents required by paragraph
4(b) hereof, and to pay fees and expenses required to be paid by the Borrower
pursuant to paragraph 4(e) hereof. Notwithstanding anything to the contrary
contained in the Credit Agreement, the Revolving Credit Agreement or any of the
other Loan Documents, the next Interest Payment Date will be January 3, 2000.
4. Other Matters.
-------------
(a) Updated Schedules. The Borrower covenants and agrees that its
-----------------
shall deliver to the Administrative Agent, in form and substance satisfactory to
the Agents, the following amended and restated Schedules on the Second Amendment
Effective Date:
-3-
<PAGE>
Schedule 1.01(P) [Permitted Liens], Schedules 6.01(a) and (c) [Qualification to
- ---------------- -------------------------
do Business, Subsidiaries and Excluded Entities], Schedule 6.01(aa) [Owned and
-----------------
Leased Real Property of the Loan Parties; Matters Regarding Certain Leased
Facilities and Indebtedness of Certain Subsidiaries], Schedule 8.02(c)
----------------
[Guaranties] and Schedule 8.02(d) [Restricted Investments], provided that the
----------------
Borrower shall not be obligated to cause new Lien searches or title examinations
to be performed in connection therewith.
(b) Execution of Joinder Documents. On or before the date hereof the
------------------------------
Borrower and each applicable Subsidiary of the Borrower shall have executed and
delivered to the Collateral Agent, in form and substance acceptable to the
Collateral Agent, the following documents: First Mortgages for Mariner Health
Care of Greater Laurel Facility (Mariner Health Care of Greater Laurel
Facility), Seventeenth St. Associates Limited Partnership (Mariner Health Care
of Huntington Facility), Beechwood Heritage Retirement Community, Inc. (Heritage
Harbour Health & Retirement Center Facility) and Pinnacle Care Corporation of
North Carolina (Mariner Health Care of Wilmington Facility). On or before the
date hereof the Borrower and each applicable Subsidiary of the Borrower shall
have executed and delivered to the Collateral Agent, in form and substance
acceptable to the Collateral Agent, the joinder documents, financing statements,
stock powers, stock certificates and the other documents listed on Schedule B
----------
attached hereto.
(c) Delivery of Requested Information. The Borrower shall and shall
---------------------------------
cause each Subsidiary of the Borrower to use its best efforts to deliver to the
Administrative Agent and the Administrative Agent's legal and other advisors all
information on the attached Schedule C by the date indicated thereon with
-----------
respect to the Borrower and its Subsidiaries and such other information that is
requested by the Agents and the Banks and their legal and other advisors,
including, but not limited to, Buchanan Ingersoll, P.C., counsel to the
Administrative Agent and the Collateral Agent, Kennedy Covington Lobdell &
Hickman L.L.P. counsel to the Syndication Agent, O'Melveny & Myers LLP, special
counsel to the Banks, and Houlihan Lokey Howard & Zukin or any other financial
advisors and other experts engaged by the Agents or the Banks.
(d) Consents. Each Bank consents to the appointment of First Union as
--------
collateral agent with respect to the cash deposited in the deposit accounts
pursuant to the Cash Deposit Agreement attached hereto as Exhibit A. All
---------
deposit accounts held by First Union for the benefit of the Banks, the Agents,
the Revolving Credit Banks and the agents under the Revolving Credit Agreement
shall be deemed to be Collateral under the Credit Agreement and Collateral as
such term is defined in and for the purpose of the Revolving Credit Agreement
and shall be deemed to be Shared Collateral as such term is defined in and for
the purpose of the Collateral Sharing Agreement and any distributions following
a Foreclosure Action (as defined in the Collateral Sharing Agreement) with
respect to the Cash Deposit Agreement shall be distributed as Shared Collateral
in accordance with the Collateral Sharing Agreement.
(e) Fees and Expenses. The Borrower shall have paid (i) legal and
-----------------
other advisor fees of Buchanan Ingersoll, P.C., counsel to the Administrative
Agent and the Collateral Agent, Kennedy Covington Lobdell & Hickman L.L.P.
counsel to the Syndication Agent, O'Melveny & Myers LLP, special counsel to the
Banks, and Houlihan Lokey Howard & Zukin or any other financial advisors and
other experts engaged by the Agents or the Banks as a group for
-4-
<PAGE>
which bills have been rendered, and (ii) all other out-of-pocket costs, expense
and disbursements accrued and unpaid for which bills have been rendered and the
out-of-pocket costs, expenses and disbursements of the Agents including, without
limitation, reasonable fees of the foregoing counsel and advisors, including,
without limitation, those incurred in connection with this Amendment for which
bills have been rendered.
(f) Legal Details; Counterparts. All legal details and proceedings in
---------------------------
connection with the transactions contemplated by this Amendment shall be in form
and substance satisfactory to the Agents, the Administrative Agent shall have
received from the Borrower and the requisite Banks an executed original of this
Amendment and the Administrative Agent shall have received all such other
counterpart originals or certified or other copies of such documents and
proceedings in connection with such transactions, in form and substance
satisfactory to the Agents.
5. Conditions of Effectiveness of Amendment of Credit Agreement; and
-----------------------------------------------------------------
Related Matters. The effectiveness of this Amendment is expressly conditioned
- ---------------
upon satisfaction of each of the following conditions precedent unless waived by
the Agents:
(a) Execution of Cash Deposit Agreement. The Borrower and each
-----------------------------------
Subsidiary of the Borrower shall have executed and satisfied the conditions of
the Cash Deposit Agreement attached hereto as Exhibit A, including, without
---------
limitation, the provisions of paragraph 2 thereof (with the exception of those
provisions which relate to future acts).
(b) DIP Projections. The Borrower and each Subsidiary of the Borrower
---------------
shall have delivered to the Administrative Agent projections regarding debtor-
in-possession financing.
(c) Representations and Warranties. The representations and
------------------------------
warranties of the Borrower contained in Article VI of the Credit Agreement shall
be true and accurate on the date hereof (taking into account this Amendment)
with the same effect as though such representations and warranties had been made
on and as of such date (except representations and warranties which relate
solely to an earlier date or time which representations and warranties shall be
true and correct on and as of the specific dates or times referred to therein or
which relate to the financial condition of the Loan Parties).
(d) Interest, Fees and Expenses. To the extent the cash in the Letter
---------------------------
of Credit Cash Collateral Account (as defined in the Revolving Credit Agreement)
is insufficient to pay interest, fees and expenses required to be paid by the
Borrower pursuant to paragraph 3 hereof, the Borrower shall have paid (i) the
Commitment Fee payment under the Credit Agreement, the Letter of Credit Fee
payment under the Credit Agreement and the quarterly interest payments under the
Credit Agreement and the Term Loan Agreement each due on October 1, 1999 in the
ordinary course, (ii) any mortgage taxes, recording taxes or similar taxes, and
all recording and filing fees, in connection with the additional documents
required by paragraph 4(b) hereof, (iii) legal and other advisor fees of
Buchanan Ingersoll, P.C., counsel to the Administrative Agent and the Collateral
Agent, Kennedy Covington Lobdell & Hickman L.L.P. counsel to the Syndication
Agent, O'Melveny & Myers LLP, special counsel to the Banks, and Houlihan Lokey
Howard & Zukin or any other financial advisors and other experts engaged by the
Agents or the
-5-
<PAGE>
Banks as a group for which bills have been rendered, and (iv) all other out-of-
pocket costs, expense and disbursements accrued and unpaid for which bills have
been rendered and the out-of-pocket costs, expenses and disbursements of the
Agents including, without limitation, reasonable fees of the foregoing counsel
and advisors, including, without limitation, those incurred in connection with
this Amendment for which bills have been rendered.
6. Force and Effect. Except as otherwise expressly modified by this
----------------
Amendment, the Credit Agreement and the other Loan Documents are hereby ratified
and confirmed and shall remain in full force and effect after the date hereof.
7. Governing Law. This Amendment shall be deemed to be a contract
-------------
under the laws of the Commonwealth of Pennsylvania and for all purposes shall be
governed by and construed and enforced in accordance with the internal laws of
the Commonwealth of Pennsylvania without regard to its conflict of laws
principles.
8. Effective Date; Certification of the Loan Parties. This
-------------------------------------------------
Amendment shall be dated as of and shall be binding, effective and enforceable
upon the date of (i) satisfaction of all conditions set forth in Section 5
hereof and (ii) receipt by the Administrative Agent of duly executed counterpart
signature pages of this Amendment from the Loan Parties, the Agents and the
requisite Banks, and from and after such date this Amendment shall be binding
upon the Loan Parties, each Bank and the Agents, and their respective
successors and assigns permitted by the Credit Agreement. Each of the Loan
Parties, by executing this Amendment, hereby certifies that this Amendment has
been duly executed.
[INTENTIONALLY BLANK]
-6-
<PAGE>
[SIGNATURE PAGE 1 OF 19 TO AMENDMENT NO. 2]
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
MARINER HEALTH GROUP, INC.
By:_______________________________________
Name:_____________________________________
Title:____________________________________
GUARANTORS:
EACH GUARANTOR LISTED ON
SCHEDULE A ATTACHED HERETO
By:_______________________________________
Name:_____________________________________
Title:_____________________________of each
Guarantor listed on Schedule A attached
hereto which is a corporation and of each
corporation listed on Schedule A attached
hereto which is the general partner or
member of a Guarantor
<PAGE>
[SIGNATURE PAGE 2 OF 19 TO AMENDMENT NO. 2]
PNC BANK, NATIONAL ASSOCIATION,
individually and as Administrative Agent
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 3 OF 19 TO AMENDMENT NO. 2]
FIRST UNION NATIONAL BANK
individually and as Syndication Agent
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 4 OF 19 TO AMENDMENT NO. 2]
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By:_______________________________________
Name:_____________________________________
Title:____________________________________
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 5 OF 19 TO AMENDMENT NO. 2]
MELLON BANK, N.A.
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 6 OF 19 TO AMENDMENT NO. 2]
TORONTO DOMINION (NEW YORK), INC.
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 7 OF 19 TO AMENDMENT NO. 2]
BANKERS TRUST COMPANY
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 8 OF 19 TO AMENDMENT NO. 2]
CREDIT LYONNAIS NEW YORK BRANCH
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 9 OF 19 TO AMENDMENT NO. 2]
AMSOUTH BANK
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 10 OF 19 TO AMENDMENT NO. 2]
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 11 OF 19 TO AMENDMENT NO. 2]
THE FUJI BANK, LIMITED NEW YORK BRANCH
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 12 OF 19 TO AMENDMENT NO. 2]
SUNTRUST BANK, CENTRAL FLORIDA, N.A.
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 13 OF 19 TO AMENDMENT NO. 2]
BANK ONE, KENTUCKY, NA
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 14 OF 19 TO AMENDMENT NO. 2]
FLEET NATIONAL BANK
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 15 OF 19 TO AMENDMENT NO. 2]
COMERICA BANK
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 16 OF 19 TO AMENDMENT NO. 2]
BANK ONE, NA
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE>
[SIGNATURE PAGE 17 OF 19 TO AMENDMENT NO. 2]
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By:___________________________________
Name:_________________________________
Title:________________________________
<PAGE>
[SIGNATURE PAGE 18 OF 19 TO AMENDMENT NO. 2]
GENERAL ELECTRIC CAPITAL
CORPORATION
By:___________________________________
Name:_________________________________
Title:________________________________
<PAGE>
[SIGNATURE PAGE 19 OF 19 TO AMENDMENT NO. 2]
RIGGS BANK N.A.
By:___________________________________
Name:_________________________________
Title:________________________________
<PAGE>
STATE OF TENNESSEE
COUNTY OF DAVIDSON
On the _____ day of ___________, 1999 personally appeared ______________,
as the __________ President of SunTrust Bank, Central Florida, N.A., and before
me executed the attached Amendment No. 2 dated as of _____________, 1999 to the
Credit Agreement between Mariner Health Group, Inc., with SunTrust Bank,
Central Florida, N.A., as Lender.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal, in the
state and county aforesaid.
________________________________________________________________
Signature of Notary Public, State of____________________________
________________________________________________________________
(Print, Type or Stamp Commissioned Name of Notary Public)
Personally known __________; OR Produced Identification_________
Type of identification produced:________________________________
________________________________________________________________
<PAGE>
SCHEDULE A
----------
GUARANTORS
----------
Bride Brook Nursing & Rehabilitation Center, Inc.
Compass Pharmacy Services, Inc.
Compass Pharmacy Services of Maryland, Inc.
Compass Pharmacy Services of Texas, Inc.
Long Ridge Nursing & Rehabilitation Center, Inc.
Longwood Rehabilitation Center, Inc.
Mariner Health Care, Inc.
Mariner Health Care of Fort Wayne, Inc.
Mariner Health Care of Greater Laurel, Inc.
Mariner Health Care of Lake Worth, Inc.
Mariner Health Care of Nashville, Inc.
Mariner Health Care of North Hills, Inc.
Mariner Health Care of Orange City, Inc.
Mariner Health Care of Palm City, Inc.
Mariner Health Care of Pinellas Point, Inc.
Mariner Health Care of Port Orange, Inc.
Mariner Health Care of Southern Connecticut, Inc.
Mariner Health Care of Toledo, Inc.
Mariner Health Care of West Hills, Inc.
Mariner Health Care of Atlantic Shores, Inc.
Mariner Health Care of Deland, Inc.
Mariner Health of Florida, Inc.
Mariner Health Care of Inverness, Inc.
Mariner Health of Jacksonville, Inc.
Mariner Health Care of MacClenny, Inc.
Mariner Health of Maryland, Inc.
Mariner Health Care of MetroWest, Inc.
Mariner Health of Orlando, Inc.
Mariner Health of Tampa, Inc.
Mariner Health Care of Tuskawilla, Inc.
Mariner Health Resources, Inc.
Mariner Practice Corporation
Mariner Physician Services, Inc.
Mariner Supply Services, Inc.
Merrimack Valley Nursing & Rehabilitation Center, Inc.
Methuen Nursing & Rehabilitation Center, Inc.
MHC Rehab. Corp.
Mystic Nursing & Rehabilitation Center, Inc.
Park Terrace Nursing & Rehabilitation Center, Inc.
Pendleton Nursing & Rehabilitation Center, Inc.
<PAGE>
Pinnacle Care Corporation
Prism Health Group, Inc.
Sassaquin Nursing & Rehabilitation Center, Inc.
Windward Health Care, Inc.
MarinerSelect Staffing Solutions, Inc.
MedRehab, Inc.
Pinnacle Care Corporation of Huntington
Pinnacle Care Corporation of Nashville
Pinnacle Care Corporation of Seneca
Pinnacle Care Corporation of Sumter
Pinnacle Care Corporation of Williams Bay
Pinnacle Care Corporation of Wilmington
Pinnacle Care Management Corporation
Pinnacle Pharmaceutical Services, Inc.
Pinnacle Rehabilitation, Inc. [a Tennessee corporation]
Cypress Nursing Facility, Inc.
Tri-State Health Care, Inc.
Aid & Assistance, Inc.
The Ocean Pharmacy, Inc.
MHC Transportation, Inc.
Pinnacle Rehabilitation of Missouri, Inc.
Seventeenth Street Associates Limited Partnership (By: Tri-State Health Care,
Inc., its general partner)
IHS Rehab Partnership, Ltd. (By: Mariner Health Care of Nashville, Inc., its
general partner)
MedRehab of Indiana, Inc.
MedRehab of Louisiana, Inc.
MedRehab of Missouri, Inc.
Mariner Health at Bonifay, Inc.
Mariner Health of Palmetto, Inc.
Mariner Health Properties IV, Ltd. (By: Mariner Health of Florida, Inc., its
general partner)
Mariner Health Properties VI, Ltd. (By: Mariner Health of Florida, Inc., its
general partner)
Beechwood Heritage Retirement Community, Inc.
National Health Strategies, Inc.
Prism Care Centers, Inc.
Prism Home Care Company, Inc.
Prism Rehab Systems, Inc.
Prism Hospital Ventures, Inc.
Prism Home Care, Inc.
Prism Home Health Services, Inc.
Mariner Health of Seminole County, Inc.
Mariner - Regency Health Partners, Inc.
Regency Health Care Center of Seminole County, Inc.
Tampa Medical Associates, Inc.
Allegis Health and Living Center at Heritage Harbour, L.L.C. (By: Mariner
Health of Maryland, Inc., member)
<PAGE>
EXHIBIT 10.89
ACKNOWLEDGMENT AND AMENDMENT
ACKNOWLEDGMENT AND AMENDMENT, dated as of August 16, 1999 (this
"Acknowledgment and Amendment"), to the Credit Agreement, dated as of November
----------------------------
4, 1997 (as amended by the First Amendment, dated as of July 8, 1998, the Second
Amendment, dated as of December 22, 1998, the Third Amendment, dated as of May
11, 1999, and as may be further amended, supplemented or otherwise modified from
time to time, the "Credit Agreement"), among MARINER POST-ACUTE NETWORK, INC.
----------------
(formerly known as Paragon Health Network, Inc.), a Delaware corporation (the
"Borrower"), the several banks and other financial institutions or entities from
---------
time to time parties thereto (the "Lenders"), BANK OF AMERICA, N.A. (formerly
-------
known as NationsBank, N.A., "BofA"), as documentation agent (in such capacity,
----
the "Documentation Agent"), and THE CHASE MANHATTAN BANK, as Administrative
-------------------
agent (in such capacity, the "Administrative Agent").
--------------------
WITNESSETH
----------
WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to
make, and have made, certain loans and other extensions to credit to the
Borrower;
WHEREAS, the Borrower and BofA are party to the Amended and Restated
Confirmation for U.S. Dollar Total Return Swap Transaction, dated as of
September 21, 1998, as amended and restated as of March, 1999 (the "BofA Swap"),
---------
under that certain ISDA Master Agreement, dated as of October 31, 1997, among
the Borrower and BofA;
WHEREAS, the Borrower is obligated to BofA in respect of the BofA Swap
in an aggregate amount equal to $26,485,562.79, net of the application of
termination payments and collateral held in respect of the BofA Swap (the "BofA
----
Swap Obligation");
- ---------------
WHEREAS, the Borrower has requested, and, upon this Acknowledgment and
Amendment becoming effective, the Lenders have agreed, that certain provisions
of the Credit Agreement be amended to permit the restructuring of the BofA Swap
Obligation and to provide that such restructured obligation be secured on a pari
passu basis with the Lenders in the Collateral, all in the manner provided for
in this Acknowledgment and Amendment; and
WHEREAS, Chase Securities Inc. has agreed to act as the lead arranger
and book manager in arranging the consents necessary for the effectiveness of
this Acknowledgment and Amendment;
NOW, THEREFORE, the parties hereto hereby agree as follows:
<PAGE>
2
1. Defined Terms. (a) General. Terms defined in the Credit Agreement
------------- -------
and used herein shall, unless otherwise indicated, have the meanings given to
them in the Credit Agreement. Terms defined and used in this Acknowledgment and
Amendment shall have the meanings given to them in this Acknowledgment and
Amendment.
(b) Addition of Definitions. The following defined terms are hereby
-----------------------
added to Section 1.1 of the Credit Agreement in appropriate alphabetical order:
"BofA": Bank of America, N.A., a national banking association.
----
"BofA Swap": the Amended and Restated Confirmation for U.S. Dollar
---------
Total Return Swap Transaction, dated as of September 21, 1998, as amended
and restated as of March, 1999, under that certain ISDA Master Agreement,
dated as of October 31, 1997, among the Borrower BofA.
"Deficiency Note": the promissory note dated August 16, 1999, by the
---------------
Borrower in favor of BofA in an aggregate principal amount equal to
$26,485,562.79 which, among other things (i) provides for the payment of
interest thereon at a rate equal to the interest rate from time to time in
effect with respect to the Revolving Credit Loans, (ii) has a tenor equal
to that of the Revolving Credit Loans, (iii) provides that the loans
thereunder may only be accelerated by BofA (A) upon a failure to pay
principal and interest due thereon or (B) if the Loans are declared to be,
or automatically become, due and payable in accordance with Section 8, (iv)
does not contain any financial or operating covenants with respect to the
Borrower or any of its Subsidiaries, (v) is not assignable by BofA unless
contemporaneous with any assignment thereof BofA shall assign all of the
remaining Loans and Commitments held by it at such time to the assignee of
the Deficiency Note, (vi) provides that any amendments, supplements,
modifications, extensions or forebearances of the Revolving Credit Loans or
the Revolving Credit Commitments shall be equally and automatically
applicable to the loans thereunder mutatis mutandis without any further
consent of BofA thereunder, (vii) provides that any permanent reduction of
the Revolving Credit Commitments resulting in a prepayment of the Revolving
Credit Loans will be accompanied by a prepayment of the loans under the
Deficiency Note, ratably based on the amount of the prepayment of the
Revolving Credit Loans, (viii) acknowledges that BofA shall not be entitled
to be treated as a class separate from the Lenders with respect to the
obligations thereunder in any bankruptcy, insolvency or reorganization
proceedings of the Borrower and (ix) is on other terms and conditions
reasonably satisfactory to the Administrative Agent."
2. Amendment to Section 7.2. Section 7.2 of the Credit Agreement is
------------------------
hereby amended by (a) deleting the word "and" at the end of paragraph (j), (b)
deleting the period at the end of paragraph (k) and substituting in lieu
thereof, "and" and (c) inserting the following new paragraph (1):
<PAGE>
3
"(l) Indebtedness in respect of the Deficiency Note."
3. Acknowledgment. The parties hereto acknowledge and agree that,
--------------
solely with respect to the Collateral, the obligations of the Borrower under the
Deficiency Note shall be (i) treated as "Borrower Obligations" as defined in the
Guarantee and Collateral Agreement and (ii) entitled to the benefits of the
collateral security provided under the Mortgages on a pari passu basis with the
Lenders.
4. Conditions to Effectiveness. The acknowledgments and amendments
---------------------------
provided for herein shall become effective upon the satisfaction of the
following conditions precedent and shall be deemed to be effective as of the
date hereof:
(a) The Administrative Agent shall have received counterparts of
this Acknowledgment and Amendment duly executed and delivered by the
Borrower and the Required Lenders.
(b) The swap transaction evidenced by the BofA Swap shall have
been terminated and the obligations in respect thereof shall have been
restructured in the form of the Deficiency Note (it being understood
that the guarantee of Mariner and certain of its Subsidiaries in
respect thereof shall remain in full force and effect).
(c) All other matters in connection with the termination of the
swap transaction evidenced by the BofA Swap shall be in form and
substance reasonably satisfactory to the Administrative Agent.
The execution and delivery of this Acknowledgment and Amendment by any Lender
shall be binding upon each of its successors and assigns (including Transferees
of its commitments and Loans in whole or in part prior to effectiveness hereof)
and binding in respect of all of its Commitments and Loans, including any
acquired subsequent to its execution and delivery hereof and prior to the
effectiveness hereof.
5. Representations and Warranties. The Borrower as of the date
------------------------------
hereof and after giving effect to the acknowledgments and amendments contained
herein, hereby confirms, reaffirms and restates that representations and
warranties made by it in Section 4 of the Credit Agreement (other than the last
sentence of Section 4.7 and other than with respect to any matters previously
disclosed in writing to the Lenders or disclosed in any of the Borrower's public
filings, including, without limitation, matters disclosed in its financial
statements); provided, that each reference to the Credit Agreement therein shall
--------
be deemed to be a reference to the Credit Agreement after giving effect to this
Acknowledgment and Amendment.
<PAGE>
4
6. Payment of Expenses. The Borrower agrees to pay or reimburse the
-------------------
Administrative Agent for all of its out-of-pocket costs and expenses incurred in
connection with this Acknowledgment and Amendment, any other documents prepared
in connection herewith and the transactions contemplated hereby, including,
without limitation, the reasonable fees and disbursements of counsel to the
Administrative Agent.
7. Reference to and Effect on the Loan Documents: Limited Effect. On and
-------------------------------------------------------------
after the date hereof and the satisfaction of the conditions contained in
paragraph 4 of this Acknowledgment and Amendment, each reference in the Credit
Agreement to "this Agreement", "hereunder", "hereof" or words of like import
referring to the Credit Agreement, and each reference in the other Loan
Documents to "the Credit Agreement", "thereunder", "thereof" or words of like
import referring to the Credit Agreement, shall mean and be a reference to the
Credit Agreement as amended hereby. The execution, delivery and effectiveness of
this Acknowledgment and Amendment shall not, except as expressly provided
herein, operate as a waiver of any right, power or remedy of any Lender or any
Agent under any of the Loan Documents, nor constitute a waiver of any provisions
of any of the Loan Documents. Except as expressly amended or waived herein, all
of the provisions and covenants of the Credit Agreement and the other Loan
Documents are and shall continue to remain in full force and effect in
accordance with the terms thereof and are hereby in all respects ratified and
confirmed.
8. Counterparts. This Acknowledgment and Amendment may be executed
------------
by one or more of the parties hereto in any number of separate counterparts
(which may include counterparts delivered by facsimile transmission) and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. Any executed counterpart delivered by facsimile transmission shall
be effective as for all purposes hereof.
9. GOVERNING LAW. THIS ACKNOWLEDGMENT AND AMENDMENT AND THE RIGHTS AND
-------------
OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE>
5
IN WITNESS WHEREOF, the parties hereto have caused this Acknowledgment
and Amendment to be duly executed and delivered by their respective proper and
duly authorized officers as of the day and year first above written.
MARINER POST-ACUTE NETWORK, INC.
By: ____________________________
Name:
Title:
THE CHASE MANHATTAN BANK, as
Administrative Agent and as a Lender
By: /s/ Agnes L. Levy
----------------------------
Name: Agnes L. Levy
Title: Vice President
BANK OF AMERICA, N.A.
/s/ F. A. Zagar
-------------------------------
By: F. A. Zagar
Title: Managing Director
<PAGE>
EXHIBIT 10.90
PROMISSORY NOTE
$26,485,562.79 New York, New York
August 16, 1999
FOR VALUE RECEIVED, the undersigned, MARINER POST-ACUTE NETWORK, INC.
(f/k/a Paragon Health Network, Inc.), a Delaware corporation (the "Maker"),
-----
hereby unconditionally promises to pay to the order of BANK OF AMERICA, N.A.
(formerly known as NationsBank, N.A.), a national banking association (the
"Holder"), at the office of Bank of America, N.A. located at 101 N. Tryon
------
Street, NC1-001-15-03, Charlotte, North Carolina 28255, in lawful money of the
United States of America and in immediately available funds on the Revolving
Credit Termination Date, the principal amount of TWENTY-SIX MILLION FOUR HUNDRED
EIGHTY-FIVE THOUSAND FIVE HUNDRED SIXTY-TWO AND 79/100 DOLLARS ($26,485,562.79).
The Maker further agrees to pay interest in like money at such office on the
unpaid principal amount hereof from time to time outstanding at the rates and on
the dates hereinafter set forth.
Capitalized terms used in this Note and not otherwise defined herein shall
have the meanings ascribed to such capitalized terms in that certain Credit
Agreement, dated as of November 4, 1997 (as amended, modified, supplemented,
extended, restated or replaced from time to time, the "Credit Agreement"), among
----------------
the Maker, as borrower, the Holder, as a lender thereunder, the several other
banks and financial institutions from time to time parties thereto (together
with the Holder, the "Lenders"), The Chase Manhattan Bank, as Administrative
-------
Agent (the "Administrative Agent"), and Bank of America, N.A. (f/k/a
--------------------
NationsBank, N.A.), as Documentation Agent.
Interest shall accrue on the outstanding principal amount hereof from and
including the date hereof to, but excluding, the date of payment in full of the
principal amount of this Note, at the rate or rates from time to time applicable
to the Revolving Credit Loans under the Credit Agreement; provided, however,
that the interest set forth in Section 2.14(c) of the Credit Agreement shall
only be applicable to the outstanding principal amount hereof if the Revolving
Credit Lenders are then charging such interest on the Revolving Credit Loans.
For any period during which the Revolving Credit Loans include multiple
Eurodollar Tranches, or one or more Eurodollar Tranches and ABR Loans, (a) a
portion of the outstanding principal amount hereof corresponding to the
percentage of the Revolving Credit Loans represented by each Eurodollar Tranche
shall bear interest at a rate (the "Deficiency Note Eurodollar Rate") equal to
-------------------------------
the sum of (i) the Eurodollar Base Rate applicable to such Eurodollar Tranche,
plus (ii) the Applicable Margin pertaining to the Revolving Credit Loans, and
(b) a portion of the outstanding principal amount hereof corresponding to the
percentage of the Revolving Credit Loans representing ABR Loans shall bear
interest at a rate (the "Deficiency Note Base Rate") equal to the sum of (i) the
-------------------------
ABR, plus (ii) the Applicable Margin pertaining to the Revolving Credit Loans.
If all or a portion of the principal amount hereof or any interest payment
hereon shall not be paid when due (whether at the stated maturity, by
acceleration as herein provided, or otherwise), the entire
<PAGE>
outstanding principal amount hereof (whether or not then overdue) shall, if the
Revolving Credit Loans are then bearing interest at the rate set forth in
Section 2.14(c) of the Credit Agreement, bear interest at a rate which is two
(2) percentage points in excess of the interest rate otherwise applicable
pursuant to the foregoing clauses (a) and (b) of this paragraph. To the extent
the indebtedness evidenced by this Note is bearing interest at the rate
specified in the immediately preceding sentence, such interest shall be payable
on demand, provided that the Holder shall not make such demand unless the
Revolving Credit Lenders have demanded the payment of default rate interest on
the Revolving Credit Loans pursuant to Section 2.14(d) of the Credit Agreement.
To the extent any portion of this Note bears interest at a Deficiency Note
Eurodollar Rate, such interest shall be due and payable, in arrears, on each
Interest Payment Date that relates to the corresponding Eurodollar Tranche(s) of
the Revolving Credit Loans on which the interest rate applicable to such portion
of this Note is based. Interest accruing hereon at the Deficiency Note Base
Rate shall be due and payable, in arrears, on each Interest Payment Date
applicable to Revolving Credit Loans that constitute ABR Loans.
Interest hereon shall be calculated on the basis of a 360-day year for the
actual number of days elapsed, except that, with respect to any portion of this
Note bearing interest at a rate determined by reference to Revolving Credit
Loans constituting ABR Loans whose rate of interest, in turn, is calculated by
reference to the Prime Rate, the interest on such portion of this Note shall be
calculated on the basis of a 365-day year (or a 366-day year, as the case may
be), for the actual number of days elapsed.
In the event there shall be any optional or mandatory prepayment, in whole
or in part, of the Revolving Credit Loans as a result of a permanent reduction
of the Revolving Credit Commitments under the Credit Agreement, whether such
prepayment results from asset sales, the application of the proceeds of
Collateral, or otherwise, the Maker agrees to make a corresponding prepayment of
principal hereunder contemporaneously therewith in an amount equal to the
product of the then outstanding principal amount hereof multiplied by a
fraction, the numerator of which shall be equal to the principal amount of the
Revolving Credit Loans being so prepaid, and the denominator of which shall be
equal to the aggregate Revolving Credit Commitments of the Revolving Credit
Lenders under the Credit Agreement immediately prior to such prepayment.
The Holder may accelerate the maturity of this Note solely upon the
occurrence of any of the following events:
(a) upon the acceleration (including, without limitation, automatic
acceleration) of the Revolving Credit Loans pursuant to Section 8 of the
Credit Agreement;
(b) upon the failure of the Maker to pay any principal amount due
hereunder as and when due and payable;
(c) upon the failure of the Maker to pay any installment of interest
due hereon within five (5) days after the due date thereof; or
-2-
<PAGE>
(d) upon the failure of the Required Lenders under the Credit
Agreement to have approved the Chase Amendment (as defined in the
Settlement Agreement hereinafter referred to) by no later than September
16, 1999.
Notwithstanding anything to the contrary contained herein, the Holder may
only pursue its remedies in respect of an acceleration of this Note arising
under clause (a) above, if and so long as the Administrative Agent or the
Collateral Agent are pursuing remedies against the Maker in connection with the
obligations arising under the Credit Agreement. The Maker agrees to pay or
reimburse the Holder for all of its out-of-pocket costs and expenses (including,
without limitation, reasonable legal fees and disbursements) incurred in
connection with the enforcement or preservation of any of its rights under this
Note or the Settlement Agreement.
All amendments, modifications, supplementations, extensions, renewals,
consents, waivers and forbearances granted by the requisite Lenders under the
Credit Agreement and applicable to the Revolving Credit Loans and the Revolving
Credit Commitments shall be automatically binding upon the Holder with respect
to the obligations evidenced by the Settlement Agreement (as hereinafter
defined) and this Note, without the necessity of any further act or deed of the
Holder.
It is the express intent of the Maker and the Holder that the obligations
of the Maker evidenced by this Note shall receive the same treatment in any in-
court or out-of-court restructuring of the Maker's debt as the Revolving Credit
Loans receive. By its acceptance of this Note, the Holder acknowledges and
agrees that in any out-of-court restructuring of the Maker's debt under the
Credit Agreement, the Holder of this Note will not be entitled in such capacity
to vote on any such restructuring plan. Nothing contained herein, however,
shall be construed to deprive the Holder of any vote on any such out-of-court
restructuring plan which the Holder may have with respect to its Revolving
Credit Loans and Revolving Credit Commitments. Furthermore, in connection with
any in-court restructuring of the Maker's debt, the Maker agrees to include the
claim evidenced by this Note in the same creditor class as the Revolving Credit
Loans, including, without limitation, for purposes of voting on any such in-
court restructuring plan, and by its acceptance of this Note, the Holder agrees
to such inclusion.
This Note may not be assigned by the Holder unless the Holder is no longer
(or after giving effect to any contemporaneous assignment of Loans and
Commitments under the Credit Agreement, will no longer be) the holder of any
Loans or Commitments under the Credit Agreement, and then this Note must be
assigned to the assignee of such Loans and Commitments under the Credit
Agreement. This Note may not be pledged or encumbered by the Holder. Any
assignment, pledge or encumbrance in violation of the provisions hereof shall be
null and void.
All parties now or hereafter liable with respect to this Note, whether
maker, principal, surety, guarantor, endorser or otherwise, hereby waive
presentment, demand, protest and all other notices of any kind in connection
with this Note.
-3-
<PAGE>
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAWS
PRINCIPLES THEREOF.
This Note is being issued by the Maker pursuant to the provisions of that
certain Swap Settlement Agreement dated as of August 13, 1999 (as the same may
be amended from time to time, the "Settlement Agreement") by and among the
--------------------
Holder, the Maker and Mariner Health Group, Inc., for itself and certain of its
subsidiaries. The indebtedness evidenced by this Note represents the deficiency
owed by the Maker under that certain Amended and Restated Confirmation for U.S.
Dollar Total Return Swap Transaction to be Subject to 1992 Master Agreement,
dated as of September 21, 1998, and amended and restated as of March, 1999 (the
"LMS Confirmation"), entered into by the Maker and the Holder pursuant to that
----------------
certain 1992 ISDA Master Agreement dated October 31, 1997 between the Maker and
the Holder (as amended, the "Master Agreement"). Any assignment of this Note in
----------------
compliance with the foregoing provisions of this Note shall automatically and
without any further act or deed constitute an assignment of the Holder's right,
title and interest in, to and under the Settlement Agreement, the Master
Agreement, the LMS Confirmation and the LMS Guaranty (as defined in the
Settlement Agreement), whether or not so specified.
This Note and the Settlement Agreement together constitute a modification,
restructuring and restatement of the LMS Confirmation and the Master Agreement,
including, without limitation, the provisions of the LMS Confirmation and the
Master Agreement relating to the Maker's payment obligations thereunder and the
enforcement and remedial rights of the Holder in connection therewith.
Notwithstanding anything to the contrary contained in the LMS Confirmation or
the Master Agreement, the provisions of this Note and the Settlement Agreement
shall in all events control over any terms or provisions contained in the LMS
Confirmation or the Master Agreement, and by its acceptance hereof, the Holder
acknowledges and agrees that its shall have no right to enforce any provision of
the LMS Confirmation or the Master Agreement, except if and to the extent such
provisions are expressly set forth in this Note or in the Settlement Agreement.
This Note shall be binding upon, and shall inure to the benefit of, the
Maker and the Holder and their respective successors and permitted assigns.
[The Remainder of this Page Intentionally Left Blank]
-4-
<PAGE>
IN WITNESS WHEREOF, the Maker has caused this duly authorized officer to
execute and deliver this Note as of the day and year first-above written.
MARINER POST-ACUTE NETWORK, INC.
By: /s/ Boyd P. Gentry
----------------------------------------
Boyd P. Gentry
Senior Vice President and Treasurer
[Deficiency Note]
<PAGE>
EXHIBIT 10.91
FORBEARANCE AGREEMENT
FORBEARANCE AGREEMENT, dated as of November 9, 1999 (this "Forbearance
-----------
Agreement"), to the Credit Agreement, dated as of November 4, 1997 (as amended
- ---------
by the First Amendment, dated as of July 8, 1998, the Second Amendment, dated as
of December 22, 1998, the Third Amendment, dated as of May 11, 1999, and the
Acknowledgment and Amendment, dated as of August 16, 1999, and as the same may
be amended, supplemented or otherwise modified from time to time, the "Credit
------
Agreement"), among MARINER POST-ACUTE NETWORK, INC. (formerly known as Paragon
- ---------
Health Network, Inc.), a Delaware corporation (the "Borrower"), the several
--------
banks and other financial institutions or entities from time to time parties
thereto (the "Lenders"), BANK OF AMERICA, N.A. (formerly known as NationsBank,
-------
N.A.), as documentation agent, and THE CHASE MANHATTAN BANK ("Chase"), as
-----
administrative agent (in such capacity, the "Administrative Agent").
--------------------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to
make, and have made, certain loans and other extensions of credit to the
Borrower;
WHEREAS, the Borrower has advised the Agent and the Lenders of the
current existence and the imminent occurrence of certain Defaults and Events of
Default under the Credit Agreement;
WHEREAS, the Borrower has requested that the Lenders forbear from
exercising certain remedies under the Credit Agreement with respect to such
Defaults and Events of Default and the Lenders are willing to so forbear, but
only on the terms and subject to the conditions set forth herein;
WHEREAS, Chase Securities Inc. has agreed to act as the lead arranger
and book manager in arranging the consents necessary for the effectiveness of
this Forbearance Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Terms defined in the Credit Agreement and used
-------------
herein shall, unless otherwise indicated, have the meanings given to them in the
Credit Agreement. As used in this Forbearance Agreement, terms defined in the
preamble or the recitals shall have the meanings so assigned and the following
terms shall have the following meanings:
"Basic Rent": as defined in Annex A to the to the Amended and Restated
----------
Participation Agreement dated as of November 4, 1997 (as amended,
supplemented or
1
<PAGE>
otherwise modified from time to time), among Living Centers Holding Company
and the parties to the Synthetic Credit Agreement.
"Forbearance Period": the period from the date hereof to the earlier
------------------
of (i) January 14, 2000, and (ii) the date on which the forbearance
provided in Section 2 of this Forbearance Agreement terminates in
accordance with its terms.
"HCFA": the Health Care Financing Administration.
----
"Synthetic Agent": Chase in its capacity as agent under the Synthetic
---------------
Credit Agreement.
"Synthetic Credit Agreement": the Amended and Restated Credit
--------------------------
Agreement, dated as of November 4, 1997, among FBTC Leasing Corp., as
borrower, the lenders from time to time party thereto, the Synthetic Agent
and The Fuji Bank, Limited (Houston Agency), as co-agent, as amended,
supplemented or otherwise modified from time to time.
"Synthetic Forbearance Agreement": the Forbearance Agreement, dated as
-------------------------------
of the date hereof, among the Borrower and certain of its direct and
indirect subsidiaries that are party thereto, FBTC Leasing Corp., the
lenders party thereto, the Synthetic Agent and The Fuji Bank, Limited
(Houston Agency), as co-agent under the Synthetic Credit Agreement.
"Synthetic Guarantee": the Amended and Restated Guarantee, dated as of
-------------------
November 4, 1997, made by the Borrower and its direct and indirect
subsidiaries that are party thereto in favor of the Synthetic Agent, as the
same has been amended, supplemented or otherwise modified from time to
time.
"Synthetic Lease": the Lease, dated as of October 10, 1996 (as
---------------
amended, supplemented or otherwise modified from time to time), between
FBTC Leasing Corp., as Lessor, and Living Centers Holding Company, as
Lessee.
2. Forbearance. The Administrative Agent and the Lenders agree to
-----------
forbear, during the Forbearance Period, from the exercise of any rights or
remedies under the Credit Agreement, the Notes and the other Loan Documents
(including, without limitation, the right to accelerate the Obligations) in
respect of Defaults or Events of Default arising as a result of (a) events or
conditions first arising or coming into existence prior to the date hereof, (b)
the Borrower's failure to pay interest on, or letter of credit, commitment or
similar fees in respect of, the obligations outstanding under the Credit
Agreement and the Deficiency Note first becoming due and payable during the
Forbearance Period, (c) the Borrower's failure to pay interest due and owing on
November 1, 1999 in respect of the Senior Subordinated Notes, (d) the Borrower's
failure to pay principal due and owing on December 31, 1999 on the Term Loans
(collectively, the "December 31 Amortization Payments") or (e) the events or
---------------------------------
conditions that are the subject of the Synthetic Forbearance Agreement; provided
--------
that the Forbearance Period shall immediately terminate in the event that the
Borrower breaches its obligations under Section 3 below.
2
<PAGE>
3. Application of Prudent Buyer Settlement Proceeds. In
------------------------------------------------
consideration for the forbearance granted hereunder, and in order to induce the
Lenders to enter into this Forbearance Agreement, the Borrower shall pay to
Chase, as Administrative Agent and Synthetic Agent, within one Business Day of
its receipt thereof all amounts representing the "Paragon Disallowance
Settlement" (as that term is used on page 9 of the bank books presented by the
Borrower to the Lenders at the meeting of Lenders in New York City on November
3, 1999) and received, in cash, from HCFA or any other Governmental Authority by
the Borrower or any Subsidiary Guarantor in respect of charges previously
disallowed for allegedly failing to satisfy HCFA's "prudent buyer" standard.
Any amounts so paid to Chase shall be applied (without duplication) as follows:
first, to the payment in full of interest, Basic Rent and fees due and owing (at
- -----
the applicable non-default rates) on the obligations outstanding under the
Credit Agreement, the Synthetic Credit Agreement, the Synthetic Lease and the
Deficiency Note, ratably in the proportion that the amount (without duplication)
of interest, Basic Rent and fees then due and owing under each of the Credit
Agreement, the Synthetic Credit Agreement, the Synthetic Lease or the Deficiency
Note bears to the aggregate amount (without duplication) of all interest, Basic
Rent and fees then due and owing under the Credit Agreement, the Synthetic
Credit Agreement, the Synthetic Lease and the Deficiency Note, second, to the
------
extent any such amounts are so paid to Chase prior to December 31, 1999, to
prepayment of the Term Loans in accordance with Section 2.17(b) and third, to
-----
the extent that such amounts are so paid to Chase on or after December 31, 1999
and the December 31 Amortization Payments have not otherwise been paid in full,
to the payment in full of the December 31 Amortization Payments, ratably in
accordance with the proportion that each December 31 Amortization Payment bears
to the aggregate of all of the December 31 Amortization Payments (with any
excess amount to be applied to prepayment of the Term Loans in accordance with
Section 2.17(b)).
4. Conditions to Effectiveness. The forbearance and agreements
---------------------------
provided for herein shall become effective, and shall be deemed to be effective
as of the date hereof, upon the Administrative Agent's receipt of counterparts
of this Forbearance Agreement duly executed and delivered by the Borrower and
the Required Lenders. The execution and delivery of this Forbearance Agreement
by any Lender shall be binding upon each of its successors and assigns
(including Transferees of its commitments and Loans in whole or in part prior to
effectiveness hereof) and binding in respect of all of its Commitments and
Loans, including any acquired subsequent to its execution and delivery hereof
and prior to the effectiveness hereof.
5. Representations and Warranties. The Borrower, as of the date
------------------------------
hereof and after giving effect to the agreements contained herein, hereby
confirms, reaffirms and restates that representations and warranties made by it
in Section 4 of the Credit Agreement (other than the last sentence of Section
4.7 and other than with respect to any matters previously disclosed in writing
to the Lenders or disclosed in any of the Borrower's public filings, including,
without limitation, matters disclosed in its financial statements); provided,
--------
that each reference to the Credit Agreement therein shall be deemed to be a
reference to the Credit Agreement as amended.
3
<PAGE>
6. Payment of Expenses. The Borrower agrees to pay or reimburse the
-------------------
Administrative Agent for all of its out-of-pocket costs and expenses incurred in
connection with this Forbearance Agreement and any other documents prepared in
connection herewith, including, without limitation, the reasonable fees and
disbursements of counsel to the Administrative Agent.
7. Reference to and Effect on the Loan Documents; Limited Effect.
-------------------------------------------------------------
This Forbearance Agreement shall be deemed to be a Loan Document for all
purposes. The execution, delivery and effectiveness of this Forbearance
Agreement shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of any Lender or any Agent under any of the Loan
Documents, nor constitute a waiver of or forbearance with respect to any
provisions of any of the Loan Documents, provided that the forbearance provided
--------
hereunder shall constitute a forbearance under the Deficiency Note. Except as
expressly provided herein, all of the provisions and covenants of the Credit
Agreement and the other Loan Documents are and shall continue to remain in full
force and effect in accordance with the terms thereof and are hereby in all
respects ratified and confirmed.
8. Counterparts. This Forbearance Agreement may be executed by one
------------
or more of the parties hereto in any number of separate counterparts (which may
include counterparts delivered by facsimile transmission) and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. Any executed counterpart delivered by facsimile transmission shall
be effective as for all purposes hereof.
9. GOVERNING LAW. THIS FORBEARANCE AGREEMENT AND THE RIGHTS AND
-------------
OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Forbearance
Agreement to be duly executed and delivered by their respective proper and duly
authorized officers as of the day and year first above written.
MARINER POST-ACUTE NETWORK, INC.
By:____________________________________
Name:
Title:
THE CHASE MANHATTAN BANK, as
Administrative Agent and as a Lender
By:____________________________________
Name:
Title:
BANK OF AMERICA, N.A.
By:____________________________________
Name:
Title:
5
<PAGE>
ABN AMRO Bank N.V.
By:____________________________
Name:
Title:
By:____________________________
Name:
Title:
6
<PAGE>
Alliance Investments, Limited
By:____________________________________
Name:
Title:
7
<PAGE>
Allstate Insurance Company
By:_______________________________
Name:
Title:
By:_______________________________
Name:
Title:
8
<PAGE>
AmSouth Bank of Alabama
By:_______________________________
Name:
Title:
By:_______________________________
Name:
Title:
9
<PAGE>
Arab Banking Corporation (B.S.C.)
By:__________________________________
Name:
Title:
10
<PAGE>
Archimedes Funding, L.L.C.,
By: ING Capital Advisors, Inc.,
As Collateral Manager
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
11
<PAGE>
Ares Leveraged Investment Fund, LP
By: Ares Management L.P.
By:_________________________________
Name:
Title:
12
<PAGE>
Balanced High Yield Fund I Ltd.
By: BHF (USA) Capital Corporation, As
Attorney-In-Fact
By:____________________________________
Name:
Title:
By:____________________________________
Name:
Title:
13
<PAGE>
Bank Austria Creditanstalt Corporate Finance Inc.
By:________________________________
Name:
Title:
By:________________________________
Name:
Title:
14
<PAGE>
Bank of America, N.A.
By:________________________________
Name:
Title:
15
<PAGE>
The Bank of Nova Scotia
By:_______________________
Name:
Title:
16
<PAGE>
Bank of Scotland
By:____________________________
Name:
Title:
17
<PAGE>
Bankers Trust Company
By:_________________________
Name:
Title:
18
<PAGE>
Banque Worms Capital Corporation
By:____________________________
Name:
Title:
By:____________________________
Name:
Title:
19
<PAGE>
Batterson Park CBO
By: General Re-New England Asset
Management, Inc., as Collateral Manager
By:__________________________________________
Name:
Title:
20
<PAGE>
Bayerische Hypo und Vereinsbank AG,
New York Branch
By:________________________________
Name:
Title:
By:________________________________
Name:
Title:
21
<PAGE>
Bear Sterns Investment Products, Inc.
By:___________________________________
Name:
Title:
22
<PAGE>
BHF(USA) Capital Corporation
By:____________________________
Name:
Title:
By:____________________________
Name:
Title:
23
<PAGE>
Captiva Finance Ltd.
By:_____________________
Name:
Title:
24
<PAGE>
Ceres Finance Ltd.
By:________________________
Name:
Title:
25
<PAGE>
Conseco Capital Management, Inc.
By:__________________________________
Name:
Title:
26
<PAGE>
Credit Lyonnais New York Branch
By:___________________________
Name:
Title:
27
<PAGE>
CypressTree Investment Partners I, Ltd.,
By: CypressTree Investment Management
Company, Inc., as Portfolio Manager
By:_____________________________________
Name:
Title:
28
<PAGE>
DLJ Capital Funding, Inc.
By:_________________________
Name:
Title:
29
<PAGE>
Dresdner Bank AG, New York and Grand Cayman
Branches
By:_______________________________
Name:
Title:
By:_______________________________
Name:
Title:
30
<PAGE>
Eaton Vance Senior Income Trust
By: Eaton Vance Management,
As Investment Advisor
By:________________________________
Name:
Title:
31
<PAGE>
Erste Bank Der
Oesterreichishen Sparkassen AG
By:______________________________
Name:
Title:
By:_______________________________
Name:
Title:
32
<PAGE>
First American National Bank
By:_______________________________
Name:
Title:
By:_______________________________
Name:
Title:
<PAGE>
First Source Financial LLP
By: First Source Financial, Inc.,
its Agent/Manager
By:________________________________
Name:
Title:
<PAGE>
First Union National Bank N.C.
By:__________________________________
Name:
Title:
By:__________________________________
Name:
Title:
<PAGE>
Floating Rate Portfolio
By: INVESCO Senior Secured Management
Inc., as attorney in fact
By:____________________________________
Name:
Title:
<PAGE>
Foothill Partners III, LP
By:_____________________________
Name:
Title:
<PAGE>
Franklin Mutual Advisors, Inc.
By:_______________________________
Name:
Title:
<PAGE>
The Fuji Bank, Limited
By:___________________________________
Name:
Title:
<PAGE>
General Electric Capital Corporation
By:_______________________________
Name:
Title:
<PAGE>
Goldman Sachs Credit Partners L.P.
By:____________________________________
Name:
Title:
<PAGE>
HSBC Bank,U.S.A.
By:____________________________
Name:
Title:
<PAGE>
Indosuez Capital Funding III, Limited
By: Indosuez Capital, as Portfolio Manager
By:___________________________________
Name:
Title:
<PAGE>
The Industrial Bank of Japan, Limited
By:___________________________________
Name:
Title:
<PAGE>
Kislak National Bank
By: ING Capital Advisors, Inc.,
As Investment Advisors
By:_____________________________
Name:
Title:
<PAGE>
KZH III LLC
By:____________________
Name:
Title:
<PAGE>
KZH Pamco LLC
By:____________________________
Name:
Title:
<PAGE>
KZH - CNC LLC
By:_____________________
Name:
Title:
<PAGE>
KZH - ING-3 LLC
By:___________________________
Name:
Title:
<PAGE>
KZH Riverside LLC
By:____________________
Name:
Title:
<PAGE>
KZH - Soleil LLC
By:____________________________
Name:
Title:
<PAGE>
KZH - Shoshone LLC
By:_____________________________
Name:
Title:
<PAGE>
KZH - Sterling LLC
By:_____________________________
Name:
Title:
<PAGE>
Merrill Lynch Debt Strategies Portfolio
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By:__________________________________
Name:
Title:
<PAGE>
Merrill Lynch Global Investment Series: Income
Strategies Portfolio
By: Merrill Lynch Asset Management, L.P., as
Investment Advisor
By:_________________________________
Name:
Title:
<PAGE>
Merrill Lynch Prime Rate Portfolio
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By:________________________________
Name:
Title:
<PAGE>
Merrill Lynch Senior Floating Rate Fund, Inc.
By:________________________________________
Name:
Title:
<PAGE>
The Mitsubishi Trust and Banking Corporation
By:________________________________
Name:
Title:
<PAGE>
ML CBO IV (Cayman) Ltd.
By: Highland Capital Management, L.P., as
Collateral Manager
By:__________________________
Name:
Title:
<PAGE>
ML Debt Strategies Fund, Inc.
By:_____________________________
Name:
Title:
<PAGE>
ML CLO XII Pilgrim America (Cayman), Ltd.
By: Pilgram Investments, Inc., as its
Investment Manager
By:__________________________________
Name:
Title:
<PAGE>
Natexis Banque BFCE
By:____________________________
Name:
Title:
By:____________________________
Name:
Title:
<PAGE>
National City Bank of Indiana
By:______________________________
Name:
Title:
<PAGE>
OCM Administrative Services II LLC
By:_________________________________
Name:
Title:
<PAGE>
Olympic Funding Trust, Series 1999-1
By:___________________________________
Name:
Title:
<PAGE>
ORIX USA Corporation
By:_____________________
Name:
Title:
<PAGE>
Pacific Life CBO 1998-1 LTD
By: Pacific Life Insurance Company,
as Collateral Manager
By:______________________________
Name:
Title:
<PAGE>
PAMCO Cayman Ltd.
By: Highland Capital Management, L.P., as
Collateral Manager
By:________________________________________
Name:
Title:
<PAGE>
PAM Capital Funding L.P.
By: Highland Capital Management, L.P., as
Collateral Manager
By:_______________________________________
Name:
Title:
<PAGE>
Paribas
By:____________________________
Name:
Title:
By:___________________________
Name:
Title:
<PAGE>
Paribas Capital Funding LLC
By:________________________________
Name:
Title:
By:________________________________
Name:
Title:
<PAGE>
Pilgrim Prime Rate Trust
By: Pilgrim Investments, Inc., as its Investment
Manager
By:____________________________________________
Name:
Title:
<PAGE>
Royalton Company
By: Pacific Investments Management Company,
as its Investment Advisor
By: PIMCO Management Inc., a general
partner
By:_____________________________________
Name:
Title:
<PAGE>
Senior Debt Portfolio
By: Boston Management and Research, as
Investment Advisor
By:___________________________________
Name:
Title:
<PAGE>
Senior High Income Portfolio, Inc.
By:___________________________________
Name:
Title:
<PAGE>
SEQUILS - Pligrim I Ltd.
By:_____________________________
Name:
Title:
<PAGE>
Skandinaviska Enskilda Banken AB (publ.)
New York Branch
By:__________________________________
Name:
Title:
By:__________________________________
Name:
Title:
<PAGE>
Societe Generale
By:_______________________________
Name:
Title:
<PAGE>
Southern Pacific Bank
By:___________________________
Name:
Title:
<PAGE>
SPS SWAPS
By:_________________________
Name:
Title:
<PAGE>
SPS High Yield Loan Trading
By:_________________________________
Name:
Title:
<PAGE>
Strata Funding Ltd.
By:________________________
Name:
Title:
<PAGE>
The Sumitomo Bank, Limited, New York Branch
By:___________________________________________
Name:
Title:
<PAGE>
Toronto Dominion Bank (Texas), Inc.
By:___________________________________
Name:
Title:
<PAGE>
Transamerica Business Credit Corporation
By:______________________________________
Name:
Title:
<PAGE>
Union Bank of California, N.A.
By:_______________________________
Name:
Title:
<PAGE>
Van Kampen Prime Rate Income Trust
By:___________________________________
Name:
Title:
<PAGE>
Wachovia Bank, N.A.
By:_____________________
Name:
Title:
<PAGE>
EXHIBIT 10.92
FORBEARANCE AGREEMENT
FORBEARANCE AGREEMENT, dated as of November 9, 1999 (this "Forbearance
-----------
Agreement"), to:
- ---------
(i) the Amended and Restated Credit Agreement, dated as of
November 4, 1997 (as amended by the First Amendment, dated as of July
8, 1998, the Second Amendment, dated as of December 22, 1998, the
Third Amendment, dated as of May 11, 1999, the Acknowledgment and
Amendment, dated as of August 16, 1999, and as the same may be further
amended, supplemented or otherwise modified from time to time, the
"Synthetic Credit Agreement"), among FBTC LEASING CORP., as Borrower
---------------------------
(the "Borrower"), the lenders party thereto (the "Lenders"), THE CHASE
-------- -------
MANHATTAN BANK ("Chase"), as agent (in such capacity, the "Agent") and
----- -----
THE FUJI BANK, LIMITED (HOUSTON AGENCY), as co-agent (in such
capacity, the "Co-Agent");
--------
(ii) the Amended and Restated Guarantee, dated as of November 4,
1997 (as amended by the First Amendment to Guarantee, dated as of July
8, 1998, the Second Amendment to Guarantee, dated as of December 22,
1998, the Third Amendment to Guarantee, dated as of May 11, 1999, the
Acknowledgment and Amendment to Guarantee, dated as of August 16,
1999, and as the same may be further amended, supplemented or
otherwise modified from time to time, the "Synthetic Guarantee"), made
-------------------
by MARINER POST-ACUTE NETWORK, INC. (formerly known as Paragon Health
Network, Inc., "Mariner"), a Delaware corporation, and the other
-------
guarantors which are signatories thereto (Mariner and each such other
guarantor, individually, a "Guarantor"; collectively, the
---------
"Guarantors"), in favor of the Agent; and
----------
(iii) the Lease, dated as of October 10, 1996 (as amended,
supplemented or otherwise modified from time to time, the "Lease"),
-----
between Borrower, as Lessor, and Living Centers Holding Company, as
Lessee.
W I T N E S S E T H:
-------------------
WHEREAS, pursuant to the Synthetic Credit Agreement, the Lenders have
agreed to make, and have made, certain loans and other extensions of credit to
the Borrower;
WHEREAS, pursuant to the Guarantee, the Guarantors agreed to guarantee
the prompt and complete performance of the Guaranteed Obligations (as defined in
the Guarantee);
<PAGE>
WHEREAS, Mariner has advised the Agent, the Lenders and the Borrower
(in its capacity as Lessor) of the current existence and the imminent occurrence
of certain Defaults and Events of Default under the Synthetic Credit Agreement,
the Synthetic Guarantee and the Lease;
WHEREAS, Mariner has requested that the Agent, the Lenders and the
Borrower (in its capacity as Lessor) forbear from exercising certain remedies
under the Synthetic Credit Agreement, the Synthetic Guarantee and the Lease with
respect to such Defaults and Events of Default and the Lenders are willing to so
forbear, but only on the terms and subject to the conditions set forth herein;
WHEREAS, Chase Securities Inc. has agreed to act as the lead arranger
and book manager in arranging the consents necessary for the effectiveness of
this Forbearance Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Terms defined in Annex A to the Amended and
-------------
Restated Participation Agreement, dated as of November 4, 1997 (as amended,
supplemented or otherwise modified from time to time, the "Participation
-------------
Agreement"), among Living Centers Holding Company, a Delaware corporation, the
- ---------
Borrower, the Agent, the Co-Agent and the Lenders, and used herein shall, unless
otherwise indicated, have the meanings given to them in the Annex A to the
Participation Agreement. As used in this Forbearance Agreement, terms defined
in the preamble or the recitals shall have the meanings so assigned and the
following terms shall have the following meanings:
"Corporate Agent": Chase in its capacity as administrative agent under
---------------
the Corporate Credit Agreement.
"Corporate Credit Agreement": the Credit Agreement, dated as of
--------------------------
November 4, 1997, among Mariner, as borrower, the several banks and other
financial institutions or entities from time to time parties thereto, Bank
of America, N.A. (formerly known as NationsBank, N.A.), as documentation
agent, and the Corporate Agent, as amended, supplemented, or otherwise
modified from time to time.
"Corporate Forbearance Agreement": the Forbearance Agreement, dated as
-------------------------------
of the date hereof, among Mariner, the lenders party thereto, Chase, as
administrative agent under the Corporate Credit Agreement and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as documentation agent
under the Corporate Credit Agreement.
"Forbearance Period": the period from the date hereof to the earlier
------------------
of (i) January 14, 2000, and (ii) the date on which the forbearance
provided in Section 2 of this Forbearance Agreement terminates in
accordance with its terms.
"HCFA": the Health Care Financing Administration.
----
2. Forbearance. The Agent, the Lenders and the Borrower (in its
-----------
capacity as Lessor) agree to forbear, during the Forbearance Period, from the
exercise of any rights or
<PAGE>
remedies under the Lease, the Synthetic Credit Agreement, the Notes, the
Synthetic Guarantee or any other Credit Document (including, without limitation,
the right to accelerate the Obligations) in respect of Defaults or Events of
Default arising as a result of (a) events or conditions first arising or coming
into existence prior to the date hereof, (b) the Lessee's failure to pay Basic
Rent or fees under the Lease first becoming due and payable during the
Forbearance Period, (c) the Borrower's failure to pay interest on, or commitment
or other fees in respect of, the obligations outstanding under the Synthetic
Credit Agreement first becoming due and payable during the Forbearance Period,
(d) Mariner's failure to pay interest due and owing on November 1, 1999 in
respect of the Senior Subordinated Notes and (e) the events or conditions that
are the subject of the Corporate Forbearance Agreement; provided that the
--------
Forbearance Period shall immediately terminate in the event that Mariner
breaches its obligations under Section 3 below or Section 3 of the Corporate
Forbearance Agreement.
3. Application of Prudent Buyer Settlement Proceeds. In
------------------------------------------------
consideration for the forbearance granted hereunder, and in order to induce the
Lenders to enter into this Forbearance Agreement, Mariner shall pay to Chase, as
Agent and Corporate Agent, within one Business Day of its receipt thereof all
amounts representing the "Paragon Disallowance Settlement" (as that term is used
on page 9 of the bank books presented by Mariner to the Lenders at the meeting
of Lenders in New York City on November 3, 1999) and received, in cash, from
HCFA or any other Governmental Authority by Mariner or any Subsidiary Guarantor
in respect of charges previously disallowed for allegedly failing to satisfy
HCFA's "prudent buyer" standard. Any amounts so paid to Chase shall be applied
(without duplication) to the payment in full of interest, Basic Rent and fees
due and owing (at the applicable non-default rates) on the obligations
outstanding under the Corporate Credit Agreement, the Synthetic Credit
Agreement, the Lease and the Deficiency Note (as defined in the Corporate Credit
Agreement), ratably in the proportion that the amount (without duplication) of
interest, Basic Rent and fees then due and owing under each of the Corporate
Credit Agreement, the Synthetic Credit Agreement, the Lease or the Deficiency
Note bears to the aggregate amount (without duplication) of the interest, Basic
Rent and fees then due and owing under the Corporate Credit Agreement, the
Synthetic Credit Agreement, the Lease and the Deficiency Note.
4. Conditions to Effectiveness. The forbearance and agreements
---------------------------
provided for herein shall become effective, and shall be deemed to be effective
as of the date hereof, upon the Agent's receipt of counterparts of this
Forbearance Agreement duly executed and delivered by the Borrower, Mariner and
the subsidiaries of Mariner set forth on the signature pages hereto and the
Required Lenders. The execution and delivery of this Forbearance Agreement by
any Lender shall be binding upon each of its successors and assigns (including
Transferees of its commitments and Loans in whole or in part prior to
effectiveness hereof) and binding in respect of all of its Commitments and
Loans, including any acquired subsequent to its execution and delivery hereof
and prior to the effectiveness hereof.
5. Representations and Warranties. Mariner, as of the date hereof
------------------------------
and after giving effect to the agreements contained herein, hereby confirms,
reaffirms and restates that representations and warranties made by it in Section
9 of the Synthetic Guarantee (other than the last sentence of such Section 9 and
other than with respect to any matters previously disclosed in writing to the
Lenders or disclosed in any of the Mariner's public filings, including, without
<PAGE>
limitation, matters disclosed in its financial statements); provided, that each
--------
reference to the Synthetic Guarantee therein shall be deemed to be a reference
to the Synthetic Guarantee after giving effect to this Forbearance Agreement.
6. Payment of Expenses. Mariner agrees to pay or reimburse the
-------------------
Agent for all of its out-of-pocket costs and expenses incurred in connection
with this Forbearance Agreement and any other documents prepared in connection
herewith, including, without limitation, the reasonable fees and disbursements
of counsel to the Agent.
7. Reference to and Effect on the Credit Documents; Limited Effect.
---------------------------------------------------------------
This Forbearance Agreement shall be deemed to be a Credit Document for all
purposes. The execution, delivery and effectiveness of this Forbearance
Agreement shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of any Lender or any Agent under any of the Credit
Documents, nor constitute a waiver of or forbearance with respect to any
provisions of any of the Credit Documents. Except as expressly provided herein,
all of the provisions and covenants of the Synthetic Guarantee and the other
Credit Documents are and shall continue to remain in full force and effect in
accordance with the terms thereof and are hereby in all respects ratified and
confirmed.
8. Counterparts. This Forbearance Agreement may be executed by one
------------
or more of the parties hereto in any number of separate counterparts (which may
include counterparts delivered by facsimile transmission) and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. Any executed counterpart delivered by facsimile transmission shall
be effective as for all purposes hereof.
9. GOVERNING LAW. THIS FORBEARANCE AGREEMENT AND THE RIGHTS AND
-------------
OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Forbearance
Agreement to be duly executed and delivered by their respective proper and duly
authorized officers as of the day and year first above written.
MARINER POST-ACUTE NETWORK, INC.
By:_______________________________________________
Name:
Title:
<PAGE>
AMERICAN-CAL MEDICAL SERVICES, INC.
AMS GREEN TREE, INC.
AMS PROPERTIES, INC.
CONNERWOOD HEALTHCARE, INC.
COORDINATED HOME HEALTH SERVICES, INC.
CORNERSTONE HEALTH MANAGEMENT COMPANY
EH ACQUISITION CORP.
EH ACQUISITION CORP. II
EH ACQUISITION CORP. III
EVERGREEN HEALTHCARE, INC.
EVERGREEN HEALTHCARE LTD., L.P.
GC SERVICES, INC.
GCI BELLA VITA, INC.
GCI CAMELLIA CARE CENTER, INC.
GCI COLTER VILLAGE, INC.
GCI EAST VALLEY MEDICAL & REHABILITATION CENTER,
INC.
GCI FAITH NURSING HOME, INC.
GCI HEALTH CARE CENTERS, INC.
GCI JOLLEY ACRES, INC.
GCI PALM COURT, INC.
GCI PRINCE GEORGE, INC.
GCI REHAB, INC.
GCI SPRINGDALE VILLAGE, INC.
GCI THERAPIES, INC.
GCI VALLEY MANOR HEALTH CARE CENTER, INC.
GCI VILLAGE GREEN, INC.
GCI-CAL HEALTH CARE CENTERS, INC.
GCI-CAL THERAPIES COMPANY
GCI-WISCONSIN PROPERTIES, INC.
MARINER HEALTH MANAGEMENT COMPANY (f/k/a
GRANCARE GPO SERVICES, INC.)
GRANCARE HOME HEALTH SERVICES, INC.
GRANCARE, INC.
GRANCARE NURSING SERVICES AND HOSPICE, INC.
GRANCARE OF MICHIGAN, INC.
GRANCARE OF NORTH CAROLINA, INC.
GRANCARE OF NORTHERN CALIFORNIA, INC.
GRANCARE SOUTH CAROLINA, INC.
HERITAGE OF LOUISIANA, INC.
HMI CONVALESCENT CARE, INC.
HOSTMASTERS, INC.
NATIONAL HERITAGE REALTY, INC.
OMEGA/INDIANA CARE CORPORATION
RENAISSANCE MENTAL HEALTH CENTER, INC.
STONECREEK MANAGEMENT COMPANY, INC.
By:___________________________________________
Name:
Title:
<PAGE>
AMERICAN PHARMACEUTICAL SERVICES, INC.
AMERICAN REHABILITY SERVICES, INC.
AMERICAN SENIOR HEALTH SERVICES, INC.
APS HOLDING COMPANY, INC.
APS PHARMACY MANAGEMENT, INC.
BRIAN CENTER HEALTH & REHABILITATION/TAMPA, INC.
BRIAN CENTER HEALTH & RETIREMENT/ALLEGHANY, INC.
BRIAN CENTER HEALTH & RETIREMENT/BASTIAN, INC.
BRIAN CENTER HEALTH & RETIREMENT/WALLACE, INC.
BRIAN CENTER MANAGEMENT CORPORATION
BRIAN CENTER NURSING CARE/AUSTELL, INC.
BRIAN CENTER NURSING CARE/FINCASTLE, INC.
BRIAN CENTER NURSING CARE/HICKORY, INC.
BRIAN CENTER NURSING CARE/POWDER SPRINGS, INC.
BRIAN CENTER OF ASHEBORO, INC.
BRIAN CENTER OF CENTRAL COLUMBIA, INC.
BRIAN CENTERS HEALTH & RETIREMENT/WALLACE, INC.
DEVCON HOLDING COMPANY
EXTENDED ACUTE HOSPITALS OF AMERICA, INC.
HOME HEALTH MANAGEMENT ASSOCIATES OF AMERICA, INC.
HOMECARE ASSOCIATES OF AMERICA, INC.
HOSPICE ASSOCIATES OF AMERICA, INC.
LC MANAGEMENT COMPANY
LCA OPERATIONAL HOLDING COMPANY
LCR, INC.
LIVING CENTERS DEVELOPMENT COMPANY
LIVING CENTERS - EAST, INC.
LIVING CENTERS HOLDING COMPANY
LIVING CENTERS LTCP DEVELOPMENT COMPANY
LIVING CENTERS OF TEXAS, INC.
LIVING CENTERS - ROCKY MOUNTAIN, INC.
LIVING CENTERS - SOUTHEAST DEVELOPMENT CORPORATION
LIVING CENTERS - SOUTHEAST, INC.
MED-THERAPY REHABILITATION SERVICES, INC.
PROFESSIONAL RX SYSTEMS, INC.
REHABILITY HEALTH SERVICES, INC.
THERACARE HOME HEALTH AGENCY, INC.
By:_________________________________________
Name:
Title:
<PAGE>
THE CHASE MANHATTAN BANK, as Agent and
as a Lender
By:__________________________________
Name:
Title:
<PAGE>
Bank of America, N.A.
By:__________________________________
Name:
Title:
<PAGE>
The Bank of Nova Scotia
By:___________________________________
Name:
Title:
<PAGE>
Credit Lyonnais New York Branch
By:________________________________
Name:
Title:
<PAGE>
Dresdner Bank AG, New York and Grand Cayman
Branches
By:___________________________________
Name:
Title:
By:___________________________________
Name:
Title:
<PAGE>
FBTC Leasing Corp.
By:_______________________________
Name:
Title:
<PAGE>
Fuji Bank, Limited (Houston Agency), as Co-Agent
By:___________________________________
Name:
Title:
<PAGE>
Union Bank of California, N.A.
By:_______________________________
Name:
Title:
<PAGE>
General Electric Capital Corporation
By:________________________________
Name:
Title:
<PAGE>
HSBC Bank, U.S.A.
By:___________________________________
Name:
Title:
<PAGE>
Toronto Dominion Bank (Texas), Inc.
By:___________________________________
Name:
Title:
<PAGE>
EXHIBIT 10.93
TERMINATION OF
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT AND
PROXY AND VOTING AGREEMENT
This TERMINATION OF AMENDED AND RESTATED STOCKHOLDERS AGREEMENT AND PROXY
AND VOTING AGREEMENT (the "Termination"), dated as of December 20, 1999, by and
among Apollo Management, L.P., a Delaware limited partnership ("Apollo
Management" and together with its affiliates and managed investment funds,
"Apollo"), Mariner Post-Acute Network, Inc., a Delaware corporation (the
"Company") and the stockholders (including Apollo) listed on the signature pages
attached hereto (the "Stockholders").
W I T N E S S E T H:
WHEREAS, the parties hereto are all of the parties to that certain
Stockholders Agreement, dated as of November 4, 1997, amended as of April 13,
1998 and amended and restated as of November 25, 1998 (the "Stockholders
Agreement") pursuant to which the parties provided for certain rights and
obligations in respect of the Shares (defined in the Stockholders Agreement);
WHEREAS, in addition to the Stockholders Agreement, the Stockholders
provided for certain voting rights and obligations in respect to Shares pursuant
to that certain Proxy and Voting Agreement, dated as November 4, 1997 (the
"Proxy Agreement"), by and among Apollo Management and the Other Stockholders
(defined in the Stockholders Agreement);
WHEREAS, each Stockholder party hereto owns the number of shares of common
stock, par value $.01 per share ("Common Stock") set forth under its name on the
signature pages attached hereto, and the Stockholders party hereto collectively
beneficially own all of the shares of Common Stock currently subject to the
Stockholders Agreement and the Proxy Agreement;
WHEREAS, in connection with the sale of the shares of Common Stock owned by
Apollo to Credit Suisse First Boston Management Corporation ("CSFBMC") pursuant
to a Transfer Agreement between CSFBMC and Apollo (the "Sale Transaction"),
Apollo, the Stockholders and the Company have agreed to enter into this
Termination to become effective (the "Effective Time") (i) with respect to the
Stockholders Agreement immediately upon its execution by Apollo, the Company and
Stockholders holding the requisite number of shares, and (ii) with respect to
the shares of Common Stock owned by each Other Stockholder subject to the Proxy
Agreement, immediately upon its execution by Apollo Management and such Other
Stockholder; and
NOW, THEREFORE, the parties hereto agree as follows:
1. Representation and Warranties. Each party hereto represents and
-----------------------------
warrants to the other party as follows:
(a) Authority Relative to this Termination. Each party hereto has the
--------------------------------------
requisite
1
<PAGE>
power and authority to execute and deliver this Termination and to consummate
the transactions contemplated hereby. The execution and delivery of this
Termination and the consummation of the transactions contemplated hereby have
been duly and validly authorized by such party and no other proceedings on the
part of such party are necessary to authorize this Termination or to consummate
the transactions so contemplated. This Termination has been duly and validly
executed and delivered by such party, and assuming that this Termination has
been duly and validly authorized, executed and delivered by the other parties
hereto, this Termination constitutes a valid and binding obligation of such
party, enforceable against such party in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency and
similar laws affecting creditor's rights generally and to general principles of
equity (whether considered in a proceeding in equity or at law).
(b) No Conflicts. Neither the execution and delivery of this
------------
Termination nor the consummation of the transactions contemplated hereby will
conflict with or constitute a violation of or default under any contract,
commitment, agreement, arrangement or restriction of any kind to which such
party is a party or by which such party is bound. Other than the Stockholders
Agreement and the Proxy Agreement there are no other agreements or
understandings with respect to the voting of the Shares.
2. Termination of Rights and Obligations. As of the applicable Effective
-------------------------------------
Time, the rights and obligations of (i) Apollo, the Company and the Stockholders
under the Stockholders Agreement and (ii) Apollo Management and each of the
Other Stockholders under the Proxy Agreement (including, without limitation, the
irrevocable proxy granted by each of the Other Stockholders to Apollo
Management), shall be deemed to be terminated and of no further effect with
respect to any shares of Common Stock beneficially owned by any of Apollo, the
Stockholders, or the Other Stockholders, as the case may be. Notwithstanding
anything herein to the contrary, this Section 2 shall not terminate or interfere
with any Other Stockholder's right to exercise its "tag-along rights" pursuant
to Section 6.2 of the Stockholders Agreement with respect to the Sale
Transaction.
3. Governing Law. This Termination shall be governed in all respects,
-------------
including validity, interpretation and effect, by the laws of the State of
Delaware (without giving effect to the provisions thereof relating to conflicts
of law).
4. Counterparts. This Termination may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
5. Descriptive Headings. The headings herein are inserted for convenience
--------------------
of reference only and are not intended to be a part of or to affect the meaning
or interpretation of this Termination.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Termination as of
the date first above written.
MARINER POST-ACUTE
NETWORK, INC.
By: /s/ Francis W. Cash
--------------------------------------
Name: Francis W. Cash
Title:
Date: January 5, 2000
APOLLO MANAGEMENT, L.P.,
on behalf of one or more managed
investment funds
By: AIF III Management, Inc.
Its General Partner
By: /s/ Michael D. Weiner
----------------------------------------
Name: Michael D. Weiner
Title: Vice President
Date: December 20, 1999
APOLLO INVESTMENT FUND III, L.P.
By: Apollo Advisors II, L.P.
Its General Partner
By: Apollo Capital Management II, Inc.
Its General Partner
By: /s/ Michael D. Weiner
----------------------------------------
Name: Michael D. Weiner
Title: Vice President
13,100,370 Shares of Common Stock
Date: December 20, 1999
3
<PAGE>
APOLLO UK PARTNERS III, L.P.
By: Apollo Advisors II, L.P.
Its General Partner
By: Apollo Capital Management II, Inc.
Its General Partner
By: /s/ Michael D. Weiner
----------------------------------------
Name: Michael D. Weiner
Title: Vice President
484,188 Shares of Common Stock
Date: December 20, 1999
APOLLO OVERSEAS PARTNERS III, L.P.
By: Apollo Advisors II, L.P.
Its General Partner
By: Apollo Capital Management II, Inc.
Its General Partner
By: /s/ Michael D. Weiner
----------------------------------------
Name: Michael D. Weiner
Title: Vice President
783,033 Shares of Common Stock
Date: December 20, 1999
4
<PAGE>
CHASE EQUITY ASSOCIATES, L.P.
By: Chase Capital Partners
Its General Partner
By: /s/ Christopher C. Behrens
----------------------------------------
Partner
2,592,594 Shares of Common Stock
Date: December 30, 1999
DRAX HOLDINGS L.P.
By: Inman Corporation
Its General Partner
By: /s/ Linda Hamilton
-------------------------------------
Name: Linda Hamilton
Title: Executive Vice President
75,000 Shares of Common Stock
Date: December 30, 1999
5
<PAGE>
WALNUT GROWTH PARTNERS LIMITED PARTNERSHIP
By: Walnut GP, L.L.C.
Its General Partner
By: Walnut Funds, Inc.
By: Joel Kanter
President
By: /s/ Joel Kanter
----------------------------------
Managing Director
74,073 Shares of Common Stock
Date: December 28, 1999
6
<PAGE>
PATRICIAN CORPORATION
(as successor to Healthcare Equity Partners,
L.P., Healthcare Equity QP Partners, L.P.,
Key Capital Corporation, and Key Equity
Partners 97)
By: /s/ John Power
---------------------------------
Its: President
1,111,113 Shares of Common Stock
Date: January 5, 2000
7
<PAGE>
EXHIBIT 10.94
EMPLOYMENT AGREEMENT
Employment Agreement dated as of September 8, 1999 between Francis W.
Cash (the "Executive") and Mariner Post-Acute Network, Inc., a Delaware
corporation (the "Company").
WHEREAS, the Company desires to employ the Executive as its Chairman
of the Board, President and Chief Executive Officer, and the Executive desires
to accept such employment, for the term and upon the other conditions
hereinafter set forth; and
WHEREAS, the parties desire to enter into this Agreement setting forth
the terms and conditions of the employment relationship of the Executive with
the Company.
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term. This Agreement shall become effective on September 8, 1999
----
(the "Effective Date"). This Agreement is for the three-year period (the "Term")
commencing on the Effective Date and terminating on the third anniversary of the
Effective Date, or upon the Executive's earlier death, disability or other
termination of employment pursuant to Section 11; provided, however, that
commencing on the third anniversary of the Effective Date and on each
anniversary thereafter, the Term shall automatically be extended for one
additional year unless, not later than six (6) months prior to any such
anniversary, either party hereto shall have notified the other party hereto in
writing that such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as Chairman
--------
of the Board and Chief Executive Officer of the Company and, pending the
appointment of a President, President of the Company or in such other senior
executive position in the Company as the Executive shall approve.
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee. Notwithstanding the preceding sentence, nothing contained
herein shall prevent the Executive from serving as a director of any company or
other entity, provided, that, the Executive does not devote a material amount of
-------- ----
his time to such service or participate in the management or operation of such
entity. The Executive shall report to the Board and, subject to the powers,
authorities and responsibilities vested in the Company's Board under the General
Corporation Law of the State of Delaware and in duly constituted committees of
the Board, the Executive shall have responsibility and authority for the overall
strategic policies, management and
<PAGE>
leadership of the Company. The Executive shall also perform such other executive
and administrative duties (not inconsistent with the position of Chairman of the
Board, President and Chief Executive Officer) as the Executive may reasonably be
expected to be capable of performing on behalf of the Company, as may from time
to time be authorized or directed by the Board. The Executive agrees to be
employed by the Company in all such capacities for the Term, subject to all the
covenants and conditions hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at the principal executive offices of the Company, except
for required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder
-----------
shall be $800,000 a year, payable monthly. The Board shall review such base
salary at least annually and make such adjustment from time to time as it may
deem advisable, but the base salary shall not at any time be less than $800,000
a year.
(b) Annual Bonus. The Company shall provide the Executive
------------
with an annual bonus plan providing the Executive with an opportunity to earn an
annual bonus equal to between fifty percent (50%) and one hundred fifty percent
(150%) of his base salary if the Company achieves for the relevant year certain
financial targets established pursuant to such plan.
(c) Relocation Bonus. On the Effective Date, in
----------------
consideration of the Executive's relocation to Atlanta, Georgia, the Company
shall pay to the Executive $200,000 (subject to any applicable payroll or other
taxes required to be withheld).
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its senior executive officers.
8. Business Expenses. The Executive shall be reimbursed for all
-----------------
ordinary and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures. The Executive shall receive an automobile
allowance of $1,000 per month during the term of this Agreement.
9. Pension and Welfare Benefits.
----------------------------
(a) Except as set forth in Section 9(b), during the
Term, the Executive shall be eligible to participate fully in all health
benefits, insurance programs, pension and retirement plans and other employee
benefit and compensation arrangements available to senior officers of the
Company generally.
2
<PAGE>
(b) From September 8, 1999, until March 31, 2000, the
Company shall either (i) assume or (ii) reimburse the Executive for the cost of
obtaining continued coverage under the life insurance and long-term disability
plans under which the Executive was covered while employed by Red Roof Inns,
Inc.; provided, that, the aggregate amount of any such assumed payments or
--------- ----
reimbursements shall not exceed $20,000 per year. Unless the Executive provides
the Company with a written election to the contrary on or prior to March 31,
2000, the obligations of the Company set forth in the first sentence of this
clause (b) shall continue throughout the Term, and the Executive shall not
participate in the life insurance and long-term disability plans otherwise
maintained by the Company. If, on or prior to March 31, 2000, the Executive so
elects by written notice provided to the Company, the obligations of the Company
set forth in the first sentence of this clause (b) shall terminate as of March
31, 2000, and from that date forward, during the Term, the Executive shall
participate in such life insurance and long-term disability plans as may be
maintained from time to time during the Term by the Company for the benefit of
the employees of the Company, to the extent and in such manner available to
other executive officers of the Company and subject to the terms and provisions
of such plans and programs.
10. Value Creation Incentive Plan. The Company, pursuant to the terms
-----------------------------
of a value creation incentive plan substantially similar to the terms set forth
in Appendix A attached hereto (and as approved by the Compensation Committee of
the Board of Directors), shall provide the Executive with an opportunity to earn
additional compensation if the Company achieves certain financial targets
established pursuant to such plan.
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be
-------
terminated without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall
automatically terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity
due to physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any twelve (12) month period, and no
reasonable accommodation can be made that will allow Executive to perform
his essential functions, the Company may terminate the Executive's
employment hereunder for any such incapacity (a "Disability").
(c) Termination by the Company. The Company may terminate
--------------------------
the Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the
Executive to perform his duties hereunder (other than any such failure resulting
from the Executive's incapacity due to physical or
3
<PAGE>
mental illness), which has not ceased within ten (10) days after a written
demand for substantial performance is delivered to the Executive by the Company,
which demand identifies the manner in which the Company believes that the
Executive has not performed such duties, (ii) the engaging by the Executive in
willful misconduct or an act of moral turpitude which is materially injurious to
the Company, monetarily or otherwise (including, but not limited to, conduct
described in Section 15) or (iii) the conviction of the Executive of, or the
entering of a plea of nolo contendere by, the Executive with respect to, a
felony. Notwithstanding the foregoing, the Executive's employment hereunder
shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to the Executive a copy of a resolution duly adopted
by the affirmative vote of not less than a majority of the entire membership of
the Board, other than the Executive, at a meeting of the Board at which the
Executive recuses himself (after written notice to the Executive and a
reasonable opportunity for the Executive, together with the Executive's counsel,
to be heard before the Board), finding that in the good faith opinion of the
Board the Executive should be terminated for Cause.
(d) Termination by the Executive. The Executive shall be
----------------------------
entitled to terminate his employment hereunder (A) for Good Reason or (B)
without the Executive's express written consent, any failure by the Company to
comply with any material provision of this Agreement, which failure has not been
cured within ten (10) days after notice of such noncompliance has been given by
the Executive to the Company. For purposes of this Agreement, "Good Reason"
shall mean the occurrence (without the Executive's express written consent),
within twenty-four (24) months after a Change in Control during the term of this
Agreement, of any one of the following acts by the Company, or failures by the
Company to act, unless, in the case of any act or failure to act described
below, such act or failure to act is corrected prior to the Date of Termination
specified in the Notice of Termination given in respect thereof:
(I) any change in the Executive's title (other
than upon the appointment of another person to serve as the President of
the Company), authorities, responsibilities (including reporting
responsibilities) which, in the Executive's reasonable judgment, represents
a significant adverse change from his status, title, position or
responsibilities (including reporting responsibilities) which were in
effect immediately prior to the Change in Control or from his status,
title, position or responsibilities (including reporting responsibilities)
which were in effect following a Change in Control pursuant to the
Executive's consent to accept any such change; the assignment to him of any
duties or work responsibilities which are inconsistent with such status,
title, position or work responsibilities; or any removal of the Executive
from, or failure to reappoint or reelect him to any of such positions,
except if any such changes are because of Disability, retirement, death or
Cause;
(II) a reduction by the Company in the Executive's
annual base salary as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary reductions
similarly affecting all senior executives of the Company and all senior
executives of any Person (as defined in
4
<PAGE>
Section 11(i)(i) below) in control of the Company provided in no event
--------
shall any such reduction reduce the Executive's base salary below $800,000;
(III) the relocation of the Executive's office at
which he is to perform his duties, to a location more than fifty (50) miles
from the location at which the Executive performed his duties prior to the
Change in Control, except for required travel on the Company's business to
an extent substantially consistent with his business travel obligations
prior to the Change in Control;
(IV) the failure by the Company, without the
Executive's consent, to pay to the Executive any portion of the Executive's
current compensation, or to pay to the Executive any portion of an
installment of deferred compensation under any deferred compensation
program of the Company, within seven (7) days of the date such compensation
is due;
(V) the failure by the Company to continue to
provide the Executive with benefits substantially similar in value to the
Executive in the aggregate to those enjoyed by the Executive under any of
the Company's pension, life insurance, medical, health and accident, or
disability plans in which the Executive was participating immediately prior
to the Change in Control, unless the Executive participates after the
Change in Control in other comparable benefit plans generally available to
senior executives of the Company and senior executives of any Person in
control of the Company; or
(VI) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 11(g) below; for purposes of this
Agreement, no such purported termination shall be effective.
The Executive's continued employment for six (6) months after any act or failure
to act constituting Good Reason hereunder shall constitute the Executive's
consent to, and a waiver of rights with respect to, such act or failure to act.
(e) Voluntary Resignation. Should the Executive wish to
---------------------
resign from his position with the Company or terminate his employment for other
than Good Reason during the Term, the Executive shall give sixty (60) days
written notice to the Company ("Notice Period"), setting forth the reasons and
specifying the date as of which his resignation is to become effective. During
the Notice Period, the Executive shall cooperate fully with the Company in
achieving a smooth transition of the Executive's duties and responsibilities to
such person(s) as may be designated by the Company. The Company reserves the
right to accelerate the Date of Termination by giving the Executive notice and
payment of amounts due to the Executive under Section 6(a) and, to the extent
applicable, Section 6(b) for the balance of the Notice Period. The Company's
obligation to continue to employ the Executive or to continue payment of the
amounts described in the
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preceding sentence shall cease immediately if: (1) the Executive has not
satisfied his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause. If the Executive terminates his employment for other than Good Reason
within twelve (12) months from the Effective Date, the Executive shall be
obligated to refund the $200,000 that he received prior to the Effective Date
for relocation and related expenses.
(f) Bankruptcy. If the Company shall commence a voluntary
----------
case concerning itself under Title 11 of the United States Code entitled
"Bankruptcy", as now or hereafter in effect, or any successor thereto (the
"Bankruptcy Code"), or an involuntary case is commenced against the Company and
the petition is not dismissed within sixty (60) days after commencement of the
case, or a custodian (as defined in the Bankruptcy Code) is appointed for, or
takes charge of, all or substantially all of the property of the Company, or the
Company commences any other proceeding under any reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect relating to
the Company, or there is commenced against the Company any such proceeding which
remains undismissed for a period of sixty (60) days, then the Executive, in his
sole discretion, may ask the Company to seek to have the court administering
such case or proceeding to approve this Agreement. The Company shall use its
best efforts to file an appropriate motion seeking such approval within 30 days
after receipt of such notice from the Executive. If (i) the Company does not
file such a motion seeking approval of this Agreement within 30 days after
receipt of notice from the Executive or (ii) the court administering such case
or proceeding does not approve this Agreement within 60 days after the motion
seeking such approval is filed, the Executive shall have no further duty to
perform under this Agreement, may cease his performance under this Agreement and
upon ceasing his performance under this Agreement in accordance with this
Section 11(f), the Executive shall be entitled to the benefits and payments set
forth in Section 12(e) hereof.
(g) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be communicated
by written Notice of Termination to the other party hereto in accordance with
Section 19. "Notice of Termination" shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon and shall set forth
in reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated.
(h) Date of Termination. "Date of Termination" shall mean
-------------------
(i) if the Executive's employment is terminated because of death, the date of
the Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the Executive's
employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for
any other reason (other than death or Disability), the date specified in the
Notice of Termination (which, in the case of a termination for Good Reason shall
not be less than fifteen (15) nor more than sixty (60) days from the date such
Notice of Termination is given, and in the case of a termination for any
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<PAGE>
other reason shall not be less than thirty (30) days (sixty (60) days in the
case of a termination under Subsection (e) hereof) from the date such Notice of
Termination is given).
(i) Change in Control. For purposes of this Agreement, a
-----------------
Change in Control of the Company shall have occurred if
(i) any "Person" (as defined in Section 3(a)(9)
of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and
used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the
Company or any of its subsidiaries, (2) any trustee or other fiduciary
holding securities under an employee benefit plan of the Company or any of
its subsidiaries, (3) an underwriter temporarily holding securities
pursuant to an offering of such securities, (4) any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially
the same proportions as their ownership of the Company's common stock or
(5) Apollo Management, L.P., any of its affiliates and any investments
funds managed by it (collectively, "Apollo"))), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more than
50% of the combined voting power of the Company's then outstanding voting
securities;
(ii) during any period of not more than two
consecutive years, not including any period prior to the date of this
Agreement, individuals who at the beginning of such period constitute the
Board, and any new director (other than a director designated by a person
(other than Apollo) who has entered into an agreement with the Company to
effect a transaction described in clause (i) of this Section 11(i)) whose
election or designation to the Board or nomination for election by the
Company's stockholders was (A) made pursuant to the Stockholders Agreement
dated as of November 4, 1997, as amended from time to time, (B) made by
Apollo, or (C) approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously
so approved, cease for any reason to constitute at least a majority
thereof;
(iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation, other
than a merger or consolidation in which (A) no person acquires or
beneficially owns a percentage of the combined voting power of the voting
securities of the Company or such surviving or parent entity outstanding
immediately after such merger or consolidation greater than the percentage
of such securities beneficially owned by Apollo or (B) both (1) the voting
securities of the Company outstanding immediately prior thereto continue to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving or parent entity) 50% or more of the
combined voting power of the voting securities of the Company or such
surviving or parent entity
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outstanding immediately after such merger or consolidation and (2) no
person (other than Apollo) acquires 50% or more of the combined voting
power of the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a
plan of complete liquidation of the Company or a agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets (or any transaction having a similar effect) other than such a sale
or disposition to Apollo.
(j) Resignation as Member of Board. If the Executive's
------------------------------
employment by the Company is terminated for any reason, the Executive hereby
agrees that he shall simultaneously submit his resignation as a member of the
Board in writing on or before the Date of Termination. If the Executive fails to
submit such required resignation in writing, the provisions of this Section
11(j) may be deemed by the Company to constitute the Executive's written
resignation as a member of the Board effective as of the Date of Termination.
(k) Return of Property. When the Executive shall cease to
------------------
be employed by the Company, the Executive shall promptly surrender to the
Company all Company property, including without limitation, all records and
other documents obtained by him or entrusted to him during the course of his
employment with the Company provided, however, that the Executive may retain
-------- -------
copies of such documents as necessary for the Executive's personal records for
federal income tax purposes.
12. Compensation During Disability, Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform
his duties hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his full salary
at the rate then in effect for such period until his employment is terminated
pursuant to Section 11(b)(ii) hereof, provided that payments so made to the
Executive during the Disability Period shall be reduced by the sum of the
amounts, if any, payable to the Executive with respect to such period under
disability benefit plans of the Company or under the Social Security disability
insurance program, and which amounts were not previously applied to reduce any
such payment.
(b) If the Executive's employment is terminated by his
death or Disability, the Company shall pay (i) any amounts due to the Executive
under Section 6(a) through the date of such termination and (ii) an amount equal
to the bonus he would have received for the fiscal year that ends on or
immediately after the Date of Termination, assuming the Company achieved the
lowest target level for which a bonus is paid under the plan described in
Section 6(b), prorated for the period beginning on the first day of the fiscal
year in which occurs the Date of Termination through the Date of Termination. In
addition, if the Executive's employment is terminated by his death, the Company
shall continue to pay to his estate his salary for an additional six months at
the rate then in effect.
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<PAGE>
(c) If the Executive's employment shall be terminated by
the Company for Cause or by the Executive for other than (i) Good Reason or (ii)
clause (B) of the first sentence of Section 11(d) hereof, the Company shall pay
the Executive his full salary through the Date of Termination at the rate in
effect at the time Notice of Termination is given, and the Company shall have no
further obligations to the Executive under this Agreement.
(d) If (A) following a Change in Control the Company shall
terminate the Executive's employment other than for Cause or otherwise repudiate
this Agreement, or (B) following a Change in Control the Executive shall
terminate his employment for Good Reason, then
(i) the Company shall pay the Executive his full
salary through the Date of Termination at the rate in effect at the time
Notice of Termination is given and all other unpaid amounts, if any, to
which the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, at the time such payments are
due;
(ii) in lieu of any further salary payments to the
Executive for periods subsequent to the Date of Termination, the Company
shall pay as liquidated damages to the Executive an aggregate amount equal
to the product of (A) the sum of (1) the Executive's annual salary rate in
effect as of the Date of Termination and (2) the average of the annual
bonuses actually paid (including $0 if no such bonus is paid and excluding
the relocation bonus paid to Executive pursuant to Section 6(c) hereof) to
the Executive by the Company with respect to the two full fiscal years
which immediately precede the year of the Term in which the Date of
Termination occurs provided, that, for purposes of this Agreement, if the
-------- ----
Date of Termination occurs after the end of the first full fiscal year, but
before the end of the second full fiscal year that ends after the Effective
Date, then such single year's bonus shall be utilized in the calculation
pursuant to this clause (2), provided, further, that for purposes of this
-------- -------
Agreement, if the Date of Termination occurs before the end of the first
full fiscal year that ends after the Effective Date, the amount of the
bonus paid by the Company to the Executive shall be deemed to be the
amount, if any, payable pursuant to Section 12(d)(iii), and (B) the number
three (3);
(iii) if it is determined that the Company has met
financial objectives established pursuant to its Incentive Compensation
Plan and to pay bonuses to eligible employees for the fiscal year within
which the Date of Termination occurs, the Company shall pay the Executive,
as long as the Executive is otherwise eligible for such payment, his bonus
prorated for the period beginning on the first day of the fiscal year in
which the Date of Termination occurs through the Date of Termination,
payable at the same time and in the same manner as the Company customarily
pays other bonuses;
9
<PAGE>
(iv) the Company shall (x) continue coverage for the Executive,
on the same terms and conditions as would be applicable if the Executive
were an active Employee, under the Company's life insurance, medical,
health, disability and similar welfare benefit plans for a period equal to
thirty-six (36) months, and (y) provide the benefits which the Executive
would have been entitled to receive pursuant to any supplemental retirement
plan maintained by the Company had his employment continued at the rate of
compensation specified herein for the remainder of the Term. Benefits
otherwise receivable by the Executive pursuant to clause (x) of this
Section 12(d)(iv) shall be reduced to the extent comparable benefits are
actually received by the Executive from a subsequent employer during the
period during which the Company is required to provide such benefits, and
the Executive shall report to the Company any such benefits actually
received by him; and
(v) the payments provided for in this Section 12(d) (other than
Sections 12(d)(iii) and 12(d)(iv)) shall be made not later than the
thirtieth day following the Date of Termination, provided, however, that if
the Company so elects, the Executive hereby agrees to enter into a
consulting agreement reasonably satisfactory to the Executive, pursuant to
which the Executive shall render consulting services to the Company for a
period of eighteen (18) months following the Date of Termination and the
Company shall pay to the Executive, in eighteen (18) equal monthly
installments, the aggregate amount of $500,000 and the liquidated damages
due to the Executive pursuant to Section 12(d)(ii) shall be reduced by
$500,000.
(e) If prior to any Change of Control the Company shall terminate the
Executive's employment without Cause or otherwise repudiate this Agreement or
the Executive shall cease to perform his duties under this Agreement pursuant
to Section 11(f) or terminate his employment under clause (B) of the first
sentence of Section 11(d) hereof, then
(i) the Company shall pay the Executive his full salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given and all other unpaid amounts, if any, to which the
Executive is entitled as of the Date of Termination under any compensation
plan or program of the Company, at the time such payments are due;
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay as
liquidated damages to the Executive an aggregate amount equal to the
product of (A) the Executive's annual base salary in effect as of the Date
of Termination and (B) the number two (2); such amount to be paid in
substantially equal monthly installments during the period commencing with
the month immediately following the month in which the Date of Termination
occurs and ending with the month corresponding to the end of the Term
hereunder. Payments otherwise receivable by the Executive pursuant to this
Section 12(e)(ii) shall be reduced to the extent compensation is
10
<PAGE>
actually received by the Executive from a subsequent employer during the
period during which the Company is required to make such payments, and the
Executive shall report to the Company any such payments actually received
by him; and
(iii) the Company shall (x) continue coverage for the
Executive, on the same terms and conditions as would be applicable if the
Executive were an active employee, under the Company's life insurance,
medical, health, disability and similar welfare benefit plans for a period
equal to twenty-four (24) months, and (y) provide the benefits which the
Executive would have been entitled to receive pursuant to any supplemental
retirement plan maintained by the Company had his employment continued at
the rate of compensation specified herein for the remainder of the Term.
Benefits otherwise receivable by the Executive pursuant to clause (x) of
this Section 12(e)(iii) shall be reduced to the extent comparable benefits
are actually received by the Executive from a subsequent employer during
the period during which the Company is required to provide such benefits,
and the Executive shall report to the Company any such benefits actually
received by him.
(f) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, and, except as provided in Sections 12(d) and 12(e) hereof, the
amount of any payment or benefit provided for in this Section 12 shall not be
reduced by any compensation earned by the Executive as the result of employment
by another employer or by retirement benefits.
(g) Release. Prior to making any payment pursuant to Sections
-------
12(d)(ii) , 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii),
whichever is applicable, the Company shall have the right to require the
Executive to sign, and the Executive hereby agrees to sign, (i) an agreement to
be bound by the terms of Section 15 of this Agreement and (ii) a waiver of all
claims the Executive may have (including any claims under the Age Discrimination
in Employment Act), other than claims for payments or benefits hereunder or
claims for indemnification for director or officer liability, in connection with
the termination of the Executive's employment with the Company and the Company
may withhold payment of such amount until the period during which the Executive
may revoke such waiver (normally seven days) has elapsed.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid and
binding agreement of the Company enforceable against it in accordance with its
terms. The Company agrees and covenants that it will (i) provide the Executive
with customary director and officer indemnification; and (ii) maintain director
and officer liability insurance which is of a type customarily maintained by
companies of similar size and with a similar business as the Company.
11
<PAGE>
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement. The Executive agrees and
covenants that he will obtain, and submit to, such physical examinations as may
be necessary to facilitate the Company obtaining an insurance policy for its
benefit insuring the life of the Executive.
14. Successors; Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
(b) This Agreement is a personal contract and the rights and
interests of the Executive hereunder may not be sold, transferred, assigned,
pledged, encumbered, or hypothecated by him, except as otherwise expressly
permitted by the provisions of this Agreement. This Agreement shall inure to
the benefit of and be enforceable by the Executive and his personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amount would still
be payable to him hereunder had the Executive continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to his devisee, legatee or other designee or, if there
is no such designee, to his estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that he will not at any time
during or at any time after the end of the Term, directly or indirectly, use for
his own account, or disclose to any person, firm or corporation, other than
authorized officers, directors and employees of the Company or its subsidiaries,
Confidential Information (as hereinafter defined) that is treated as trade
secrets by the Company and will not at any time during or for a period of five
(5) years after the end of the Term, directly or indirectly, use for his own
account, or disclose to any person, firm or corporation, other than authorized
officers, directors and employees of the Company or its subsidiaries, any other
Confidential Information. As used herein, "Confidential Information" of the
Company means information of any kind, nature or description which is disclosed
to or otherwise known to the Executive as a direct or indirect consequence of
his association with the Company, which information is not generally known to
the public or in the business in which the Company is engaged or which
information relates to specific investment opportunities within the scope of the
Company's business which were considered by the Executive or the Company during
the term of this Agreement. Confidential Information that is treated as
confidential trade secrets by the Company shall include, but not be limited to,
strategic operating plans and budgets, policy and procedure manuals, computer
programs, financial forms and information, patient or resident lists and
accounts, supplier information, accounting forms and procedures, personnel
policies, information pertaining
12
<PAGE>
to the salaries, positions and performance reviews of the Company's employees,
information on the methods of the Company's operations, research and data
developed by or for the benefit of the Company and information relating to
revenues, costs, profits and the financial condition of the Company. During the
Term and, if (i) the Executive's employment is terminated by the Executive for
other than Good Reason or (ii) the Executive shall cease to perform his duties
under this Agreement other than pursuant to Section 11(f), for a period of two
(2) years following the termination of the Executive's employment, the Executive
shall not induce any employee of the Company or its subsidiaries to terminate
his or her employment by the Company or its subsidiaries in order to obtain
employment by any person, firm or corporation affiliated with the Executive.
(b) The Executive covenants and agrees that any information,
materials, ideas, discoveries, techniques or programs developed or discovered by
the Executive in connection with the performance of his duties hereunder shall
remain the sole and exclusive property of the Company and, to the extent it
constitutes Confidential Information, shall be subject to the covenants
contained in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term and, if
(i) the Executive's employment is terminated by the Executive for other than
Good Reason or (ii) the Executive shall cease to perform his duties under this
Agreement other than pursuant to Section 11(f), for a period of two (2) years
following the termination of the Executive's employment, the Executive shall
not, directly or indirectly, own an interest in, operate, join, control, or
participate as a partner, director, principal, officer, or agent of, enter into
the employment of, or act as a consultant to, in any case in which he has
control or supervision over a significant portion of any entity (i) whose
principal business is the operation of one or more skilled nursing facilities or
(ii) which operates a skilled nursing business that is material in relation to
the Company's comparable business and (iii) in either case, which derives at
least 10% of its skilled nursing facility revenue from facilities which are
located within 35 miles of a center or facility operated by the Company.
Notwithstanding anything herein to the contrary, the foregoing provisions of
this Section 15(c) shall not prevent the Executive from acquiring securities
representing not more than 5% of the outstanding voting securities of any
publicly held corporation.
(d) Without limiting the right of the Company to pursue all other
legal and equitable remedies available for violation by the Executive of the
covenants contained in this Section 15, it is expressly agreed by the Executive
and the Company that such other remedies cannot fully compensate the Company for
any such violation and that the Company shall be entitled to injunctive relief,
without the necessity of proving actual monetary loss, to prevent any such
violation or any continuing violation thereof. Each party intends and agrees
that if in any action before any court or agency legally empowered to enforce
the covenants contained in this Section 15, any term, restriction, covenant or
promise contained herein is found to be unreasonable and accordingly
unenforceable, then such term, restriction, covenant or promise shall be deemed
modified to the extent necessary to make it enforceable by such court or agency.
The covenants contained in Section 15 shall survive the conclusion of the
Executive's employment by the Company.
13
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16. Tax Considerations.
-------------------
Notwithstanding anything herein to the contrary, in the event any
payments to the Executive hereunder ("Total Payments") are determined by the
Company to be subject to the tax imposed by Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code") or any similar federal or state excise
tax, FICA tax, or any interest or penalties are incurred by the Executive with
respect to such excise tax (such excise tax, together with any such interest or
penalties are hereinafter collectively referred to as the "Excise Tax"), the
Company shall pay to the Executive at the time specified in Section 12(d)(v), an
additional amount (the "Gross-Up Payment") such that after the payment by the
Executive of all federal, state, or local income taxes, Excise Taxes, FICA
taxes, or other taxes (including any interest or penalties imposed with respect
thereto) imposed upon the receipt of the Gross-Up Payment, the Executive retains
an amount of the Gross-Up Payment equal to the Excise Tax imposed on the Total
Payments.
If the Excise Tax is subsequently determined to be less than the
amount taken into account hereunder at the time of termination of employment,
the Executive shall repay to the Company, at the time the reduction in Excise
Tax is finally determined, the portion of the Gross-Up Payment attributable to
such reduction. If the Excise Tax is determined to exceed the amount taken into
account hereunder at the time of termination of employment, the Company shall
make an additional Gross-Up Payment to the Executive in respect of such excess
at the time the amount of such excess is finally determined. The Executive
shall notify the Company in writing of any claim by the Internal Revenue Service
that, if successful, would require the payment by the Company of the Gross-Up
Payment. Such notification shall be given as soon as practicable but no later
than ten (10) business days after the Executive is informed in writing of such
claim and shall apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid. The Executive shall not pay such
claim prior to the expiration of the thirty (30) day period following the date
on which he gives such notice to the Company (or such shorter period ending on
the date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such period
that it desires to contest such claim, the Executive shall:
(a) give the Company any information reasonably requested by the
Company relating to such claim;
(b) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company;
(c) cooperate with the Company in good faith in order to effectively
contest such claim; and
(d) permit the Company to participate in any proceedings relating to
such claim;
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<PAGE>
provided, however, that the Company shall bear and pay directly all costs and
- -------- -------
expenses (including legal and accounting fees and additional interest and
penalties) incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax, FICA tax, or
income tax (including interest and penalties with respect thereto) imposed as a
result of such representation and payment of costs and expenses. Without
limitation on the foregoing provisions of this Section 16, the Company shall
control all proceedings taken in connection with such contest and, at its sole
option, may pursue or forgo any and all administrative appeals, proceedings,
hearings, and conferences with the taxing authority in respect of such claim and
may, at its sole option, either direct the Executive to pay the tax claimed and
sue for a refund or contest the claim in any permissible manner, and the
Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction, and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis, and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and provided,
further, that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, other
issues raised by the Internal Revenue Service or any other taxing authority.
If any such claim referred to in this Section 16 is made by the Internal
Revenue Service and the Company does not request the Executive to contest the
claim within the thirty (30) day period following notice of the claim, the
Company shall pay to the Executive the amount on any Gross-Up Payment owed to
the Executive, but not previously paid pursuant to this Section 16, immediately
upon the expiration of such thirty (30) day period. If any such claim is made
by the Internal Revenue Service and the Company requests the Executive to
contest such claim, but does not advance the amount of such claim to the
Executive for purposes of such contest, the Company shall pay to the Executive
the amount of any Gross-Up Payment owed to the Executive, but not previously
paid under the provisions of this Section 16, within five (5) business days of a
Final Determination of the liability of the Executive for such Excise Tax. For
purposes of this Agreement, a "Final Determination" shall be deemed to occur
with respect to a claim when (i) there is a decision, judgment, decree, or other
order by any court of competent jurisdiction, which decision, judgment, decree,
or other order has become final, i.e., all allowable appeals pursuant to this
Section 16 have been exhausted by either party to the action, (ii) there is a
closing agreement made under Section 7121 of the Code, or (iii) the time for
instituting a claim for refund has expired, or if a claim was filed, the time
for instituting suit with respect thereto has expired.
If, after the receipt by the Executive of an amount advanced by the Company
pursuant to this Section 16, the Executive becomes entitled to receive any
refund with respect to such claim, the
15
<PAGE>
Executive shall (subject to the Company's complying with the requirements of
this Section 16) promptly pay to the Company the amount of such refund (together
with any interest paid or credited thereon after taxes applicable thereto). If
after the receipt by the Executive of an amount advanced by the Company pursuant
to this Section 16, a determination is made by the Internal Revenue Service that
the Executive is not entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification, Waiver. No provision of this
---------------------------------
Agreement may be amended or waived unless such amendment or waiver is agreed to
in writing, signed by the Executive and by a duly authorized officer of the
Company. No waiver by any party hereto of any breach by another party hereto of
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Notices. Any notice to be given hereunder shall be in writing
-------
and shall be deemed given when delivered personally, sent by courier or telecopy
or registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To the Executive at: Francis W. Cash
360 Devils Bight
Naples, Florida 34103
To the Company at: Mariner Post-Acute Network, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346
Attn: General Counsel
Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
16
<PAGE>
20. Severability. If any provision of this Agreement or the
------------
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances other than those to which it
is so determined to be invalid and unenforceable, shall not be affected thereby,
and each provision hereof shall be validated and shall be enforced to the
fullest extent permitted by law.
21. Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
22. Governing Law; Attorney's Fees.
------------------------------
(a) This Agreement will be governed by and construed in accordance
with the laws of the State of Georgia, without regard to its conflicts of laws
principles.
(b) The prevailing party in any dispute arising out of this Agreement
shall be entitled to be paid its reasonable attorney's fees incurred in
connection with such dispute from the other party to such dispute.
23 Dispute Resolution. The Executive and the Company shall not
------------------
initiate legal proceedings relating in any way to this Agreement or to the
Executive's employment or termination from employment with the Company until
thirty days after the party against whom the claim is made ("respondent")
receives written notice from the claiming party of the specific nature of any
purported claims and the amount of any purported damages attributable to each
such claim. The Executive and the Company further agree that if respondent
submits the claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty day period, the claiming party
may not institute arbitration or other legal proceedings against respondent
until the earlier of: (a) the completion of good-faith mediation efforts or (b)
90 days after the date on which the respondent received written notice of the
claimant's claim(s); provided, however, that nothing in this Section 23 shall
prohibit the Company from pursuing injunctive or other equitable relief against
the Executive prior to, contemporaneous with, or subsequent to invoking or
participating in these dispute resolution processes. The Company shall pay the
cost of the Mediator.
24 Headings. All descriptive headings of sections and paragraphs in
--------
this Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
25 Withholdings. All payments to the Executive under this Agreement
------------
shall be reduced by all applicable withholding required by federal, state or
local tax laws.
17
<PAGE>
26 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
MARINER POST-ACUTE NETWORK, INC.
BY:_______________________________________
NAME:_____________________________________
TITLE:____________________________________
THE EXECUTIVE
__________________________________________
Francis W. Cash
18
<PAGE>
APPENDIX A
----------
Value Creation Incentive Plan
<TABLE>
<S> <C>
Objectives ..................................... Create incentive to maximize cash flow (EBITDA) while optimizing investment in
working capital and capital expenditures.
Term of Plan .................................... Three years -- FYE 9/30/00 through FYE 9/30/02
Baseline EBITDA ................................. To be determined based on operating results during FY99QIV subject to a pro forma
adjustment to reflect a reorganization of MHG such that 100% of MHG's EBITDA is
no longer included in MPN's consolidated EBITDA.
Cash Basis EBITDA ............................... Earnings before depreciation, interest and taxes less increase in accounts
receivable.
New Investment .................................. Excess of capital expenditures and acquisitions over the sum of maintenance
capital expenditures and the proceeds from any divestitures during the Term of
the Plan).
Target ROI ...................................... 15% (Effectively, the Baseline EBITDA is increased by 15% of the amount of New
Investment in the business during the Term of the Plan).
Valuation Multiple .............................. 8x Cash Basis EBITDA
Total Value Created ............................. 8x {FY02 Cash Basis EBITDA-Baseline EBITDA-15% of New Investment
Executive's Share ............................... 2.5% of Total Value Created
Vesting ......................................... One-third of award shall vest on each of 9/30/00, 9/30/01 and 9/30/02 subject to
accelerated vesting of the entire award upon a Change of Control.
Conversion of Plan .............................. Upon mutual agreement of Executive and Company, amounts earned under the Value
Creation Incentive Plan can be converted into employee stock options. It is
anticipated that this would only be considered upon the completion of the
restructuring of MPN's capital structure currently in progress.
</TABLE>
19
<PAGE>
EXECUTION
EXHIBIT 10.95
DEBTOR-IN-POSSESSION CREDIT AGREEMENT
dated as of
January 20, 2000
among
MARINER HEALTH GROUP, INC.,
and
EACH OF THE SUBSIDIARIES OF MARINER HEALTH GROUP, INC. PARTY HERETO,
each as debtor and debtor-in-possession,
THE LENDERS PARTY HERETO,
THE LC ISSUING BANKS PARTY HERETO,
FIRST UNION NATIONAL BANK,
as Syndication Agent,
PNC CAPITAL MARKETS, INC. and FIRST UNION SECURITIES, INC.,
as Co-Arrangers,
and
PNC BANK, NATIONAL ASSOCIATION,
as Administrative Agent and Collateral Agent
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE 1. Definitions................................................................................. 1
Section 1.01 Defined Terms............................................................................... 1
Section 1.02 Accounting Terms and Determinations......................................................... 25
Section 1.03 Other Definitional Provisions............................................................... 25
ARTICLE 2. The Credit Facilities....................................................................... 25
Section 2.01 Commitments to Lend......................................................................... 25
Section 2.02 Notice of Borrowing......................................................................... 27
Section 2.03 Notice to Lenders; Funding of Loans......................................................... 27
Section 2.04 Interest Rate; Default Rate................................................................. 28
Section 2.05 Letters of Credit........................................................................... 28
Section 2.06 Fees........................................................................................ 36
Section 2.07 Final Maturity of Loans..................................................................... 36
Section 2.08 Unscheduled Mandatory Prepayments of Loans; Reduction of Commitments....................... 37
Section 2.09 Optional Prepayments........................................................................ 38
Section 2.10 Termination or Reduction of Commitments..................................................... 39
Section 2.11 General Provisions as to Payments........................................................... 39
Section 2.12 Computation of Interest and Fees............................................................ 40
Section 2.13 Superpriority Nature of Obligations......................................................... 40
Section 2.14 Joint and Several Liability; Payment Indemnifications....................................... 41
ARTICLE 3. Conditions.................................................................................. 41
Section 3.01 Effectiveness of this Agreement; Closing.................................................... 41
Section 3.02 Credit Events............................................................................... 45
ARTICLE 4. Representations and Warranties.............................................................. 46
Section 4.01 Corporate Existence and Power............................................................... 46
Section 4.02 Corporate and Governmental Authorization; No Contravention.................................. 47
Section 4.03 Binding Effect.............................................................................. 47
Section 4.04 Security Interests.......................................................................... 47
Section 4.05 Financial Information....................................................................... 47
Section 4.06 Litigation.................................................................................. 48
Section 4.07 Compliance with ERISA....................................................................... 48
Section 4.08 Taxes....................................................................................... 48
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
Section 4.09 Compliance with Laws........................................................................ 48
Section 4.10 No Regulatory Restrictions on Borrowing..................................................... 49
Section 4.11 Environmental Matters....................................................................... 50
Section 4.12 Full Disclosure............................................................................. 50
Section 4.13 Information as to Equity Interests and Instruments Owned by MHG Companies................... 50
Section 4.14 Representations in Other Financing Documents................................................ 50
Section 4.15 Year 2000 Compliance........................................................................ 50
Section 4.16 Margin Stock................................................................................ 51
Section 4.17 Representations Concerning Cash Management System; Credit and Collection Policy............. 51
Section 4.18 Prepetition Indebtedness.................................................................... 51
Section 4.19 Chapter 11 Cases............................................................................ 51
Section 4.20 Cash Budget; Year 2000 DIP Budget........................................................... 51
Section 4.21 Liens....................................................................................... 51
Section 4.22 Government Claims........................................................................... 52
Section 4.23 Management Employees........................................................................ 52
ARTICLE 5. Affirmative Covenants....................................................................... 52
Section 5.01 Information................................................................................. 52
Section 5.02 Maintenance of Property..................................................................... 57
Section 5.03 Insurance................................................................................... 57
Section 5.04 Compliance with Law......................................................................... 57
Section 5.05 Maintenance of Existence, Rights, Etc....................................................... 58
Section 5.06 Use of Proceeds and Letters of Credit....................................................... 58
Section 5.07 Future Actions with Respect to Collateral................................................... 58
Section 5.08 Casualty Events............................................................................. 60
Section 5.09 Cash Management System; Credit and Collection Policy........................................ 61
Section 5.10 Certain Orders.............................................................................. 61
Section 5.11 Inspection Rights; Lender Meeting........................................................... 61
Section 5.12 Creditor Schedule........................................................................... 62
Section 5.13 Transition Management....................................................................... 62
Section 5.14 Overhead Payments........................................................................... 63
Section 5.15 Post Closing Deliveries..................................................................... 63
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE 6. Financial Covenants......................................................................... 64
Section 6.01 Consolidated EBITDAR........................................................................ 64
Section 6.02 Nursing Home Occupancy...................................................................... 64
Section 6.03 Receivables................................................................................. 65
Section 6.04 Compliance with Cash Budget................................................................. 65
Section 6.05 Capital Expenditures........................................................................ 65
ARTICLE 7. Negative Covenants.......................................................................... 66
Section 7.01 Limitation on Debt.......................................................................... 66
Section 7.02 Negative Pledge............................................................................. 67
Section 7.03 Consolidations, Mergers and Asset Sales..................................................... 68
Section 7.04 Limitations on Investments.................................................................. 68
Section 7.05 Limitations on Transactions with Affiliates................................................. 69
Section 7.06 Limitation on Restrictions Affecting Subsidiaries........................................... 69
Section 7.07 Restricted Payments......................................................................... 69
Section 7.08 No Modification of Certain Documents Without Consent........................................ 70
Section 7.09 No Change of Fiscal Periods................................................................. 71
Section 7.10 Margin Stock................................................................................ 71
Section 7.11 Limitation on Business...................................................................... 71
Section 7.12 Leases...................................................................................... 71
Section 7.13 Limitation on Cash Not Held in Collateral Accounts or Concentration Accounts................ 71
Section 7.14 Chapter 11 Claims........................................................................... 71
Section 7.15 Limitation on Repayments; Prepetition Obligations........................................... 72
Section 7.16 Agreements.................................................................................. 72
Section 7.17 Management Employees........................................................................ 72
ARTICLE 8. Defaults.................................................................................... 72
Section 8.01 Events of Default........................................................................... 72
Section 8.02 Notice of Default........................................................................... 76
Section 8.03 Enforcement Notice.......................................................................... 76
Section 8.04 Cash Cover.................................................................................. 76
ARTICLE 9. The Agents.................................................................................. 77
Section 9.01 Appointment and Authorization............................................................... 77
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C>
Section 9.02 Agents and Affiliates....................................................................... 77
Section 9.03 Action by Agents............................................................................ 77
Section 9.04 Delegation of Duties; Consultation with Experts............................................. 78
Section 9.05 Liability of Agents......................................................................... 78
Section 9.06 Indemnification............................................................................. 79
Section 9.07 Credit Decision............................................................................. 79
Section 9.08 Successor Agents............................................................................ 80
ARTICLE 10. Changes In Circumstances.................................................................... 80
Section 10.01 Increased Cost and Reduced Return........................................................... 80
Section 10.02 Taxes....................................................................................... 81
ARTICLE 11. Miscellaneous............................................................................... 83
Section 11.01 Notices..................................................................................... 83
Section 11.02 No Waiver................................................................................... 83
Section 11.03 Expenses; Indemnification................................................................... 83
Section 11.04 Sharing of Set-offs......................................................................... 87
Section 11.05 Amendments and Waivers...................................................................... 87
Section 11.06 Successors and Assigns...................................................................... 89
Section 11.07 Margin Stock................................................................................ 91
Section 11.08 Governing Law; Submission to Jurisdiction................................................... 91
Section 11.09 Counterparts; Integration................................................................... 92
Section 11.10 WAIVER OF JURY TRIAL........................................................................ 92
Section 11.11 Confidentiality............................................................................. 92
Section 11.12 Parties Including Trustees; Court Proceedings............................................... 93
Section 11.13 MHG Appointed Attorney-In-Fact.............................................................. 94
Section 11.14 No Waiver................................................................................... 94
Section 11.15 Survival of Agreements...................................................................... 94
</TABLE>
iv
<PAGE>
SCHEDULES
- ---------
Commitment Schedule
Schedule 1 - [Intentionally Omitted]
Schedule 2 - [Intentionally Omitted]
Schedule 3 - Subsidiaries; Excluded Subsidiaries
Schedule 4 - Certain Transactions
Schedule 5 - [Intentionally Omitted]
Schedule 6 - Prepetition Indebtedness
Schedule 7 - Existing Liens
Schedule 8 - Existing Investments
Schedule 9 - Material Contracts and Approvals
Schedule 10 - Cash Management System
Schedule 11 - [Intentionally Omitted]
Schedule 12 - Healthcare Facilities; Nursing Home Facilities
Schedule 13 - Prepetition Liens on Accounts
Schedule 14 - [Intentionally Omitted]
Schedule 15 - Management Employees
-v-
<PAGE>
EXHIBITS
--------
Exhibit A - Form of Tranche A Note
Exhibit B - Form of Tranche B Note
Exhibit C - Form of Notice of Borrowing
Exhibit D - Form of LC Request
Exhibit E - Form of Prepayment Notice
Exhibit F - Form of Security Agreement
Exhibit G - Financial Officer's Certificate
Exhibit H - Form of Opinion of Counsel for the Borrowers
Exhibit I - Form of Assignment Agreement
Exhibit J - Form of Interim Borrowing Order
Exhibit K - Form of Borrowing Order
Exhibit L - Form of Healthcare Status Report
vi
<PAGE>
DEBTOR-IN-POSSESSION CREDIT AGREEMENT
This DEBTOR-IN-POSSESSION CREDIT AGREEMENT is dated as of January 20,
2000 and entered into by and among MARINER HEALTH GROUP, INC., a Delaware
corporation ("MHG"), as debtor and debtor-in-possession, and EACH OF MHG'S
SUBSIDIARIES LISTED ON THE SIGNATURE PAGES HEREOF, each as debtor and debtor-in-
possession (each such Subsidiary and MHG individually referred to herein as a
"Borrower" and, collectively, on a joint and several basis, as the "Borrowers");
THE LENDERS LISTED ON THE SIGNATURE PAGES HEREOF (each individually referred to
herein as a "Lender" and collectively as "Lenders"); FIRST UNION NATIONAL BANK
("First Union"), as Syndication Agent; PNC CAPITAL MARKETS, INC. and FIRST UNION
SECURITIES, INC., as Co-Arrangers; and PNC BANK, NATIONAL ASSOCIATION ("PNC"),
as Collateral Agent and Administrative Agent, and as an issuing bank for Letters
of Credit hereunder.
RECITALS
WHEREAS, on January 18, 2000 (the "Petition Date"), each Borrower
filed a voluntary petition for relief under the Bankruptcy Code (such term and
other capitalized terms used in these Recitals without definition have the
meanings set forth in Section 1.01 of this Agreement) with the United States
Bankruptcy Court for the District of Delaware (the "Court") (such proceedings
being jointly administered under Case No. 00-215 (MFW) are hereinafter referred
to as the "Chapter 11 Cases"). Each Borrower continues to operate its businesses
and manage its properties as a debtor-in-possession pursuant to Sections 1107
and 1108 of the Bankruptcy Code; and
WHEREAS, the Borrowers have requested Lenders to provide revolving
credit facilities in an aggregate amount of up to $50,000,000 on a post-petition
basis on the terms and conditions set forth herein; and
WHEREAS, Lenders are willing to provide such financing only if, as set
forth herein, all Obligations (i) shall constitute allowed super-priority
administrative expense claims in the Chapter 11 Cases and (ii) are secured by a
first priority Lien on substantially all of the Borrowers' real, personal and
mixed property, including a pledge of all of the capital stock of each of the
Subsidiaries of each Borrower;
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the Borrowers, Lenders and Agents
hereby agree as follows:
ARTICLE 1. Definitions
Section 1.01 Defined Terms. The following terms, as used herein,
-------------
have the following meanings:
1
<PAGE>
"Account Party" means the party identified as the Account Party for a
Letter of Credit pursuant to Section 2.05(c).
"Accounts Receivable" means any right to payment that is due within one
year from any invoice date for goods sold or leased or for services rendered no
matter how evidenced, all as determined in conformity with GAAP.
"Adjusted Consolidated Net Income" means, for any period, Consolidated Net
Income for such period, adjusted to exclude therefrom, without duplication, (i)
gains or losses from Asset Sales net of related tax effects and (ii) any net
income (or loss) of any Person other than a Borrower in which any Person other
than a Borrower has an ownership interest, except that such Person's net income
shall not be excluded if (and to the extent that) such Person pays dividends or
distributions in cash to a Borrower during such period.
"Administrative Agent" means PNC, in its capacity as Administrative Agent
for the Lenders under the Financing Documents, and any successor thereto in such
capacity.
"Administrative Questionnaire" means, with respect to each Lender, an
administrative questionnaire in the form prepared by the Administrative Agent,
duly completed by such Lender and submitted to the Administrative Agent (with a
copy to the Borrowers).
"Affiliate" means any Person (other than a Subsidiary) directly or
indirectly controlling, controlled by or under common control with MHG. As used
in this definition, the term "control" means possession, directly or indirectly,
of the power to vote 10% or more of any class of voting securities of a Person
or to direct or cause the direction of the management or policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
Notwithstanding anything to the contrary in this definition, no individual shall
be deemed an Affiliate of any Person solely by reason of his or her being an
employee, officer or director of such Person.
"Agents" means the Syndication Agent, the Administrative Agent and the
Collateral Agent, collectively.
"Aggregate LC Exposure" means, at any time, the sum, without duplication,
of (i) the aggregate amount that is (or may thereafter become) available for
drawing under all Letters of Credit outstanding at such time and (ii) the
aggregate unpaid principal amount of all LC Reimbursement Obligations
outstanding at such time.
"Agreement" means this Debtor-In-Possession Credit Agreement dated as of
January 18, 2000, as it may hereafter be amended, supplemented, extended or
otherwise modified from time to time.
"Applicable Laws" means all applicable provisions of constitutions,
statutes, laws, rules, treaties, regulations and orders of all Governmental
Authorities and all applicable orders, rules and decrees of courts and
arbitrators.
2
<PAGE>
"Approvals" has the meaning set forth in Section 4.09(c).
"Asset Sale" means any sale, lease or other transfer (including any such
transaction effected by way of merger or consolidation) of any asset by any MHG
Company, including without limitation any sale-leaseback transaction, whether or
not involving a capital lease, but excluding (i) any sale of inventory, cash,
cash equivalents and other cash management investments and obsolete, unused or
unnecessary equipment, in each case in the ordinary course of business, (ii) any
transfer of assets by any Borrower to another Borrower, (iii) any sub-lease, in
the ordinary course of business and consistent with MHG's past practices, to
another Person (for use by such Person in connection with a business related to
the operation of the applicable Healthcare Facility) of a portion of the floor
space and related property at any Healthcare Facility, and (iv) any sale of
equipment or other goods for which the sales price does not exceed $250,000 for
any single sale or related series of sales, and $500,000 for all such sales in
the aggregate.
"Assignee" has the meaning set forth in Section 11.06(c).
"Assignment Agreement" means an Assignment Agreement in substantially the
form of Exhibit I annexed hereto.
---------
"Bankruptcy Code" means Title 11 of the United States Code entitled
"Bankruptcy", as now and hereafter in effect, or any successor statute.
"Base Rate" means, for any day, a rate per annum equal to the higher of (i)
the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal
Funds Rate for such day.
"Borrower" and "Borrowers" have the respective meanings set forth in the
introduction to this Agreement.
"Borrowing" means an aggregation of Tranche A Loans or of Tranche B Loans,
as the case may be, made or to be made to the Borrowers by the Lenders pursuant
to Section 2.01(a) or 2.01(b), respectively, on the same day.
"Borrowing Base" means, as of any date of determination during any calendar
month, the sum of (i) $7,500,000 and (ii) the amount shown in the Year 2000 DIP
Budget's projected monthly balance sheets as "Working Capital Facility"
borrowings for such calendar month.
"Borrowing Order" means an order of the Court entered in the Chapter 11
Cases after a final hearing under Bankruptcy Rule 4001(c)(2) in the form
attached hereto as Exhibit K with any modifications thereto on or prior to the
---------
entry thereof as are approved by Agents in their sole discretion, as the same
may thereafter be amended, supplemented, extended or otherwise modified from
time to time with the express written consent or joinder of Required Lenders.
"Business Day" means any day except a Saturday, Sunday or other day on
which either (i) in the case of any action to be taken by the Court or any
filing with the Court, the Court is unable or unwilling to act or is observing a
"legal holiday" as provided in Rule 9006(a) of the Federal Rules of
3
<PAGE>
Bankruptcy Procedure, or (ii) in all other cases, commercial banks in
Pittsburgh, Pennsylvania, Charlotte, North Carolina, or New York, New York are
authorized by law to close.
"Capital Lease" means a lease that would be capitalized on a balance sheet
of the lessee prepared in accordance with GAAP.
"Carve-Out" has the meaning set forth in Section 2.13.
"Carve-Out Notice" has the meaning set forth in Section 2.13.
"Cash Balance" means, as at any time of determination, the sum of the
dollar amount of all money, currency, Temporary Cash Investments and credit
balances held or carried in the Concentration Accounts, after giving effect to
checks issued and outstanding and any administrative holds assessed by the
financial institution maintaining the Concentration Accounts.
"Cash Budget" means the consolidated cash forecast for the Borrowers for
the 13-week period commencing with the week beginning January 8, 2000, delivered
by the Borrowers to the Agents pursuant to Section 3.01(r), as it may be amended
or supplemented pursuant to Section 5.01(q).
"Cash Management System" means the cash management system of the Borrowers
described in Schedule 10 hereto.
-----------
"Casualty Event" means (i) any Condemnation Event with respect to any
property owned by or leased to any MHG Company or (ii) any damage to, or
destruction of, any property owned by or leased to any MHG Company.
"Casualty Proceeds" means (i) with respect to any Condemnation Event, all
awards or payments received by any MHG Company or the Collateral Agent by reason
of such Condemnation Event, including all amounts received with respect to any
transfer in lieu or anticipation of such Condemnation Event or in settlement of
any proceeding relating to such Condemnation Event and (ii) with respect to any
other Casualty Event, all insurance proceeds or payments (excluding payments
with respect to business interruption) which any MHG Company or the Collateral
Agent receive by reason of such other Casualty Event.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended from time to time, and the regulations
promulgated thereunder.
"Chapter 11 Cases" has the meaning set forth in the recitals to this
Agreement.
"Closing" means the closing hereunder on the Closing Date.
"Closing Date" means the date on which the Agents shall have received the
documents specified in or pursuant to Section 3.01 and the other conditions
specified in Section 3.01 shall have been satisfied or waived in accordance with
the terms hereof.
4
<PAGE>
"Co-Arrangers" means PNC Capital Markets, Inc. and First Union Securities,
Inc. in their capacities as Co-Arrangers under the Financing Documents.
"Collateral" means all property, real and personal, tangible and
intangible, with respect to which Liens are created or purportedly created for
the benefit of Lenders pursuant to the Collateral Documents.
"Collateral Agent" means PNC, in its capacity as Collateral Agent for the
holders of the Secured Obligations under the Collateral Documents, and any
successor thereto in such capacity.
"Collateral Documents" means the Security Agreement, the Mortgages and all
other supplemental or additional security agreements, mortgages or similar
instruments delivered pursuant hereto or thereto or pursuant to an applicable
order of the Court.
"Commitment" means, as to any Lender, the aggregate amount of such Lender's
Tranche A Commitment and Tranche B Commitment, and "Commitments" means all such
Commitments of all Lenders, in the aggregate.
"Commitment Schedule" means the Commitment Schedule attached hereto.
"Commitment Termination Date" means the earliest of (i) the Stated Maturity
Date, (ii) the effective date of a joint plan of reorganization in the Chapter
11 Cases, as specified in such plan, (iii) the date of (x) termination of the
Borrowers' exclusive right to file a plan or plans of reorganization in any of
the Chapter 11 Cases other than as a result of the filing of a plan or plans of
reorganization in the Chapter 11 Cases acceptable to the Required Lenders or (y)
filing of any plan of reorganization or any modification to any previously filed
plan of reorganization, in any such case without the prior written approval of
the Required Lenders, (iv) the date of termination in whole of the Commitments
pursuant to Article 8, (v) the date that is 15 days after the Petition Date, if
neither the Interim Borrowing Order nor the Borrowing Order has been entered by
the Court by such date; (vi) the date that is 30 days after the Petition Date if
the Borrowing Order has not been entered by the Court by such date, unless
Required Lenders agree in their sole discretion to extend such date by no more
than 15 additional days; and (vii) the date of any sale, transfer or other
disposition of all or substantially all of the assets or stock of the MHG
Companies.
"Concentration Accounts" means the Concentration Accounts for the Cash
Management System as identified in Schedule 10 hereto.
-----------
"Condemnation Event" means any condemnation or other taking or temporary or
permanent requisition of any property, any interest therein or right appurtenant
thereto, or any change of grade affecting any property, as the result of the
exercise of any right of condemnation or eminent domain. A transfer to a
governmental authority in lieu or anticipation of condemnation shall be deemed
to be a Condemnation Event.
5
<PAGE>
"Consolidated Capital Expenditures" means, for any period, the gross
additions to property, plant and equipment and other capital expenditures of MHG
and its Consolidated Subsidiaries for such period, as the same are or would be
reflected in a consolidated statement of cash flows of MHG and its Consolidated
Subsidiaries for such period.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent deducted in determining Adjusted
Consolidated Net Income for such period, the sum of (i) Consolidated Interest
Expense, (ii) income tax expense and (iii) depreciation, amortization and other
similar non-cash charges.
"Consolidated EBITDAR" means, for any period, Consolidated EBITDA for such
period plus, to the extent deducted in determining Consolidated EBITDA for such
period, the sum (without duplication) of (i) Consolidated Rental Expense, (ii)
Overhead Payments and (iii) non-cash compensation expense and minus (iv) any
cash paid during such period in respect of non-cash compensation expense accrued
during any prior period; provided that Consolidated EBITDAR shall be calculated
so as to exclude the effect of any income or expense that (A) is classified as
extraordinary, (B) is reported separately as an unusual or non-recurring item,
(C) is attributable to discontinued operations or (D) represents the effect of
an accounting change on prior periods, in each case in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, the interest expense
of MHG and its Consolidated Subsidiaries, determined on a consolidated basis for
such period; provided that Consolidated Interest Expense shall not (i) include
interest capitalized in accordance with GAAP or (ii) be reduced by any interest
income.
"Consolidated Net Income" means, for any period, the net income of MHG and
its Consolidated Subsidiaries, determined on a consolidated basis for such
period.
"Consolidated Rental Expense" means, for any period, the total rental
expense for operating leases of MHG and its Consolidated Subsidiaries,
determined on a consolidated basis for such period; provided that Consolidated
Rental Expense shall not be reduced by any rental income.
"Consolidated Subsidiary" means, as to any Person at any date, any
Subsidiary or other entity the accounts of which would be consolidated with
those of such Person in its consolidated financial statements if such statements
were prepared as of such date. Unless otherwise specified, "Consolidated
Subsidiary" means a Consolidated Subsidiary of MHG; provided that the
Consolidated Subsidiaries of MHG shall not include any Excluded Subsidiaries.
"Court" has the meaning set forth in the recitals to this Agreement.
"Credit and Collection Policy" means the policies and procedures existing
as of the Closing Date for the MHG Companies in respect of creating,
administering and collecting accounts receivable, including without limitation
the policy for creating reserves in accordance with GAAP
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<PAGE>
and writing down or writing off accounts receivables, delivered to the Agents on
or prior to the Closing Date pursuant to Section 3.01(t).
"Credit Event" means (i) the making of a Loan, (ii) the issuance of a
Letter of Credit or (iii) the extension of the expiry date of a Letter of
Credit.
"Credit Exposure" means, as to any Lender, (i) at any time before the
termination of its Commitment in its entirety, the amount of its Commitment at
such time; or (ii) at any time thereafter, if the Commitments have terminated in
their entirety, its Outstanding Credit Amount, all determined at such time after
giving effect to any prior assignments by or to such Lender pursuant to Section
11.06(c).
"Credit Facilities" means the credit facilities provided to the Borrowers
under Sections 2.01(a), 2.01(b) and 2.05 and the other provisions hereof
relating to Loans and Letters of Credit.
"Credit Parties" means the Borrowers, collectively.
"Debt" of any Person means, without duplication, (i) all obligations of
such Person for borrowed money, (ii) all obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person to pay the deferred purchase price of property or services, (iv) all
obligations of such Person as lessee under Capital Leases, (v) all obligations
of such Person to purchase securities which arise out of or in connection with
the sale of the same or substantially similar securities, (vi) all obligations
of such Person (whether contingent or non-contingent) to reimburse any Lender or
other Person in respect of amounts paid under a letter of credit, banker's
acceptance or similar instrument, (vii) all obligations secured by a Lien on any
asset of such Person, whether or not such Debt is otherwise an obligation of
such Person, and (viii) all Guarantees by such Person of obligations of another
Person (each such Guarantee to constitute Debt in an amount equal to the maximum
amount of such other Person's obligations Guaranteed thereby); provided that
neither trade accounts payable nor amounts owed to patients or residents arising
after the Petition Date in the ordinary course of business nor obligations
arising after the Petition Date in the ordinary course of business in respect of
insurance policies or performance or surety bonds which are not themselves
Guarantees of Debt (nor drafts, acceptances or similar instruments evidencing
the same nor obligations in respect of letters of credit supporting the payment
of the same) shall constitute Debt.
"Default" means any condition or event that constitutes an Event of Default
or that with the giving of notice or lapse of time or both would, unless cured
or waived, become an Event of Default.
"Deposit Account" means a demand, time, savings, passbook or like account
with a bank, savings and loan association, credit union or like organization,
other than an account evidenced by a negotiable certificate of deposit.
"Eastern Time" means local time in the Eastern time zone of the United
States.
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"Eligible Assignee" means any Person which is a holder of Prepetition
Indebtedness at the time of the relevant assignment and which is either (A) (i)
a commercial bank organized under the laws of the United States or any state
thereof having unimpaired capital and surplus of not less than $500,000,000;
(ii) a savings and loan association or savings bank organized under the laws of
the United States or any state thereof having unimpaired capital and surplus of
not less than $500,000,000; (iii) a commercial bank organized under the laws of
any other country or a political subdivision thereof having unimpaired capital
and surplus of not less than $500,000,000; provided that (x) such bank is acting
through a branch or agency located in the United States or (y) such bank is
organized under the laws of a country that is a member of the Organization for
Economic Cooperation and Development or a political subdivision of such country;
or (iv) an "accredited investor" (as defined in Regulation D under the
Securities Act of 1933, as amended) which extends credit as one of its
businesses including, but not limited to, insurance companies, mutual funds and
lease financing companies and having unimpaired capital and surplus of not less
than $100,000,000; or (B) a Lender or an Affiliate of a Lender; provided that no
MHG Company or Affiliate of any of them shall be an Eligible Assignee; and
provided further that Eligible Assignee shall mean and include any other Person
designated as such pursuant to the prior written consent of (y) the Agents (such
consent not to be unreasonably withheld or delayed) and (z) as long as no Event
of Default has occurred or is continuing, MHG, acting on behalf of itself and
all other Borrowers (such consent not to be unreasonably withheld or delayed).
"Enforceable Judgment" means a judgment or order of a court or arbitral or
regulatory authority as to which the period, if any, during which the
enforcement of such judgment or order is stayed shall have expired. A judgment
or order which is under appeal or as to which the time in which to perfect an
appeal has not expired shall not be deemed an Enforceable Judgment so long as
enforcement thereof is effectively stayed pending the outcome of such appeal or
the expiration of such period, as the case may be.
"Enforcement Notice" means a notice delivered by the Administrative Agent
to the Collateral Agent pursuant to Section 8.03 directing the Collateral Agent
to exercise one or more specific rights or remedies under the Collateral
Documents.
"Environmental Laws" means any and all federal, state, local and foreign
statutes, laws, judicial decisions, regulations, ordinances, rules, judgments,
orders, decrees, codes, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and governmental restrictions relating to the
environment or to the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances or
wastes into the environment, including ambient air, surface water, ground water
or land, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of pollutants,
contaminants, Hazardous Substances or wastes or the clean-up or other
remediation thereof.
"Environmental Liabilities" means any and all liabilities of or relating to
any of the MHG Companies (including any entity which is, in whole or in part, a
predecessor of any of the MHG
8
<PAGE>
Companies), whether vested or unvested, contingent or fixed, actual or
potential, known or unknown, which arise under or relate to matters covered by
Environmental Laws.
"Equity Interest" means (i) in the case of a corporation, any shares of its
capital stock, (ii) in the case of a limited liability company, any membership
interest therein, (iii) in the case of a partnership, any partnership interest
(whether general or limited) therein, (iv) in the case of any other business
entity, any participation or other interest in the equity or profits thereof or
(v) any warrant, option or other right to acquire any Equity Interest described
in the foregoing clauses (i), (ii), (iii) and (iv).
"Equity Issuance" means any issuance or sale by any MHG Company of any
Equity Interest in such MHG Company, other than any issuance or sale of such
Equity Interests to any other MHG Company.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means the MHG Companies and all members of a controlled group
of corporations and all trades or businesses (whether or not incorporated) under
common control which, together with any MHG Company, are treated as a single
employer under Section 414 of the Internal Revenue Code.
"Event of Default" means any event defined as an "Event of Default" in
Section 8.01.
"Excess Cash Amount" has the meaning set forth in Section 2.08(f).
"Excess Casualty Proceeds" has the meaning set forth in Section 5.08(a).
"Excluded Subsidiaries" means each of the Subsidiary joint ventures of MHG
identified on Schedule 3 hereto as an Excluded Subsidiary.
----------
"Executive Officer" means any "executive officer" (within the meaning of
Rule 3b-7 under the Securities Exchange Act) of any of the Borrowers.
"Existing Credit Facilities" means, collectively, (i) the Term Loan
Facility Credit Agreement dated as of December 23, 1998, as amended through the
Closing Date, among MHG and the lenders and agents named therein, (ii) the
Revolving Credit Facility Credit Agreement dated as of May 18, 1994, as amended
through the Closing Date, among MHG and the lenders and agents named therein,
(iii) all agreements, documents and instruments pursuant to which any interest
in collateral is granted or purported to be granted, created, evidenced or
perfected in connection with any of such Credit Agreements, including without
limitation, all deeds of trust, mortgages, security agreements, pledge
agreements, assignments, licenses, landlord consents and releases, financing
statements, fixture filings, registrations or similar documents and (iv) all
ancillary agreements as to which any holder of any of the obligations evidenced
by any of the foregoing is a party or a beneficiary and all other agreements,
instruments, documents and certificates including promissory
9
<PAGE>
notes, consents, assignments, contracts, and notices delivered in connection
with any of the foregoing or the transactions contemplated thereby, in each case
as any of the foregoing may be in effect as of the Closing Date and as the same
may be amended, supplemented or otherwise modified from time to time to the
extent permitted hereunder.
"Existing Lender" means each of the "Banks" party to any of the Existing
Credit Facilities.
"Existing Lender Lien" means, collectively, the adequate protection Liens
provided to the Existing Lenders as set forth in the Interim Borrowing Order and
the Borrowing Order.
"Existing Note Indenture" means the indenture dated as of April 4, 1996, as
amended through the Closing Date, pursuant to which indenture the Existing Notes
were issued.
"Existing Notes" means the 9-1/2% subordinated notes of MHG in the
aggregate outstanding principal amount of $150,000,000 issued pursuant to the
Existing Note Indenture.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Business Day next
succeeding such day, provided that (i) if such day is not a Business Day, the
Federal Funds Rate for such day shall be such rate on such transactions on the
next preceding Business Day as so published on the next succeeding Business Day,
and (ii) if no such rate is so published on such next succeeding Business Day,
the Federal Funds Rate for such day shall be the average rate quoted to the
Administrative Agent on such day on such transactions as determined by the
Administrative Agent.
"Fee Mortgages" means fee mortgages in favor of the Collateral Agent in
form and substance satisfactory to the Collateral Agent relating to any real
property now or hereafter owned in fee by any MHG Company which is required to
be so encumbered to secure the Obligations pursuant to Section 5.07.
"Final Order" means an order, judgment or other decree of the Court or any
other court or judicial body with proper jurisdiction, as the case may be, which
(i) in the case of any order, judgment or decree other than the Interim
Borrowing Order and the Borrowing Order, is in full force and effect and has not
been reversed, stayed, modified or amended and as to which (a) any right to
appeal or seek certiorari, review or rehearing has been waived or (b) the time
to appeal or seek certiorari, review or rehearing has expired and as to which no
appeal or petition for certiorari, review or rehearing is pending, and (ii) in
the case of the Interim Borrowing Order and the Borrowing Order, is in full
force and effect and has not been reversed or stayed or, without the consent of
Required Lenders, modified or amended.
"Financial Accommodations" means arrangements for the extension of credit
or other financial accommodation to one or more of the MHG Companies, including
committed or uncommitted lines of credit for advances or other financial
accommodation, letters of credit, performance and surety bonds and the like,
committed or uncommitted agreements for the purchase
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<PAGE>
of accounts receivable or other financial assets, with or without recourse or
repurchase obligation, forward and future contracts for purchase of bullion or
foreign currencies and other similar arrangements and interest rate swaps and
other similar arrangements, but excluding (i) trade accounts payable and amounts
owed to patients or residents arising after the Petition Date, in each case
arising in the ordinary course of business, and obligations arising after the
Petition Date in the ordinary course of business in respect of insurance
policies or performance or surety bonds which are not themselves Guarantees of
Debt (and drafts, acceptances or similar instruments evidencing the same and
obligations in respect of letters of credit supporting the payment of the same)
and (ii) Debt, Letters of Credit and Commitments under this Agreement.
"Financial Officer" means, with respect to any Person, the principal
financial officer (which, if so identified by the Borrowers, may include a vice
president principally responsible for financial matters), principal accounting
officer or treasurer of such Person, in each case acceptable to the
Administrative Agent.
"Financing Documents" means this Agreement (including the Schedules and
Exhibits hereto), the Notes and the Collateral Documents.
"First Day Orders" means those orders entered by the Court as a result of
motions and applications filed by the Borrowers with the Court on or about the
Petition Date, in each case in form and substance as approved by the
Administrative Agent pursuant to Section 3.01.
"First Union" has the meaning set forth in the introduction to this
Agreement.
"Fiscal Quarter" means a fiscal quarter of MHG.
"Fiscal Year" means a fiscal year of MHG.
"GAAP" means at any time generally accepted accounting principles as then
in effect in the United States, applied on a basis consistent (except for
changes concurred in by MHG's independent public accountants) with the Most
Recent Audited Financial Statements.
"Governmental Approvals" means all authorizations, consents, approvals,
licenses and exemptions of, registrations and filings with, and reports to, all
Governmental Authorities.
"Governmental Authority" means any nation, province, state or political
subdivision thereof, and any government or any Person exercising executive,
legislative, regulatory or administrative functions of or pertaining to
government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.
"Grantor" means a MHG Company that grants a Lien on any of its property
pursuant to the Collateral Documents.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person directly or indirectly guaranteeing any Debt (the "primary
obligation") of any other Person (the
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<PAGE>
"primary obligor") and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt (whether arising by virtue of partnership arrangements, by agreement to
keep-well, to purchase assets, goods, securities or services primarily for the
purpose of assuring the owner of such primary obligation of the ability of the
primary obligor to pay such primary obligation, to take-or-pay, or to maintain
financial statement conditions or otherwise), (ii) to reimburse a bank for
drawings under a letter of credit for the purpose of paying such Debt or (iii)
entered into for the purpose of assuring in any other manner the holder of such
Debt of the payment thereof or to protect such holder against loss in respect
thereof (in whole or in part); provided that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee", when used as a verb, has a corresponding
meaning.
"Hazardous Substances" means any toxic, radioactive, corrosive or otherwise
hazardous substance, including petroleum, its derivatives, by-products and other
hydrocarbons, or any substance having any constituent elements displaying any of
the foregoing characteristics, whether or not regulated under Environmental
Laws.
"Healthcare Event" means (i) the termination (without reinstatement) of the
Medicare or Medicaid contract or license for any three or more Healthcare
Facilities (other than Managed Facilities); or (ii) the involuntary receivership
or involuntary management of any Healthcare Facility (other than a Managed
Facility) by any applicable Governmental Authority; or (iii) the imposition by
any applicable Governmental Authority, with respect to four or more Healthcare
Facilities (other than Managed Facilities) in the aggregate, of administrative
holds or similar restrictions or limitations on the admission of patients (but
only for so long as such holds, restrictions or limitations shall be in effect).
"Healthcare Facility" means any of the following to the extent owned,
leased, managed or operated by an MHG Company: (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 (as described in clause (i)) or (iii)
any business related or ancillary to the provision of healthcare services or the
operation of a Healthcare Facility (as described in clause (i)) including, but
not limited to, pharmaceutical services, respiratory and infusion management,
contract therapy services, as well as hospice and home care services.
"Healthcare Status Report" has the meaning set forth in Section 5.01(l).
"HHS Stipulation" means the Stipulation Between the United States
Department of Health and Human Services and the Debtors in the form provided to
the Agents on or prior to the Closing Date, with any modifications thereto on or
prior to the Closing Date or entry thereof, which modifications are approved by
the Agents in their sole discretion, as the same may thereafter be amended,
supplemented or otherwise modified from time to time with the express written
consent of Required Lenders.
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"Indemnitee" has the meaning set forth in Section 11.03(b).
"Insolvency Proceeding" shall mean, with respect to any Person, (a) a case,
action or proceeding with respect to such Person (i) before any court or any
other Official Body under any bankruptcy, insolvency, reorganization or other
similar law now or hereafter in effect, or (ii) for the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator
(or similar official) of any such Person or otherwise relating to the
liquidation, dissolution, winding-up or relief of such Person, or (b) any
general assignment for the benefit of creditors, composition, marshaling of
assets of creditors, or other, similar arrangements in respect of such Person's
creditors generally or any substantial portion of its creditors; undertaken
under any law.
"Interim Borrowing Order" means an order of the Court entered in the
Chapter 11 Cases after a hearing under Bankruptcy Rule 4001(c)(2) in the form
attached hereto as Exhibit J, with any modifications thereto on or prior to the
---------
Closing Date or entry thereof as are approved by the Agents in their sole
discretion, as the same may thereafter be amended, supplemented or otherwise
modified from time to time with the express written consent or joinder of
Required Lenders.
"Interim Order Date" means the date that the Court signs the Interim
Borrowing Order.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute.
"Investment" means, with respect to any Person (the "Investor"), any
investment by the Investor in any other Person, whether by means of share
purchase, capital contribution, loan, advance, purchase of Debt, payment in
respect of a Guarantee of Debt, time deposit or otherwise.
"Investor" has the meaning set forth in the definition of "Investment" in
this Section 1.01.
"LC Exposure" means, with respect to any Lender at any time, its Percentage
of the Aggregate LC Exposure at such time.
"LC Fee Rate" means a per annum rate equal to 4.50% or, upon the occurrence
and during the continuation of any Event of Default, 7.00%.
"LC Indemnitees" has the meaning set forth in Section 2.05(n).
"LC Issuing Bank" means (i) PNC and (ii) any other Lender designated as an
"LC Issuing Bank" for purposes hereof in a notice to the Administrative Agent
signed by MHG (acting on its own behalf and on behalf of all other Borrowers)
and such Lender, acting in each case in the capacity of an LC Issuing Bank under
the letter of credit facility described in Section 2.05, and their respective
successors.
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"LC Issuing Bank Fee Letter" means the letter agreement dated the Closing
Date by and among PNC and the Borrowers regarding fees to be paid by the
Borrowers to PNC as LC Issuing Bank with respect to Letters of Credit.
"LC Office" means, with respect to any LC Issuing Bank, the office at which
it books any Letter of Credit issued by it.
"LC Payment Date" has the meaning set forth in Section 2.05(h).
"LC Reimbursement Obligations" means, at any time, all obligations of the
Borrowers to reimburse the LC Issuing Banks pursuant to Section 2.05 for amounts
paid by the LC Issuing Banks in respect of drawings under Letters of Credit,
including any portion of any such obligation to which a Lender has become
subrogated pursuant to Section 2.05(j)(i).
"LC Request" has the meaning set forth in Section 2.05(c).
"Leasehold Mortgages" means leasehold mortgages in favor of, and in form
and substance satisfactory to, the Collateral Agent, relating to the leases of
any real properties leased by any MHG Company which are required to be
encumbered to secure the Obligations pursuant to Section 5.07.
"Lender" means each bank or other financial institution listed on the
Commitment Schedule, each Assignee which becomes a "Lender" for purposes hereof
pursuant to Section 11.06, and their respective successors.
"Lender Parties" means the Lenders, each LC Issuing Bank and the Agents.
"Lending Office" means, as to each Lender, its office located at its
address set forth in its Administrative Questionnaire (or identified in its
Administrative Questionnaire as its Lending Office) or such other office as such
Lender may hereafter designate as its Lending Office by notice to the Borrowers
and the Administrative Agent.
"Letter of Credit" means any letter of credit issued pursuant to Section
2.05 by an LC Issuing Bank.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset or
any other arrangement (other than a right of set-off, recoupment, counterclaim
or similar right) the economic effect of which is to give a creditor
preferential access to such asset to satisfy its claim. For purposes of this
Agreement, any MHG Company shall be deemed to own subject to a Lien any asset
that it has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement or other title retention agreement relating
to such asset or any Capital Lease.
"Loan" or "Loans" means one or more of the Tranche A Loans or Tranche B
Loans or any combination thereof.
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"Managed Facility" means a Healthcare Facility (i) which is neither owned
nor leased by any MHG Company, (ii) which the relevant MHG Company either
manages or operates primarily in its capacity as a manager, and (iii) with
respect to which no MHG Company would have liability as a result of any event or
occurrence of any type described in the definition of Healthcare Event.
"Management and Service Agreements" means all agreements or arrangements
between any Borrower and any Person other than a Borrower for employment
(including agreements with employees of any Borrower), management consulting
services, or the provision of any other management services to any MHG Company.
"Management Employee" has the meaning set forth in Section 4.23.
"Margin Stock" has the meaning set forth in Regulation U.
"Material Adverse Effect" means (i) any material adverse effect upon the
condition (financial or otherwise), results of operations, business or prospects
of MHG and its Consolidated Subsidiaries, taken as a whole, (ii) a material
adverse effect on the validity, binding effect or enforceability of any
Financing Document or (iii) a material adverse effect on the validity,
perfection or priority of any Lien on any of the Collateral created or
purportedly created under the Collateral Documents; provided that a Material
Adverse Effect shall not be deemed to have occurred solely on account of (x) the
events, occurrences and circumstances disclosed in writing in detail prior to
the date hereof to the Existing Lenders or (y) the filing of the petitions in
the Chapter 11 Cases.
"Material Contract" means any contract or other arrangement to which any
MHG Company is a party (other than the Financing Documents) for which breach,
nonperformance, cancellation or failure to renew could reasonably be expected to
have a Material Adverse Effect.
"Material Plan" means at any time a Plan or Plans having aggregate Unfunded
Liabilities in excess of $1,000,000.
"Medicaid" means the medical assistance program established by Title XIX of
the Social Security Act (42 U.S.C. (S)(S) 1396 et seq.) and any statutes
-- ---
succeeding thereto.
"Medicaid Regulations" means, collectively, (a) all federal statutes
(whether set forth in Title XIX of the Social Security Act or elsewhere)
affecting Medicaid, (b) all applicable provisions of all federal rules,
regulations, manuals and orders of Governmental Authorities promulgated pursuant
to or in connection with the statutes described in clause (a) above and all
federal administrative, reimbursement and other guidelines of all Governmental
Authorities having the force of law promulgated pursuant to or in connection
with the statutes described in clause (a) above, (c) all state statutes and
plans for medical assistance enacted in connection with the statutes and
provisions described in clauses (a) and (b) above, and (d) all applicable
provisions of all rules, regulations, manuals and orders of all Governmental
Authorities promulgated pursuant to or in connection with the statutes described
in clause (c) above and all state administrative, reimbursement and other
guidelines of all Governmental Authorities having the force of law promulgated
pursuant
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to or in connection with the statutes described in clause (c) above, in each
case as may be amended or supplemented.
"Medicare" means the health insurance program for the aged and disabled
established by Title XVIII of the Social Security Act (42 U.S.C. (S)(S) 1995 et
--
seq.) and any statutes succeeding thereto.
- ---
"Medicare Regulations" means, collectively, all federal statutes (whether
set forth in Title XVIII of the Social Security Act or elsewhere) affecting
Medicare, together with all applicable provisions of all rules, regulations,
manuals and orders and administrative, reimbursement and other guidelines having
the force of law of all Governmental Authorities (including without limitation,
Health and Human Services ("HHS"), Health Care Finance Administration, the
Office of the Inspector General for HHS, or any Person succeeding to the
functions of any of the foregoing) promulgated pursuant to or in connection with
any of the foregoing having the force of law, in each case as may be amended or
supplemented.
"MHG" has the meaning set forth in the introduction to this Agreement.
"MHG Company" means MHG or any Subsidiary of MHG (other than an Excluded
Subsidiary).
"Moody's" means Moody's Investors Service, Inc.
"Mortgages" means the Leasehold Mortgages and Fee Mortgages, collectively.
"Most Recent Audited Financial Statements" means the audited consolidated
financial statements of MHG and its Consolidated Subsidiaries as of December 31,
1998.
"MPAN" means Mariner Post-Acute Network, Inc., a Delaware corporation, and
each of its Subsidiaries and Affiliates (other than the MHG Companies and the
Excluded Subsidiaries).
"Multiemployer Plan" means at any time an employee pension benefit plan
within the meaning of Section 4001(a)(3) of ERISA to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
has within the preceding five plan years made contributions, including for these
purposes any Person which ceased to be a member of the ERISA Group during such
five year period.
"Net Amount of Eligible Accounts" means, the dollar value of all trade
Accounts Receivable of MHG and the Consolidated Subsidiaries that are payable in
United States Dollars and are generated in the ordinary course of the rendition
of healthcare services at the Healthcare Facilities by the MHG Companies, stated
on a basis consistent with the Credit and Collection Policy, less, without
duplication, the sum of the following: (a) any account receivable or portion
thereof that is payable (1) by an individual beneficiary, recipient or
subscriber individually and not directly to a Borrower by (v) the United States
of America acting under Medicaid or Medicare (w) any State or the District of
Columbia acting pursuant to a health plan adopted pursuant to Title XIX of the
Social
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Security Act, (x) a commercial insurer, (y) the Veterans Administration or (z)
any agent, carrier, administrator or intermediary for any of the foregoing
(provided that in the case of MHG's "inpatient" division no account receivable
shall be excluded as a result of this clause (1) unless either 30 days have
passed from the applicable invoice date or Medicare coverage of such account
receivable has been declined), or (2) by a commercial medical insurance carrier
that is not acceptable to the Administrative Agent in its sole discretion; (b)
any account receivable that remains unpaid more than 120 days after the
applicable claim, statement or invoice date; (c) any account receivable to the
extent that it is subject to any asserted or claimed defense, set-off,
counterclaim, deduction, discount, credit, charge-back, allowance or adjustment
of any kind (whether issued, owing, granted or outstanding); (d) any account
receivable that is subject to a Lien other than a Lien permitted hereunder or
that is subject to a Lien described on Schedule 13 hereto; (e) any
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account receivable which is due from an account debtor that is (w) the debtor in
any bankruptcy, insolvency, arrangement, reorganization, receivership or similar
proceeding under any federal or state law, (x) has a principal place of business
or chief executive office outside the United States, (y) is an Affiliate of any
MHG Company or (z) is otherwise unacceptable to Administrative Agent acting in
good faith.
"Net Cash Proceeds" means, with respect to any Asset Sale, Equity Issuance
or incurrence of Debt other than Debt incurred pursuant to the Financing
Documents, an amount equal to the cash proceeds received by the MHG Companies in
respect of such Asset Sale, Equity Issuance or incurrence of Debt (including any
cash proceeds received as income or other cash proceeds of any noncash proceeds
of such Asset Sale), less (a) any expenses reasonably incurred by the MHG
Companies in respect of such Asset Sale, Equity Issuance or incurrence of Debt
(including reasonable attorneys' fees and expenses and including any payment
with respect to taxes actually paid or to become payable by the MHG Companies
(as reasonably estimated by the Financial Officer) in respect of such Asset
Sale, Equity Issuance or incurrence of Debt) and approved by the Court, if such
approval is necessary pursuant to the Bankruptcy Code or any applicable order of
the Court, and (b) amounts required to be applied against Debt (other than Debt
incurred pursuant to the Financing Documents) secured by a Lien on the assets so
sold.
"Note" means one or more of the Tranche A Notes or Tranche B Notes or any
combination thereof.
"Notice of Borrowing" has the meaning set forth in Section 2.02.
"Nursing Home Census" has the meaning set forth in Section 5.01(r).
"Nursing Home Facility" means any Healthcare Facility constituting a
licensed nursing home center as set forth and identified as a "Nursing Home
Facility" in Schedule 12 hereto.
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"Nursing Home Occupancy" means, as of any week of determination, the amount
expressed as a percentage obtained by dividing (i) the Nursing Home Census for
such week by (ii) the average of the aggregate patient capacity of all Nursing
Home Facilities (other than Managed Facilities) as of each day of such week.
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"Oakwood Facilities" means, collectively, the Healthcare Facilities known
as Cape Heritage Rehabilitation and Nursing Center, Cape Regency Rehabilitation
and Nursing Center, East Lincoln Rehabilitation and Nursing Center, Mayflower
Rehabilitation and Nursing Center, Northbridge Rehabilitation and Nursing
Center, Northwood Rehabilitation and Nursing Center and Oakwood Rehabilitation
and Nursing Center.
"Obligations" means all obligations of every nature of each of the
Borrowers under the Financing Documents, including, without limitation, any
liability of any such Borrower on any claim, whether or not the right to payment
in respect of such claim is reduced to judgment, liquidated, unliquidated, fixed
or contingent, matured, disputed, undisputed, legal, equitable, secured or
unsecured, and whether or not such claim is discharged, stayed or otherwise
affected by any bankruptcy, insolvency, reorganization or other similar
proceeding. Without limiting the generality of the foregoing, the Obligations of
the Borrowers under the Financing Documents include (i) the obligation to pay
principal, interest, charges, expenses, fees, actual and reasonable attorneys'
fees and disbursements, indemnities and other amounts payable by any Borrower
under any Financing Document and (ii) the obligation to reimburse any amount in
respect of any of the foregoing that any Agent or any Lender, in its sole
discretion, may elect to pay or advance on behalf of any Borrower. In addition
to the foregoing, "Obligations" means all obligations of any Borrower owed to
any Lender arising in the ordinary course of operation of the Cash Management
System, without regard to whether such obligations arise or have arisen with
respect to items deposited, collected, presented, paid, returned or reversed
pre-petition or post-petition, and including without limitation obligations for
overdrafts, returned items, fees, expenses, indemnities and similar charges;
provided that this sentence shall not be construed to include within the
definition of "Obligations" any obligation for prepetition loans or other
prepetition obligations other than obligations incurred by any Borrower in the
ordinary course of operation of the Cash Management System and approved by order
of the Court.
"Official Body" shall mean any national, federal, state, local or other
government or political subdivision or any agency, authority, board, bureau,
central bank, commission, department or instrumentality of either, or any court,
tribunal, grand jury or arbitrator, in each case whether foreign or domestic.
"Organizational Documents" means (i) with respect to any corporation, its
certificate or articles of incorporation, by-laws and other constitutional
documents, including the certificate of designation for any series of its
preferred stock, (ii) with respect to any limited liability company, its
articles of organization and operating agreement, or other comparable documents
however named, and (iii) with respect to any partnership, its partnership
agreement and any certificate of limited partnership or statement of partnership
filed with a Governmental Authority.
"Outstanding Credit Amount" means, with respect to any Lender at any time,
the sum of (i) the Outstanding Tranche A Amount of such Lender and (ii) the
Outstanding Tranche B Amount of such Lender.
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"Outstanding Tranche A Amount" means, with respect to any Lender at any
time, the sum of (i) the aggregate outstanding principal amount of its Tranche A
Loans and (ii) its LC Exposure, all determined at such time after giving effect
to any prior assignments by or to such Lender pursuant to Section 11.06(c).
"Outstanding Tranche B Amount" means, with respect to any Lender at any
time, the aggregate outstanding principal amount of its Tranche B Loans,
determined at such time after giving effect to any prior assignments by or to
such Lender pursuant to Section 11.06(c).
"Overhead Payment" has the meaning set forth in Section 7.07.
"Parent" means, with respect to any Lender, any Person controlling such
Lender.
"Participant" has the meaning set forth in Section 11.06(b).
"Patient Trust Accounts" means the accounts of the Borrowers holding solely
funds that residents of Nursing Home Facilities receive as income (whether from
government or private sources) which are required to be held in such accounts
pursuant to the Omnibus Budget and Reconciliation Act of 1987, 28 U.S.C.
(S)483.10(c) and the regulations of the Health Care Financing Administration.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Percentage" means, with respect to any Lender at any time, the percentage
which the amount of its Commitment at such time represents of the aggregate
amount of all the Commitments at such time. At any time after the Commitments
shall have terminated, the term "Percentage" shall refer to a Lender's
Percentage immediately before such termination, adjusted to reflect any
subsequent assignments pursuant to Section 11.06(c).
"Permitted Adequate Protection Liens" means Liens for "adequate protection"
(as such term is used in Sections 361 through 364 of the Bankruptcy Code) which
are approved in writing by Required Lenders and the Court.
"Permitted Encumbrances" means, with respect to any property (including any
leasehold interest) owned by any MHG Company:
(a) Liens for taxes, assessments or other governmental charges not
yet due or which are being contested in good faith and by appropriate
proceedings if adequate reserves with respect thereto are maintained on the
books of such MHG Company in accordance with GAAP;
(b) carriers', warehousemen's, mechanics', materialmens', repairmens'
or other like Liens arising by operation of law in the ordinary course of
business so long as (A) the
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underlying obligations are not overdue for a period of more than 30 days or
(B) such Liens are being contested in good faith and by appropriate
proceedings and adequate reserves with respect thereto are maintained on
the books of such MHG Company in accordance with GAAP;
(c) Liens consisting of rights of patients in respect of Patient
Trust Accounts;
(d) other Liens or title defects (including matters which an accurate
survey might disclose and exceptions to title set forth in title insurance
with respect to the Fee Mortgages) which (x) do not secure Debt and (y) do
not materially detract from the value of such property or materially impair
the use thereof by such MHG Company in the operation of its business;
(e) pledges or deposits made in the ordinary course of business to
secure payment of workers' compensation, or to participate in any fund in
connection with workers' compensation, unemployment insurance, old-age
pensions or other social security programs; and
(f) good faith pledges or deposits made in the ordinary course of
business to secure performance of bids, tenders, progress or advance
payments, contracts (other than for the repayment of borrowed money) or
leases, not in excess of the aggregate amount due thereunder, or to secure
statutory obligations, or surety, appeal, indemnity, performance or other
similar bonds required in the ordinary course of business.
"Permitted Intercompany Debt" means Debt owed by any Borrower to any other
Borrower; provided that such Debt is either evidenced by a promissory note or
maintained in the form of open account balances in which, in either case, the
Collateral Agent has a first priority, perfected security interest under the
Interim Borrowing Order, the Borrowing Order or the Security Agreement at all
times until such security interest is released pursuant to Section 18 thereof.
"Person" means an individual, a corporation, a limited liability company, a
partnership, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Petition Date" has the meaning set forth in the recitals to this
Agreement.
"Plan" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group.
"PNC" has the meaning set forth in the introduction to this Agreement.
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"Prepayment Notice" means a properly completed Prepayment Notice,
substantially in the form of Exhibit E hereto.
---------
"Prepetition Indebtedness" means Debt of any Credit Party outstanding on
the Petition Date, including Debt under the Existing Credit Facilities and the
Existing Notes.
"Prime Rate" means the rate of interest established by the PNC from time to
time as its Prime Rate, which may not be the lowest rate then being charged
commercial borrowers by PNC.
"Register" has the meaning set forth in Section 11.06(e).
"Regulation U" means Regulation U of the Board of Governors of the Federal
Reserve System, as in effect from time to time.
"Related Fund" means, with respect to any Lender that is a fund that
invests in commercial loans, any other fund that invests in commercial loans and
is managed by the same investment advisor as such Lender or by an affiliate of
such investment advisor.
"Reporting Event" has the meaning set forth in Section 5.01(l).
"Required Cash Flow Amount" has the meaning set forth in Section 6.04.
"Required Lenders" means, at any time, Lenders having outstanding Credit
Exposures in an aggregate amount (excluding accrued interest) equal to more than
66-2/3% of the aggregate amount of the Credit Exposures of all Lenders at such
time.
"Restricted Payment" means (i) any dividend or other distribution on any
Equity Interests of MHG (except dividends payable solely in Equity Interests of
the same class), (ii) any payment on account of the purchase, redemption,
retirement or acquisition of any Equity Interests of MHG, (iii) any payment or
prepayment of principal of, premium, if any, or interest on, or redemption,
purchase, retirement, defeasance (including in-substance or legal defeasance),
sinking fund or similar payment with respect to, any Prepetition Indebtedness
and (iv) any payment, dividend or other distribution to, or on behalf of, MPAN.
"S&P" means Standard and Poor's Rating Services, a division of The McGraw-
Hill Companies, Inc.
"SEC" means the United States Securities and Exchange Commission.
"Secured Obligations" has the meaning set forth in Section 1 of the
Security Agreement.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
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"Security Agreement" means the Security Agreement dated as of the Closing
Date among the Borrowers and the Collateral Agent, substantially in the form of
Exhibit F hereto, as amended from time to time.
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"Security Interests" has the meaning set forth in Section 1 of the Security
Agreement.
"Settlement Letter" means the letter dated July 20, 1999 by the Health Care
Financing Administration of the Department of Health and Human Services,
acknowledged and agreed to by Mariner Post Acute Network, Inc. and MHG, in form
and substance acceptable to the Agents.
"Specified Change" has the meaning set forth in Section 11.05(b).
"Specified Default" means (i) any Healthcare Event affecting 10% or more of
the Healthcare Facilities (excluding any Managed Facilities), and (ii) any Event
of Default (a) under Section 8.01(a), 8.01(j)(iii) (excluding, at all times
after the Obligations have been paid in full and no Lender has any Credit
Exposure hereunder, Section 8.01(j)(i)(b)(2)) or 8.01(k)(iii), or (b) arising as
a result of any breach of any provision under the first paragraph of Section
5.01 or under Section 5.01(a), 5.01(b)(ii), 5.01(l), 5.01(n), 5.01(q), 5.01(r),
5.03(a), 5.11, 5.13, 7.07 or 7.17; provided, that an Event of Default arising
under the first paragraph of Section 5.01 or under Section 5.01(a), 5.01(b)(ii),
5.01(l), 5.01(n), 5.01(q), 5.01(r), 5.03(a), 5.11 or 5.13 shall constitute a
Specified Default only in the event not less than 15 days' prior written notice
from the Administrative Agent to MPAN setting forth the details of such
Specified Default shall have been delivered (which notice may be delivered
during the pendency of any applicable cure period with respect to any Default
which, if not cured, would constitute any such Event of Default) and such
Specified Default shall not be cured prior to the later of (x) the expiration of
such 15-day period and (y) the date of occurrence of such Event of Default.
"Stated Maturity Date" means January 19, 2001.
"Subsidiary" means, as to any Person, (i) any corporation or other entity
of which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by such Person or (ii)
any limited liability company or partnership that, in accordance with GAAP, is a
Consolidated Subsidiary of such Person. Unless otherwise specified, "Subsidiary"
means a Subsidiary of MHG.
"Supermajority Lenders" means, at any time, Lenders having outstanding
Credit Exposures in an aggregate amount (excluding accrued interest) equal to
more than 75% of the aggregate amount of the Credit Exposures of all Lenders at
such time.
"Syndication Agent" means First Union in its capacity as Syndication Agent
under the Financing Documents.
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"Temporary Cash Investment" means any Investment in (i) securities issued,
or directly and fully guaranteed or insured, by the United States or any agency
or instrumentality thereof; provided that the full faith and credit of the
United States is pledged in support thereof, (ii) time deposit accounts,
bankers' acceptances, certificates of deposit and money market deposits maturing
within 30 days of the date of acquisition thereof issued by any office located
in the United States of a bank or trust company which is organized or licensed
under the laws of the United States or any State thereof and which bank or trust
company has capital, surplus and undivided profits aggregating more than
$1,000,000,000 and has outstanding debt which is rated "P-1" (or higher) by
Moody's or "A-1" (or higher) by S&P or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with an office located in
the United States of a bank or trust company meeting the qualifications
described in clause (ii) above, (iv) commercial paper, maturing not more than 30
days after the date of acquisition, issued by a corporation (other than any MHG
Company or any Affiliate) organized under the laws of the United States or any
State thereof with a rating, at the date of acquisition, of "P-1" (or higher) by
Moody's or "A-1" (or higher) by S&P, (v) securities with maturities of 30 days
or less from the date of acquisition issued or fully and unconditionally
guaranteed by any State, commonwealth or territory of the United States, or by a
political subdivision or taxing authority thereof, and rated at least "P-1" (or
higher) by Moody's or "A-1" (or higher) by S&P and (vi) money market funds which
invest substantially all of their assets in securities described in the
preceding clauses (i) through (v).
"Total Utilization of Commitments" means, as at any date of determination,
the aggregate Outstanding Credit Amounts of all Lenders.
"Tranche A Commitment Fee Rate" means 0.75% per annum.
"Tranche A Commitments" means (i) with respect to any Lender listed on the
Commitment Schedule, the amount (if any) set forth therein opposite the name of
such Lender under the heading "Tranche A Commitment" and (ii) with respect to
any Assignee of a Tranche A Commitment, the amount of the transferor Lender's
Tranche A Commitment assigned to such Assignee pursuant to Section 11.06(c), in
each case as such amount may be reduced from time to time pursuant to Section
2.08 or 2.10 or changed as a result of an assignment pursuant to Section
11.06(c).
"Tranche A Default Rate" has the meaning set forth in Section 2.04.
"Tranche A Exposure" means, as to any Lender, (i) at any time before the
termination of its Tranche A Commitment in its entirety, the amount of its
Tranche A Commitment at such time; or (ii) at any time thereafter, if its
Tranche A Commitment has terminated in its entirety, its Outstanding Tranche A
Amount, all determined at such time after giving effect to any prior assignments
by or to such Lender pursuant to Section 11.06(c).
"Tranche A Interest Rate" has the meaning set forth in Section 2.04.
"Tranche A Loan" means a loan made by a Lender pursuant to Section 2.01(a).
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"Tranche A Note" means a promissory note of the Borrowers payable to the
order of a Lender evidencing the Borrowers' obligation to repay the Tranche A
Loans made by such Lender. Each Tranche A Note shall be substantially in the
form of Exhibit A hereto. "Tranche A Notes" means any or all of such promissory
---------
notes, as the context may require.
"Tranche B Commencement Date" has the meaning set forth in Section 2.01(b).
"Tranche B Commitment Fee Rate" means (i) until the Tranche B Commencement
Date, 0.25% per annum and (ii) on and after the Tranche B Commencement Date,
0.75% per annum.
"Tranche B Commitments" means (i) with respect to any Lender listed on the
Commitment Schedule, the amount (if any) set forth therein opposite the name of
such Lender under the heading "Tranche B Commitment" and (ii) with respect to
any Assignee of a Tranche B Commitment, the amount of the transferor Lender's
Tranche B Commitment assigned to such Assignee pursuant to Section 11.06(c), in
each case as such amount may be reduced from time to time pursuant to Section
2.08 or 2.10 or changed as a result of an assignment pursuant to Section
11.06(c).
"Tranche B Default Rate" has the meaning set forth in Section 2.04.
"Tranche B Exposure" means, as to any Lender, (i) at any time before the
termination of its Tranche B Commitment in its entirety, the amount of its
Tranche B Commitment at such time; or (ii) at any time thereafter, if its
Tranche B Commitment has terminated in its entirety, its Outstanding Tranche B
Amount, all determined at such time after giving effect to any prior assignments
by or to such Lender pursuant to Section 11.06(c).
"Tranche B Interest Rate" has the meaning set forth in Section 2.04.
"Tranche B Loan" means a loan made by a Lender pursuant to Section 2.01(b).
"Tranche B Note" means a promissory note of the Borrowers payable to the
order of a Lender evidencing the Borrowers' obligation to repay the Tranche B
Loans made by such Lender. Each Tranche B Note shall be substantially in the
form of Exhibit B hereto. "Tranche B Notes" means any or all of such promissory
---------
notes, as the context may require.
"UCC" has the meaning set forth in Section 1 of the Security Agreement.
"UCP" means the Uniform Customs and Practice for Documentary Credits (1993
Revision), International Chamber of Commerce Publication No. 500, or any
successor publication governing the rights and obligations of the parties in
connection with Letters of Credit.
"Unfunded Liabilities" means, with respect to any Plan at any time, the
amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed by
the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title I of ERISA
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<PAGE>
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.
"United States" means the United States of America, including the States
and the District of Columbia, but excluding its territories and possessions.
"Unscheduled Mandatory Prepayment" has the meaning set forth in Section
2.08(h).
"Year 2000 DIP Budget" means the projected financial statements with
respect to MHG and its Consolidated Subsidiaries for the Fiscal Year ending
December 31, 2000 delivered to the Agents on or prior to the Closing Date
pursuant to Section 3.01(r)(ii); provided, that such projected financial
statements may be amended, supplemented, replaced or otherwise modified with the
approval of the Required Lenders.
Section 1.02 Accounting Terms and Determinations. Unless otherwise
-----------------------------------
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with GAAP;
provided that, if the Borrowers notify the Administrative Agent that the
Borrowers wish to amend any provision hereof to eliminate the effect of any
change in GAAP on the operation of such provision (or if the Administrative
Agent notifies the Borrowers that the Required Lenders wish to amend any
provision hereof for such purpose), then such provision shall be applied on the
basis of GAAP in effect immediately before the relevant change in GAAP became
effective, until either such notice is withdrawn or such provision is amended in
a manner satisfactory to the Borrowers and the Required Lenders.
Section 1.03 Other Definitional Provisions. References in this
-----------------------------
Agreement to "Articles", "Sections", "Schedules" or "Exhibits" are to Articles,
Sections, Schedules or Exhibits of or to this Agreement unless otherwise
specifically provided. Any of the terms defined in Section 1.01 may, unless the
context otherwise requires, be used in the singular or plural depending on the
reference. "Include", "includes" and "including" are deemed to be followed by
"without limitation" whether or not they are in fact followed by such words or
words of like import. "Writing", "written" and comparable terms refer to
printing, typing, facsimile and other means of reproducing words on paper.
References to any agreement or contract are to such agreement or contract as
amended, modified or supplemented from time to time (whether before, on or after
the Closing Date) in accordance with the terms hereof and thereof. "Hereto",
"herein" and "hereof" refer to this Agreement as amended from time to time.
ARTICLE 2. The Credit Facilities
Section 2.01 Commitments to Lend.
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(a) Tranche A Loans. Subject to the terms and conditions set forth in
this Agreement, each Lender severally agrees to make Tranche A Loans to the
Borrowers from time to
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time during the period from and including the Closing Date to but excluding the
Commitment Termination Date; provided that, immediately after each such Tranche
A Loan is made, such Lender's Outstanding Tranche A Amount shall not exceed its
Tranche A Commitment. Each Borrowing of Tranche A Loans shall be borrowed from
the several Lenders ratably in proportion to their respective Tranche A
Commitments. The initial aggregate amount of the Tranche A Commitments of all
Lenders as of the Closing Date is $40,000,000. Within the limits specified
herein, the Borrowers may borrow Tranche A Loans, repay such borrowing and
reborrow Tranche A Loans pursuant to the terms of this Agreement.
(b) Tranche B Loans. Subject to the terms and conditions set forth in
this Agreement, each Lender severally agrees to make Tranche B Loans to the
Borrowers from time to time during the period from and including the Tranche B
Commencement Date to but excluding the Commitment Termination Date; provided
that, immediately after each such Tranche B Loan is made, such Lender's
Outstanding Tranche B Amount shall not exceed its Tranche B Commitment. Each
Borrowing of Tranche B Loans shall be borrowed from the several Lenders ratably
in proportion to their respective Tranche B Commitments. The initial aggregate
amount of the Tranche B Commitments of all Lenders as of the Closing Date is
$10,000,000. Within the limits specified herein, the Borrowers may borrow
Tranche B Loans, repay such borrowing and reborrow Tranche B Loans pursuant to
the terms of this Agreement. As used in this Section 2.01(b), "Tranche B
Commencement Date" means the date, if any, on which Supermajority Lenders in
their sole discretion shall have consented in writing to a request by the
Borrowers (delivered to the Administrative Agent and the Lenders) that Lenders
permit Tranche B Loans to be borrowed hereunder. Notwithstanding anything to
the contrary contained herein, Supermajority Lenders may in their sole
discretion, together with any consent described in the preceding sentence,
prescribe additional limitations on the aggregate amount of Tranche B Loans
permitted to be borrowed from time to time, the increments for borrowing Tranche
B Loans and the times such Borrowings may be made hereunder and other terms and
conditions relating to the availability of the Tranche B Loans.
(c) Borrowing Limitations. Anything contained in this Agreement to
the contrary notwithstanding, (A) in no event shall the Total Utilization of
Commitments at any time outstanding exceed the lesser of (x) the Commitments and
(y) the amount permitted to be outstanding hereunder pursuant to the Interim
Borrowing Order or the Borrowing Order, as applicable, in each case as the
foregoing limits may be in effect from time to time; (B) in no event shall the
Outstanding Tranche A Amount of all Lenders exceed the lesser of (x) the Tranche
A Commitments and (y) the Borrowing Base, in each case as the foregoing limits
may be in effect from time to time; (C) in no event shall the Outstanding
Tranche B Amounts of all Lenders exceed the Tranche B Commitments in effect from
time to time; (D) the Borrowers shall comply with any additional limitations on
Tranche B Loan Borrowings prescribed by Supermajority Lenders pursuant to the
last sentence of Section 2.01(b) and incorporated into this Agreement by
amendment; and (E) the Borrowers agree to immediately prepay the Loans in the
amounts and at the times as may be necessary to comply with the foregoing
clauses (A), (B), (C) and (D).
(d) Amount of Each Borrowing. Each Borrowing under this Section 2.01
shall be in an aggregate principal amount of $1,000,000 or any larger multiple
of $500,000; provided that any
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Borrowing of Tranche A Loans or Tranche B Loans may be in an aggregate amount
equal to the aggregate unused amount of the Tranche A Commitments or Tranche B
Commitments, respectively.
Section 2.02 Notice of Borrowing. The Borrowers shall give the
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Administrative Agent notice, substantially in the form of Exhibit C hereto (a
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"Notice of Borrowing"), not later than 1:00 P.M. (Eastern Time) on the date
which is one Business Day immediately preceding the date of the proposed
borrowing (provided that no such Notice of Borrowing for Tranche B Loans shall
be given to the Administrative Agent prior to obtaining the consent of
Supermajority Lenders described in clause (i) of the definition of Tranche B
Commencement Date) specifying:
(i) the proposed date of such borrowing, which shall be a Business
Day; and
(ii) the amount of Tranche A Loans and/or the amount of Tranche B
Loans requested.
Section 2.03 Notice to Lenders; Funding of Loans.
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(a) Upon receipt of a Notice of Borrowing, the Administrative Agent
shall promptly notify each Lender of the contents thereof and of such Lender's
ratable share of such Borrowing. Such Notice of Borrowing shall not thereafter
be revocable by the Borrowers.
(b) Not later than 12:00 Noon (Eastern Time) on the date of each
Borrowing, each Lender shall make available its ratable share of such Borrowing,
in Federal or other funds immediately available in Pittsburgh, Pennsylvania, to
the Administrative Agent at its address for payments specified in or pursuant to
Section 11.01. Unless the Administrative Agent determines that any applicable
condition specified in Article 3 has not been satisfied, the Administrative
Agent shall promptly make such funds received from Lenders available to the
Borrowers on such date at the Administrative Agent's aforesaid address.
(c) Unless the Administrative Agent shall have received, prior to the
date of any Borrowing, notice from a Lender that such Lender will not make
available to the Administrative Agent such Lender's share of such Borrowing, the
Administrative Agent may assume that such Lender has made such share available
to the Administrative Agent on the date of such Borrowing in accordance with
Section 2.03(b) and, in reliance upon such assumption, Administrative Agent may
(but shall not be obligated to) make available to the Borrowers on such date a
corresponding amount. If and to the extent that such Lender shall not have so
made such share available to the Administrative Agent, such Lender and the
Borrowers severally agree to repay to the Administrative Agent forthwith on
demand such corresponding amount together with interest thereon, for each day
from the day such amount is made available to the Borrowers until the day such
amount is repaid to the Administrative Agent, at (i) in the case of the
Borrowers, a rate per annum equal to the Tranche A Interest Rate or Tranche B
Interest Rate, as applicable, and (ii) in the case of such Lender, a rate per
annum equal to (x) for each day from the day such amount is made available to
the Borrowers to the third succeeding Business Day, inclusive, the Federal Funds
Rate for such day as determined by the Administrative Agent and (y) for each day
thereafter until the day such amount is repaid to the Administrative Agent, the
Base Rate for such day. If such Lender shall repay such corresponding
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amount to the Administrative Agent, the amount so repaid shall constitute such
Lender's Loan included in such Borrowing for purposes of this Agreement.
(d) Each Lender's Tranche A Loans shall be evidenced by a single
Tranche A Note, and each Lender's Tranche B Loans (if any) shall be evidenced by
a single Tranche B Note, in each case payable to the order of such Lender for
the account of its Lending Office.
(e) Upon receipt of each Lender's Tranche A Note and Tranche B Note
pursuant to Section 3.01(b), the Administrative Agent shall forward such Notes
to such Lender. Each Lender shall record the date and amount of each Loan made
by it and the date and amount of each payment of principal made by the Borrowers
with respect thereto, and may, in connection with any transfer or enforcement of
either of its Notes, endorse on the schedule forming a part thereof appropriate
notations to evidence the foregoing information with respect to the then
outstanding Loans evidenced by such Note; provided that neither the failure of
any Lender to make any such recordation or endorsement nor any error therein
shall affect the obligations of the Borrowers under any Financing Document.
Each Lender is hereby irrevocably authorized by the Borrowers so to endorse each
of its Notes and to attach to and make a part of such Note a continuation of any
such schedule as and when required.
Section 2.04 Interest Rate; Default Rate. Each Loan shall bear
---------------------------
interest on the outstanding principal amount thereof, for each day from and
including the day such Loan is made to but excluding the day it becomes due, (i)
in the case of Tranche A Loans, at a rate per annum equal to the sum of 2.50%
plus the Base Rate for such day (the "Tranche A Interest Rate"), and (ii) in the
case of Tranche B Loans, at a rate per annum equal to the sum of 3.00% plus the
Base Rate for such day (the "Tranche B Interest Rate"). Such interest shall be
payable monthly in arrears on the last Business Day of each month. Upon the
occurrence and during the continuation of any Event of Default, the outstanding
principal amount of all Loans and, to the extent permitted by Applicable Law,
any interest payments thereon not paid when due and any fees and other amounts
then due and payable hereunder, shall thereafter bear interest payable upon
demand at a rate that is (a) in the case of Tranche A Loans and such amounts
related thereto, 2.50% per annum in excess of the Tranche A Interest Rate (the
"Tranche A Default Rate"), and (b) in the case of Tranche B Loans and such
amounts related thereto, 2.50% per annum in excess of the Tranche B Interest
Rate (the "Tranche B Default Rate"). Payment or acceptance of the increased
rates of interest provided for herein is not a permitted alternative to timely
payment and shall not constitute a waiver of any Event of Default or otherwise
prejudice or limit any rights or remedies of any Agent or any Lender.
Section 2.05 Letters of Credit.
-----------------
(a) Issuance of Letters of Credit. Any LC Issuing Bank may, but shall
not be obligated to, issue a letter of credit (other than a trade letter of
credit) at the request of the Borrowers pursuant to this subsection, from time
to time during the period from and including the Closing Date to but excluding
the earlier of (x) the Commitment Termination Date and (y) the date which is 60
days prior to the Stated Maturity Date; provided that, immediately after each
such letter of credit is issued and participations therein are sold to the
Lenders as provided in this subsection:
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(i) the Aggregate LC Exposure shall not exceed $5,000,000; and
(ii) in the case of each Lender, its Outstanding Tranche A Amount
shall not exceed its Tranche A Commitment.
Upon the issuance by any LC Issuing Bank of a Letter of Credit pursuant to this
subsection, such LC Issuing Bank shall be deemed, without further action by any
party hereto, to have sold to each other Lender, and each such Lender shall be
deemed, without further action by any party hereto, to have purchased from such
LC Issuing Bank, a participation in such Letter of Credit, on the terms
specified in this Section 2.05, equal to such Lender's Percentage thereof.
(b) Expiry Dates. No Letter of Credit shall have an expiry date
later than the tenth Business Day before the Stated Maturity Date.
(c) Notice of Proposed Issuance. With respect to each Letter of
Credit, the Borrowers shall give the relevant LC Issuing Bank and the
Administrative Agent at least five Business Days' prior notice, substantially in
the form of Exhibit D hereto (a "LC Request") (i) specifying the date such
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Letter of Credit is to be issued, (ii) describing the proposed terms of such
Letter of Credit and the nature of the transactions proposed to be supported
thereby and (iii) specifying the Account Party for such Letter of Credit, which
may be any Borrower. Upon receipt of an LC Request, the Agents shall promptly
notify each Lender of the contents thereof.
(d) Conditions to Issuance. No LC Issuing Bank shall issue any Letter
of Credit unless:
(i) such Letter of Credit shall be satisfactory in form and
substance to such LC Issuing Bank in its sole discretion;
(ii) the Borrowers shall have executed and delivered such other
instruments and agreements relating to such Letter of Credit as such LC
Issuing Bank shall have reasonably requested;
(iii) such LC Issuing Bank shall have confirmed with the Agents on
the date of such issuance that the limitations specified in clauses (i) and
(ii) of subsection (a) of this Section 2.05 will not be exceeded
immediately after such Letter of Credit is issued; and
(iv) such LC Issuing Bank shall not have been notified in writing
by any MHG Company, any Agent or the Required Lenders expressly to the
effect that any condition specified in Section 3.02 is not satisfied at the
time such Letter of Credit is to be issued.
(e) Notice of Proposed Extensions of Expiry Dates. The relevant LC
Issuing Bank or the Borrowers shall give the Administrative Agent at least five
Business Days' notice before such LC Issuing Bank extends the expiry date of any
Letter of Credit issued by it. Such notice shall (i) identify such Letter of
Credit, (ii) specify the date on which such extension is to be made (or the last
day on which such LC Issuing Bank can give notice to prevent such extension from
occurring)
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and (iii) specify the date to which such expiry date is to be so extended. Upon
receipt of such notice, the Administrative Agent shall promptly notify each
Lender of the contents thereof. No LC Issuing Bank shall extend (or allow the
extension of) the expiry date of any Letter of Credit if (x) the extended expiry
date would be after the tenth Business Day before the Stated Maturity Date or
(y) such LC Issuing Bank shall have been notified by any MHG Company, any Agent
or the Required Lenders expressly to the effect that any condition specified in
Section 3.02 is not satisfied at the time such Letter of Credit is to be
extended.
(f) Notice of Actual Issuances and Extensions. Promptly upon issuing any
Letter of Credit or extending any Letter of Credit, the relevant LC Issuing Bank
will notify the Administrative Agent of the date of such Letter of Credit, the
amount thereof, the beneficiary or beneficiaries thereof and the expiry date or
extended expiry date thereof. Upon receipt of such notice the Administrative
Agent shall promptly notify each Lender of the contents thereof and the amount
of such Lender's participation in the relevant Letter of Credit. Promptly upon
issuing any Letter of Credit, the relevant LC Issuing Bank will send a copy of
such Letter of Credit to the Administrative Agent.
(g) Fees. The Borrowers shall pay to the Administrative Agent, for the
account of the Lenders ratably in accordance with their respective Percentages,
a letter of credit fee, calculated for each day at the LC Fee Rate for such day,
on the aggregate amount available for drawings (whether or not conditions for
drawing thereunder have been satisfied) under all Letters of Credit outstanding
at the close of business on such day. Such letter of credit fee shall be
payable with respect to each Letter of Credit in arrears on the last Business
Day of each month for so long as such Letter of Credit is outstanding and on the
final expiry date thereof. The Borrowers shall pay to each LC Issuing Bank
additional fronting fees, monthly in arrears, and reasonable expenses in the
amounts and at the times agreed between the Borrowers and such LC Issuing Bank.
(h) Drawings. Upon receiving a demand for payment under any Letter of
Credit from the beneficiary thereof, the relevant LC Issuing Bank shall
determine in accordance with the terms of such Letter of Credit whether such
demand for payment should be honored. In determining whether to honor any
request for drawing under any Letter of Credit by the beneficiary thereof, the
LC Issuing Bank shall be responsible only to determine that the documents and
certificates required to be delivered under such Letter of Credit have been
delivered and that they comply on their face with the requirements of such
Letter of Credit. If such LC Issuing Bank determines that any such demand for
payment should be honored, such LC Issuing Bank shall (i) promptly notify the
Borrowers and the Administrative Agent as to the amount to be paid by such LC
Issuing Bank as a result of such demand and the date on which such amount is to
be paid (an "LC Payment Date") and (ii) on such LC Payment Date make available
to such beneficiary in accordance with the terms of such Letter of Credit the
amount of the drawing under such Letter of Credit.
(i) Reimbursement and Other Payments by the Borrowers. If any amount is
drawn under any Letter of Credit:
(i) the Borrowers irrevocably and unconditionally agree to reimburse
the relevant LC Issuing Bank for all amounts paid by such LC Issuing Bank
upon such drawing,
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together with any and all reasonable charges and expenses which such LC
Issuing Bank may pay or incur relative to such drawing and interest on the
amount drawn at the Federal Funds Rate for each day from and including the
date such amount is drawn to but excluding the date such reimbursement
payment is due and payable. Such reimbursement payment shall be due and
payable at or before 3:00 P.M. (Eastern Time) (x) on the relevant LC
Payment Date if such LC Issuing Bank notifies the Borrowers of such drawing
before 11:00 A.M. (Eastern Time) on such date or (y) on the date such
notice is given, if such notice is given after the LC Payment Date;
provided that any notice given to the Borrowers after 11:00 A.M. (Eastern
Time) on any day shall be deemed for purposes of the foregoing clause (y)
to have been given on the next succeeding Business Day; and
(ii) in addition, the Borrowers agree to pay to the relevant LC
Issuing Bank interest on any and all amounts not paid by the Borrowers when
due hereunder with respect to a Letter of Credit, for each day from and
including the date when such amount becomes due to but excluding the date
such amount is paid in full, payable on demand, at a rate per annum equal
to the Default Rate for such day.
Each payment to be made by the Borrowers pursuant to this subsection
(i) shall be made to the relevant LC Issuing Bank in Federal or other funds
immediately available to it at its address specified in or pursuant to Section
11.01.
(j) Payments by Lenders with Respect to Letters of Credit. If the
Borrowers fail to reimburse the relevant LC Issuing Bank as and when required by
subsection (i) above for all or any portion of any amount drawn under a Letter
of Credit issued by it:
(i) such LC Issuing Bank may notify the Administrative Agent of
such unreimbursed amount and request that the Lenders reimburse such LC
Issuing Bank for their respective Percentages thereof. Upon receiving any
such notice from an LC Issuing Bank, the Administrative Agent shall
promptly notify each Lender of the unreimbursed amount and such Lender's
Percentage thereof, but the failure of the Administrative Agent to give
such notice on the drawing date or in sufficient time to enable any Lender
to effect payment on such date shall not relieve such Lender from its
obligations under this Section 2.05(j)(i). Upon receiving such notice from
the Administrative Agent, each Lender shall make available to such LC
Issuing Bank, at its address specified in or pursuant to Section 11.01, an
amount equal to such Lender's Percentage of such unreimbursed amount as set
forth in such notice, in Federal or other funds immediately available to
such LC Issuing Bank, by 3:00 P.M. (Eastern Time) (A) on the day such
Lender receives such notice if it is received at or before 12:00 Noon
(Eastern Time) on such day or (B) on the first Business Day following such
Lender's receipt of such notice if it is received after 12:00 Noon (Eastern
Time) on the date of receipt. Upon payment in full thereof, such Lender
shall be subrogated to the rights of such LC Issuing Bank against the
Borrowers to the extent of such Lender's Percentage of the related LC
Reimbursement Obligation (including interest accrued thereon). Nothing in
this subsection (j) shall affect any rights any Lender may have against any
LC Issuing Bank for any action or omission for which such LC Issuing Bank
is not indemnified under subsection (n) of this Section 2.05; and
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(ii) if any Lender fails to pay any amount required to be paid by
it pursuant to clause (i) of this subsection (j) on the date on which such
payment is due, interest shall accrue on such Lender's obligation to make
such payment, for each day from and including the date such payment became
due to but excluding the date such Lender makes such payment, at a rate per
annum equal to (x) for each day from the day such payment is due to the
third succeeding Business Day, inclusive, the Federal Funds Rate for such
day as determined by the relevant LC Issuing Bank and (y) for each day
thereafter the Base Rate for such day. Any payment made by any Lender after
3:00 P.M. (Eastern Time) on any Business Day shall be deemed for purposes
of the preceding sentence to have been made on the next succeeding Business
Day.
If the Borrowers shall reimburse any LC Issuing Bank for any drawing
with respect to which any Lender shall have made funds available to such LC
Issuing Bank in accordance with clause (i) of this subsection (j), such LC
Issuing Bank shall promptly upon receipt of such reimbursement distribute to
such Lender its pro rata share thereof, including interest, to the extent
received by such LC Issuing Bank.
If the LC Issuing Bank is required at any time to return to any
Borrower, or to a trustee, receiver, liquidator, custodian, or any official in
any Insolvency Proceeding, any portion of the payments made by any Borrower to
the LC Issuing Bank pursuant to Section 2.05(i) in reimbursement of a payment
made under any Letter of Credit or interest or fee thereon, each Lender shall,
on demand of the LC Issuing Bank, forthwith return to the LC Issuing Bank the
amount equal to such Lender's Percentage of any amounts so returned by the LC
Issuing Bank plus interest thereon from the date such demand is made to the date
such amounts are returned by such Lender to the LC Issuing Bank, at a rate per
annum equal to (x) for each day from the day such payment is due to the third
succeeding Business Day, inclusive, the Federal Funds Rate for such day as
determined by the relevant LC Issuing Bank and (y) for each day thereafter the
Base Rate for such day. Any payment made by any Lender after 3:00 p.m. (Eastern
time) on any Business Day shall be deemed for purposes of the preceding sentence
to have been made on the next succeeding Business Day.
(k) Increased Cost and Reduced Return. If, on or after the date
hereof, the adoption of any applicable law, rule or regulation, or any change in
any applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Lender or LC Issuing Bank with any request or directive (whether or not
having the force of law) of any such authority, central bank or comparable
agency, shall impose, modify or deem applicable any tax, reserve, special
deposit or similar requirement against or with respect to or measured by
reference to letters of credit or participations therein, and the result of any
of the foregoing is to increase the cost to such Lender or LC Issuing Bank of
issuing or maintaining any Letter of Credit or any participation therein, or to
reduce any amount receivable by any Lender or LC Issuing Bank under this Section
2.05 in respect of any Letter of Credit or any participation therein (which
increase in cost, or reduction in amount receivable, shall be the result of such
Lender's or LC Issuing Bank's reasonable allocation of the aggregate of such
increases or reductions resulting from such event), then, within 15 days after
written demand by such Lender or LC Issuing
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Bank (with a copy to the Administrative Agent), the Borrowers agree to pay to
such Lender or LC Issuing Bank, from time to time as specified by such Lender or
LC Issuing Bank, such additional amounts as shall be sufficient to compensate
such Lender or LC Issuing Bank for such increased cost or reduction. A
certificate of such Lender or LC Issuing Bank submitted to the Borrowers
pursuant to this subsection (k) and setting forth the additional amount or
amounts to be paid to it hereunder shall be conclusive in the absence of
manifest error.
(l) Exculpatory Provisions. The Borrowers' obligations under this
Section 2.05 shall be absolute and unconditional under any and all circumstances
and irrespective of any setoff, counterclaim or defense to payment which any MHG
Company or any Account Party may have or have had against any LC Issuing Bank,
any Lender, the beneficiary of any Letter of Credit or any other Person. The
Borrowers assume all risks of the acts or omissions of, or misuse of any Letter
of Credit by, any beneficiary of any Letter of Credit with respect to the use of
such Letter of Credit by such beneficiary. None of the LC Issuing Banks, the
Lenders and their respective officers, directors, employees and agents shall be
responsible for, and the obligations of each Lender to make payments to each LC
Issuing Bank and of the Borrowers to reimburse each LC Issuing Bank for drawings
pursuant to this Section 2.05 (except to the extent such obligations result from
the gross negligence or willful misconduct of the relevant LC Issuing Bank)
shall not be excused or affected by, among other things, (i) the use which may
be made of any Letter of Credit or any acts or omissions of any beneficiary or
transferee in connection therewith; (ii) the form, validity, sufficiency, legal
effect or genuineness of documents presented under any Letter of Credit or of
any endorsements thereon, even if such documents should in fact prove to be in
any or all respects invalid, insufficient, fraudulent or forged (even if the LC
Issuing Bank shall have been notified thereof); (iii) payment by any LC Issuing
Bank against presentation of documents to it which do not comply with the terms
of the relevant Letter of Credit; (iv) any dispute between or among any of the
MHG Companies or their Affiliates, the beneficiary of any Letter of Credit or
any other Person or any claims or defenses whatsoever of any of the MHG
Companies or their Affiliates or any other Person against the beneficiary of any
Letter of Credit; (v) the validity or sufficiency of any instrument transferring
or assigning or purporting to transfer or assign any such Letter of Credit or
the rights or benefits thereunder or proceeds thereof, in whole or in part,
which may prove to be invalid or ineffective for any reason; (vi) the failure of
the beneficiary of any such Letter of Credit, or any other party to which such
Letter of Credit may be transferred, to comply fully with any conditions
required in order to draw upon such Letter of Credit or any other claim of any
Borrower against any beneficiary of such Letter of Credit, or any such
transferee, or any dispute between or among any Borrower and any beneficiary of
any Letter of Credit or any such transferee; (vii) errors in interpretation of
technical terms; (viii) any loss or delay in the transmission or otherwise of
any documents required in order to make a drawing under any such Letter of
Credit or of the proceeds thereof; (ix) the misapplication by the beneficiary of
any such Letter of Credit of the proceeds of any drawing under any such Letter
of Credit; or (x) any consequences arising from causes beyond the control of the
LC Issuing Bank, including any act or omission, whether rightful or wrongful, of
any present or future de jure or de facto government or governmental authority,
and none of the above shall affect or impair, or prevent the vesting of, any of
the LC Issuing Bank's rights or powers hereunder. No LC Issuing Bank shall be
liable for any error, omission, interruption or delay in transmission, dispatch
or delivery of any message or advice, however transmitted, in connection with
any Letter of Credit. Any action taken
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or omitted by any LC Issuing Bank or any Lender under or in connection with any
Letter of Credit and the related drafts and documents, if done without willful
misconduct or gross negligence, shall be binding upon the Borrowers and shall
not place any LC Issuing Bank or any Lender under any liability to any MHG
Company.
(m) Reliance, Etc. Subject to Section 2.05(d), each LC Issuing Bank
shall be entitled (but not obligated) to rely, and shall be fully protected in
relying, on the representation and warranty by the Borrowers set forth in the
last sentence of Section 3.02 to establish whether the conditions specified in
Section 3.02 are met in connection with any issuance or extension of a Letter of
Credit. The rights and obligations of each LC Issuing Bank under each Letter of
Credit issued by it shall be governed by the provisions thereof and the
provisions of the UCP and/or UCC referred to therein or otherwise applicable
thereto.
(n) Indemnification by the Borrowers. The Borrowers agree to
protect, indemnify, pay and hold harmless each Lender, each LC Issuing Bank and
each Agent and their respective directors, officers, agents and employees
(collectively, the "LC Indemnitees") from and against any and all claims,
demands, liabilities, charges, damages, losses, liabilities, costs or expenses
(including, without limitation, the reasonable fees and disbursements of counsel
and allowed costs of internal counsel) which such LC Indemnitee may reasonably
incur (or which may be claimed against any such LC Indemnitee by any Person) by
reason of or in connection with the execution and delivery or transfer of or
payment or failure to pay under any Letter of Credit or any actual or proposed
use of any Letter of Credit, including any claims, demands, liabilities,
charges, damages, losses, liabilities, costs or expenses which any LC Issuing
Bank may incur by reason of or in connection with the failure of any Lender to
fulfill or comply with its obligations to such LC Issuing Bank hereunder in
connection with any Letter of Credit (but nothing herein contained shall affect
any rights the Borrowers may have against any such defaulting Lender); provided
that the Borrowers shall not be required to indemnify any LC Indemnitee for any
claims, demands, liabilities, charges, damages, losses, liabilities, costs or
expenses to the extent, but only to the extent, caused by (i) the willful
misconduct or gross negligence of any LC Indemnitee as determined by a final
judgment of a court with competent jurisdiction in determining whether a request
presented under any Letter of Credit issued by it complied with the terms of
such Letter of Credit or (ii) any LC Issuing Bank's failure to pay under any
Letter of Credit issued by it after the presentation to it of a request strictly
complying with the terms and conditions of such Letter of Credit. Nothing in
this subsection (n) is intended to limit the obligations of the Borrowers under
any other provision of this Section 2.05.
(o) Indemnification by Lenders. Each Lender shall, ratably in
accordance with its Percentage, indemnify each LC Issuing Bank, its affiliates
and their respective directors, officers, agents and employees (to the extent
not reimbursed by the MHG Companies) against any cost, expense (including
reasonable fees and disbursements of counsel), claim, demand, action, loss or
liability (except such as result from such indemnitees' gross negligence or
willful misconduct or such LC Issuing Bank's failure to pay under any Letter of
Credit issued by it after the presentation to it of a request strictly complying
with the terms and conditions of such Letter of Credit) that any such indemnitee
may suffer or incur in connection with this Section 2.05 or any action taken or
omitted by such indemnitee under this Section 2.05. Each Lender's obligation in
accordance with
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this Agreement to reimburse the LC Issuing Bank for its respective Percentage,
as contemplated by Section 2.05(j), as a result of a drawing under a Letter of
Credit, and the Obligations of any Borrower to reimburse the LC Issuing Bank
upon a draw under a Letter of Credit, shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms of
this Section 2.05 under all circumstances, including the following
circumstances:
(i) any set-off, counterclaim, recoupment, defense or other right
which such Lender may have against the LC Issuing Bank, any Borrower or other
Person for any reason whatsoever;
(ii) any lack of validity or enforceability of any Letter of Credit;
(iii) the existence of any claim, set-off, defense or other right
which any Borrower or any Lender may have at any time against a beneficiary or
any transferee of any Letter of Credit (or any Persons for whom any such
transferee may be acting), the LC Issuing Bank or any Lender or any other Person
or, whether in connection with this Agreement, the transactions contemplated
herein or any unrelated transaction (including any underlying transaction
between any MHG Companies or their Affiliates and the beneficiary for which any
Letter of Credit was procured);
(iv) any draft, demand, certificate or other document presented
under any Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or inaccurate
in any respect even if the LC Issuing Bank has been notified thereof;
(v) payment by the LC Issuing Bank under any Letter of Credit
against presentation of a demand, draft or certificate or other document which
does not comply with the terms of such Letter of Credit;
(vi) any adverse change in the business, operations, properties,
assets, condition (financial or otherwise) or prospects of any Borrower or
Subsidiaries of a Borrower;
(vii) any breach of this Agreement or any other Financing Document by
any party thereto;
(viii) the occurrence or continuance of an Insolvency Proceeding with
respect to any Borrower;
(ix) the fact that an Event of Default shall have occurred and be
continuing;
(x) the fact that the Commitment Termination Date shall have passed
or this Agreement or the Commitments hereunder shall have been terminated; and
(xi) any other circumstances or happening whatsoever, whether or not
similar to any of the foregoing.
(p) Liability for Damages. Nothing in this Section 2.05 shall
preclude the Borrowers or any Lender from asserting against any LC Issuing Bank
any claim for direct (but not
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consequential) damages suffered by the Borrowers or such Lender to the extent,
but only to the extent, caused by (i) the willful misconduct or gross negligence
of such LC Issuing Bank or its directors, officers, employees or agents in
determining whether a request presented under any Letter of Credit issued by it
complied with the terms thereof or (ii) such LC Issuing Bank's failure to pay
under any such Letter of Credit after the presentation to it of a request
strictly complying with the terms and conditions thereof.
(q) Dual Capacities. In its capacity as a Lender, each LC Issuing
Bank shall have the same rights and obligations under this Section 2.05 as any
other Lender.
(r) Information to be Provided to Administrative Agent. The LC
Issuing Banks shall furnish to the Administrative Agent upon request such
information as the Administrative Agent shall reasonably request in order to
calculate (i) the Aggregate LC Exposure existing from time to time and (ii) the
amount of any fee payable for the account of the Lenders under Section 2.05(g).
Section 2.06 Fees.
----
(a) Closing Date Financing Fee. The Borrowers shall pay to the
Administrative Agent for distribution to each Lender on the Closing Date
financing fees in an amount equal to 2.50% of the aggregate Commitments.
(b) Arrangement Fee. The Borrowers shall pay on the Closing Date to
the Co-Arrangers, for their own accounts to be shared equally by the Co-
Arrangers, an arrangement fee in an aggregate amount equal to 1.00% of the
aggregate Commitments.
(c) Administrative Agent's Fee. The Borrowers shall pay to the
Administrative Agent, for its own account, a monthly Administrative Agent's fee
of $5,000, payable in advance on the Closing Date (for the remainder of the
month in which such date falls) and on the last Business Day of each month
thereafter (for the next succeeding month).
(d) Commitment Fee. The Borrowers shall pay to the Administrative
Agent for the account of each Lender a commitment fee, calculated for each day
and equal to the sum of (i) the Tranche A Commitment Fee Rate for such day
(expressed as a daily rate), multiplied by the amount by which such Lender's
Tranche A Commitment on such day exceeds its Outstanding Tranche A Amount on
such day, plus (ii) the Tranche B Commitment Fee Rate for such day (expressed as
a daily rate), multiplied by the amount by which such Lender's Tranche B
Commitment on such day exceeds its Outstanding Tranche B Amount on such day,
regardless of whether the Tranche B Commencement Date shall have occurred. Such
commitment fees shall accrue from and including the Interim Order Date to but
excluding the Commitment Termination Date and shall be payable monthly in
arrears on the last Business Day of each month after the Closing Date, and on
the Commitment Termination Date .
Section 2.07 Final Maturity of Loans. The Loans shall mature, and
-----------------------
the outstanding principal amount thereof shall be due and payable (together with
interest accrued thereon), on the Commitment Termination Date.
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Section 2.08 Unscheduled Mandatory Prepayments of Loans; Reduction
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of Commitments.
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(a) Asset Sales. If after the Closing Date any MHG Company receives
any Net Cash Proceeds of any Asset Sale, the Borrowers shall prepay (subject to
subsection (g) below) an aggregate principal amount of Loans and permanently
reduce the Commitments in an amount equal to 100% of such Net Cash Proceeds of
such Asset Sale.
(b) Incurrence of Debt. If after the Closing Date any MHG Company
receives any Net Cash Proceeds from the issuance or other incurrence of any
Debt, the Borrowers shall prepay (subject to subsection (g) below) an aggregate
principal amount of Loans and permanently reduce the Commitments in an amount
equal to 100% of such Net Cash Proceeds; provided that this subsection (b) shall
not apply to any Net Cash Proceeds of (i) Debt under this Agreement or (ii)
Permitted Intercompany Debt.
(c) Equity Issuances. If after the Closing Date any MHG Company
receives any Net Cash Proceeds from any Equity Issuance, the Borrowers shall
prepay (subject to subsection (g) below) an aggregate principal amount of Loans
and permanently reduce the Commitments in an amount equal to 100% of such Net
Cash Proceeds.
(d) Tax Refunds. If after the Closing Date any MHG Company receives
any cash refund or rebate of any federal, state or other tax, the Borrowers
shall prepay (subject to subsection (g) below) an aggregate principal amount of
Loans and permanently reduce the Commitments in an amount equal to 100% of such
tax refund or rebate; provided that this Section 2.08(d) shall not require any
such prepayment unless the aggregate amount of such refunds and rebates received
after the Closing Date shall exceed $100,000.
(e) Excess Casualty Proceeds. The Borrowers (or the Collateral Agent
on its behalf) shall apply any Excess Casualty Proceeds to prepay (subject to
subsection (g) below) an aggregate principal amount of Loans and permanently
reduce the Commitments in an amount equal to 100% of such Excess Casualty
Proceeds; provided that this Section 2.08(e) shall not require any such
prepayment unless the aggregate amount of such Excess Casualty Proceeds received
after the Closing Date shall exceed $100,000.
(f) Prepayments from Cash Balances. The Borrowers shall on each
Business Day prepay (subject to subsection (g) below) an aggregate principal
amount of Loans in an amount equal to the excess (such excess, as of any date of
determination, being the "Excess Cash Amount"), if any, of (x) the amount of the
Cash Balances of the Borrowers outstanding on such date over (y) the sum of (a)
$5,000,000 and (b) the aggregate amount of cash required to be maintained on
deposit as a minimum balance by the applicable financial institutions for the
disbursement accounts, payroll accounts, depository accounts, concentration
accounts and sub-concentration accounts as described in Schedule 10 hereto.
-----------
(g) Timing of Prepayment. Each prepayment required by subsection (a),
(b), (c), (d) or (e) of this Section 2.08 shall be made within one Business Day
after any MHG Company
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receives the relevant Net Cash Proceeds, and each prepayment required by
subsection (f) of this Section 2.08 shall be made on the Business Day on which
any excess Cash Balance which is required to be prepaid under such subsection is
outstanding.
(h) Allocation of Prepayments; Ratable Application. Each prepayment
of the Loans required under Section 2.08(a) through (e) above (an "Unscheduled
Mandatory Prepayment") shall be applied (i) prior to the Tranche B Commencement
Date, first, to prepay the outstanding Tranche A Loans to the full extent
-----
thereof and permanently reduce the Tranche A Commitments by the amount of such
prepayments, second, to permanently reduce the Tranche A Commitments to the full
------
extent thereof, and third, to permanently reduce the Tranche B Commitments to
-----
the full extent thereof; and (ii) on and after the Tranche B Commencement Date,
first, to prepay the outstanding Tranche B Loans to the full extent thereof and
- -----
permanently reduce the Tranche B Commitments by the amount of such prepayments,
second, to prepay the outstanding Tranche A Loans to the full extent thereof and
- ------
permanently reduce the Tranche A Commitments by the amount of such prepayments,
third, to the extent of any remaining amount of such prepayment, to further
- -----
permanently reduce the Tranche B Commitments to the full extent thereof, and
fourth, to further permanently reduce the Tranche A Commitments to the full
- ------
extent thereof. Each prepayment of the Loans required under Section 2.08(f)
shall be applied, without reducing the Commitments, (i) prior to the Tranche B
Commencement Date, to prepay the outstanding Tranche A Loans to the full extent
thereof; and (ii) on and after the Tranche B Commencement Date, first, to prepay
-----
the outstanding Tranche B Loans to the full extent thereof, and second, to
------
prepay the outstanding Tranche A Loans to the full extent thereof. Each
prepayment of Loans or reduction of Commitments pursuant to this Section 2.08
shall be applied in accordance with this Agreement ratably to the applicable
Loans and Commitments, respectively, of the several Lenders. The Borrowers
shall give the Administrative Agent notice of any such prepayment as if it were
an optional prepayment made pursuant to Section 2.09. Any amounts required to
be applied to reduce Tranche A Commitments under this Section 2.08 to an amount
below the aggregate LC Exposure of all Lenders shall be applied to cash
collateralize Letters of Credit in accordance with the Security Agreement.
(i) Interest. Each prepayment of principal of the Loans under this
Section 2.08, other than prepayments pursuant to Section 2.08(f), shall be made
together with interest accrued on the amount prepaid to the date of payment.
Section 2.09 Optional Prepayments.
--------------------
(a) Notice to Administrative Agent. The Borrowers may, upon giving a
Prepayment Notice to the Administrative Agent before 12:00 Noon (Eastern Time)
on the date of prepayment, prepay the Tranche A Loans or Tranche B Loans (as
specified in such Prepayment Notice) outstanding on any Business Day in whole or
in part in amounts aggregating $1,000,000 or any larger multiple of $100,000.
(b) Notice to Lenders. Upon receiving a Prepayment Notice pursuant to
this Section 2.09, the Administrative Agent shall promptly notify each Lender of
the contents thereof and of such Lender's share of such prepayment and such
Prepayment Notice shall not thereafter be revocable by the Borrowers.
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(c) Ratable Application. Each prepayment of Tranche A Loans or
Tranche B Loans pursuant to this Section 2.09 shall be applied ratably to the
Tranche A Loans or Tranche B Loans, respectively, of the several Lenders.
(d) Payment of Accrued Interest. Each prepayment of principal of the
Loans under this Section 2.09 shall be made together with interest accrued on
the amount prepaid to the date of payment.
Section 2.10 Termination or Reduction of Commitments. The Borrowers
---------------------------------------
may, upon at least three Business Days' notice to the Administrative Agent, (i)
terminate the Commitments at any time, if no Lender has any Outstanding Tranche
A Amount or Outstanding Tranche B Amount, respectively, after such termination,
or (ii) ratably reduce the Tranche A Commitments or Tranche B Commitments from
time to time by an aggregate amount of $5,000,000 or any larger multiple of
$1,000,000; provided that immediately after such reduction no Lender's
Outstanding Tranche A Amount or Outstanding Tranche B Amount shall exceed its
Tranche A Commitment or Tranche B Commitment, respectively, as so reduced.
Unless previously terminated, the Commitments shall terminate in their entirety
on the Commitment Termination Date. Once reduced or terminated the Commitments
may not be reinstated. The Borrowers' notice to the Administrative Agent shall
designate the date (which shall be a Business Day) of such termination or
reduction, whether the Tranche A Commitments or the Tranche B Commitments are to
be terminated or reduced, and the amount of any partial reduction of the Tranche
A Commitments or the Tranche B Commitments, and such termination or reduction of
the Tranche A Commitments or Tranche B Commitments shall be effective on the
date specified in the Borrowers' notice and shall be applied ratably to the
Tranche A Commitments or Tranche B Commitments (as specified by the Borrowers in
such notice), respectively, of the several Lenders.
Section 2.11 General Provisions as to Payments.
---------------------------------
(a) The Borrowers shall make each payment of principal of, and
interest on, the Loans and the LC Reimbursement Obligations and each payment of
facility fees, commitment fees and letter of credit fees (other than fees
payable directly to the LC Issuing Banks) hereunder not later than 1:00 P.M.
(Eastern Time) on the date when due, in Federal or other funds immediately
available in Pittsburgh, Pennsylvania, to the Administrative Agent at its
address for payments specified in or pursuant to Section 11.01. Upon receiving
a payment for the account of the Lenders, the Administrative Agent will promptly
distribute to each such Lender its ratable share of such payment. Whenever any
payment of principal of, or interest on, Loans or LC Reimbursement Obligations
or any payment of commitment fees or letter of credit fees shall be due on a day
which is not a Business Day, the date for payment thereof shall be extended to
the next succeeding Business Day. If the date for any payment of principal is
extended by operation of law or otherwise, interest thereon shall be payable for
such extended time.
(b) Unless the Administrative Agent shall have received notice from
the Borrowers before the date on which any payment is due to any of the Lenders
hereunder that the Borrowers will not make such payment in full, the
Administrative Agent may assume that the Borrowers have made such payment in
full to the Administrative Agent on such date and, in reliance
39
<PAGE>
upon such assumption, the Administrative Agent may (but shall not be obligated
to) cause to be distributed to each Lender on such due date an amount equal to
the amount then due such Lender. If and to the extent that the Borrowers shall
not have so made such payment, each such Lender shall repay to the
Administrative Agent forthwith on demand any such amount distributed to such
Lender together with interest thereon, for each day from the date such amount is
distributed to such Lender until the date such Lender repays such amount to the
Administrative Agent, at the Federal Funds Rate.
Section 2.12 Computation of Interest and Fees.
--------------------------------
(a) Interest and fees hereunder shall be computed on the basis of a
year of 365 days (or 366 days in a leap year) and paid for the actual number of
days elapsed (including the first day but excluding the last day).
(b) The Administrative Agent shall determine the Tranche A Interest
Rate, the Tranche B Interest Rate, the Tranche A Default Rate, the Tranche B
Default Rate and the LC Fee Rate applicable hereunder and the amount of accrued
interest and fees. The Administrative Agent shall give prompt notice to the
Borrowers and the Lenders of each Tranche A Interest Rate, Tranche B Interest
Rate, Tranche A Default Rate, Tranche B Default Rate and LC Fee Rate and the
amount of accrued interest and fees so determined, and its determination thereof
shall be conclusive in the absence of manifest error.
Section 2.13 Superpriority Nature of Obligations. All Obligations
-----------------------------------
under the Financing Documents shall constitute allowed administrative expense
claims in the Chapter 11 Cases against Borrowers with priority under Section
364(c)(1) of the Bankruptcy Code over any and all other administrative expenses
of the kind specified or ordered pursuant to any provision of the Bankruptcy
Code, including, but not limited to, Sections 105, 326, 328, 503(b), 506(c),
507(a), 507(b) and 726 of the Bankruptcy Code; provided that, the superpriority
administrative claim status of the Obligations, and the Liens and security
interests securing the same, shall be subject only to the "Carve-Out",
consisting of: (i) unpaid professional fees and expenses incurred (x) prior to
the date of the delivery of a notice from the Administrative Agent or Required
Lenders to the Borrowers of the occurrence of an Event of Default and specifying
that the limitation on professional fees and expenses referred to in the
following clause (ii) is in effect (such notice being the "Carve-Out Notice") or
(y) after the earlier of (1) such time as no Event of Default shall be
continuing or (2) such time as such Carve-Out Notice shall be rescinded by the
Administrative Agent at the direction of Required Lenders in their sole
discretion, to the extent such fees and expenses described in this clause (i)
are allowed by the Court in the Chapter 11 Cases (including on an interim basis
and subject to final allowance), (ii) after and from the date of the delivery of
a Carve-Out Notice, professional fees and expenses allowed by the Court in the
Chapter 11 Cases (including on an interim basis and subject to final allowance)
in an aggregate amount (determined without regard to fees and expenses incurred
prior to the date of the delivery of such Carve-Out Notice and which are at any
time allowed by the Court (including on an interim basis and subject to final
allowance)) not to exceed $2,000,000 (for any period commencing at the time a
Carve-Out Notice shall have been so delivered and ending at the earlier of (1)
such subsequent time as no Event of Default shall be continuing and (2) such
time as such Carve-Out Notice shall be rescinded by the Administrative
40
<PAGE>
Agent at the direction of Required Lenders in their sole discretion), and (iii)
fees payable to the Clerk of the Court and to the United States Trustee pursuant
to 28 U.S.C. (S)1930(a)(6).
Section 2.14 Joint and Several Liability; Payment Indemnifications.
-----------------------------------------------------
(a) All Obligations of Borrowers under the Financing Documents shall
be the joint and several Obligations of the Borrowers. The Obligations of and
the Liens granted by any such Borrower under the Financing Documents shall not
be impaired or released by any action or inaction on the part of any Agent or
any Lender with respect to any Credit Party, including any action or inaction
which would otherwise release a surety.
(b) In order to provide for just and equitable contribution between
the Borrowers if any payment is made by a Borrower (a "Funding Borrower") in
discharging any of the Obligations, each of the Funding Borrowers shall be
entitled to a contribution from the other Borrowers for all payments, damages
and expenses incurred by such Funding Borrower in discharging the Obligations,
in the manner and to the extent required to allocate liabilities in an equitable
manner among the Borrowers on the basis of the relative benefits received by the
Borrowers. If and to the extent that a Funding Borrower makes any payment to
any Lender or any other Person in respect of the Obligations, any claim which
said Funding Borrower may have against the other Borrowers by reason thereof
shall be subject and subordinate to the prior Cash payment in full of the
Obligations. The parties hereto acknowledge that the right to contribution
hereunder shall constitute an asset of the party to which such contribution is
owing. Notwithstanding any of the foregoing to the contrary, such contribution
arrangements shall not limit in any manner the joint and several nature of the
Obligations, limit, release or otherwise impair any rights of any Agent or any
Lender under the Financing Documents, or alter, limit or impair the obligation
of each Borrower, which is absolute and unconditional and joint and several with
the other Borrowers, to repay the Obligations. The obligation of any Borrower
to make any contribution to another Borrower under this Section 2.14(b) shall be
deemed an expense of administration of such Borrower arising under Section
503(b) of the Bankruptcy Code and shall be junior in priority to all Obligations
of such Borrower and of the Borrowers under the Financing Documents.
ARTICLE 3. Conditions
Section 3.01 Effectiveness of this Agreement; Closing. This
----------------------------------------
Agreement will become effective, and the Closing will occur, when (i) the Agents
shall have received the following documents, each dated the Closing Date unless
otherwise indicated, and (ii) the other conditions specified below shall have
been satisfied or waived in accordance with the terms hereof:
(a) with respect to each party listed on the signature pages hereof,
either a counterpart of this Agreement signed by such party or facsimile or
other written confirmation satisfactory to the Administrative Agent that
such party has signed a counterpart hereof;
(b) a duly executed Tranche A Note and a duly executed Tranche B Note
complying with the provisions of Section 2.03 payable to each Lender;
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<PAGE>
(c) a counterpart of the Security Agreement, signed by each of the
Borrowers, together with (to the extent not previously delivered to
Collateral Agent in its capacity as collateral agent under the Existing
Credit Facilities) certificates evidencing all the certificated Equity
Interests listed in Schedule 3 hereto and signed stock powers or other
----------
appropriate instruments of transfer relating thereto;
(d) all signed UCC financing statements requested by the Collateral
Agent to perfect its security interests in the Collateral;
(e) to the extent received by the Collateral Agent on or prior to the
Closing Date, the results of Lien and tax and judgment Lien searches with
respect to the personal, mixed and real properties of the Borrowers in the
jurisdictions and with the scope requested by the Collateral Agent, which
results shall be satisfactory to the Collateral Agent;
(f) written wire transfer instructions signed by MHG on behalf of the
Borrowers and in form and substance satisfactory to the Administrative
Agent for application of the proceeds of the initial Borrowing hereunder on
the date of initial Borrowing, including providing for the payment on the
date of initial Borrowing of (1) all fees, expenses and other amounts
payable by the Borrowers on or before such date to the Agents, Co-Arrangers
and the Lenders in connection with this Agreement, and (2) all fees and
expenses of each counsel and advisor to the Agents, the Lenders and the
Existing Lenders in connection with this Agreement, the Existing Credit
Facilities, the Existing Notes and the transactions contemplated thereby
(including without limitation O'Melveny & Myers LLP, counsel to the Agents,
Lenders and Existing Lenders, Buchanan Ingersoll, P.C., special counsel to
the Administrative Agent and the administrative agent under the Existing
Credit Facilities, Kennedy Covington Lobdell & Hickman, L.L.P., special
counsel to the Syndication Agent and the syndication agent under the
Existing Credit Facilities, Houlihan Lokey Howard & Zukin and Care
Consulting, L.L.C.), incurred and invoiced but not yet paid through the
Petition Date;
(g) an opinion of Powell, Goldstein, Frazer & Murphy LLP, special
counsel for the Borrowers, substantially in the form of Exhibit H hereto
---------
(and Borrowers hereby request such counsel to deliver such opinions to
Lenders);
(h) all approvals, consents and other actions by or in respect of, or
filings with, any governmental body, agency, official, authority or other
Person (including stockholders) required in connection with the
transactions contemplated by the Financing Documents shall have been
obtained, taken or made (except for any such approvals, consents, actions
or filings with any Person (other than any governmental body, agency,
official or authority) (1) as to which the failure to have obtained, taken
or made them is not, in the aggregate, material or (2) which have been
rendered unnecessary, in the reasonable judgment of the Agents, due to the
entry of the Interim Borrowing Order);
(i) the Interim Borrowing Order (or if there is no Interim Borrowing
Order, the Borrowing Order) shall have been entered by the Court;
42
<PAGE>
(j) no pleading, application or objection sought by any party in
interest (including any Existing Lender) shall have been filed with and
granted by the Court (or shall have been filed with the Court by or on
behalf of an official committee of creditors) which has not been withdrawn,
stayed, dismissed or denied seeking (i) to dismiss or convert any of the
Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code, (ii) the
appointment of a Chapter 11 trustee in any of the Chapter 11 Cases or of a
trustee of any Borrower under Chapter 7, (iii) the appointment of an
examiner (with expanded powers beyond those set forth in Sections
1106(a)(3) and (4) of the Bankruptcy Code) for any Borrower under Section
1106(b) of the Bankruptcy Code, (iv) the granting of an administrative
expense or priority claim or a Lien in either case pari passu or senior to
that of the Collateral Agent granted pursuant to the Collateral Documents,
the Interim Borrowing Order and the Borrowing Order, other than the Carve-
Out, (v) to stay, reverse, vacate, or otherwise modify the Interim
Borrowing Order or the Borrowing Order without the prior written consent of
the Agents and Required Lenders, or (vi) relief from the automatic stay (or
any other injunction having similar effect) so as to allow a third party to
proceed against any property or assets of the Borrowers deemed material by
the Agents;
(k) all First Day Orders shall be in form and substance satisfactory
to the Agents, and the Agents shall have received copies of all orders, if
any, entered by the United States Bankruptcy Court in the bankruptcy cases
of MPAN as a result of motions and applications filed by the relevant
debtors with such court on the relevant petition date;
(l) since the date of the Most Recent Audited Financial Statements,
no Material Adverse Effect (in the sole opinion of Required Lenders) shall
have occurred;
(m) the Agents shall have received, in form and substance
satisfactory to the Agents, a certificate from an appropriate officer of
each of the Credit Parties (i) attaching copies of the Organizational
Documents of such Credit Party and copies of resolutions or consents of the
board of directors of such Credit Party or of its applicable partner or
member authorizing the applicable Financing Documents, the Chapter 11 Cases
and the other transactions contemplated hereby, and (ii) certifying (A)
that such copies are true, correct and complete copies thereof and that
such resolutions and Organizational Documents are in full force and effect
as of the Closing Date and have been duly adopted in accordance with the
Organizational Documents of such Credit Party, and (B) as to the signatures
and incumbency of the Persons executing Financing Documents on behalf of
such Credit Party;
(n) the Agents shall have received copies of all Management and
Service Agreements, including all employment agreements (if any) with the
administrator, facility director, and director of nursing for each
Healthcare Facility, which shall be (i) in form and substance satisfactory
to the Agents and (ii) certified as true, correct and complete and in full
force and effect as of the Closing Date by an appropriate officer of the
Credit Parties;
(o) the Lenders shall have received (i) unaudited consolidated
financial statements of MHG and its Consolidated Subsidiaries for the nine-
month period ended September 30, 1999 and the one-month period ended
October 31, 1999, consisting of
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<PAGE>
consolidated balance sheets and the related consolidated statements of
income, stockholders' equity and cash flows for such Fiscal Year, which
unaudited financial statements shall be in form and substance satisfactory
to the Agents and Lenders and shall be certified by a Financial Officer of
MHG that they fairly present the financial condition of MHG and its
Consolidated Subsidiaries as at the dates indicated and the results of
their operations and their cash flows for the periods indicated, and (ii)
drafts of the audited consolidated balance sheet of Mariner Post-Acute
Network, Inc. and its Subsidiaries for the fiscal year ended September 30,
1999 and the related audited consolidated statements of income,
stockholders' equity and cash flows of Mariner Post-Acute Network, Inc. and
its Subsidiaries for such fiscal year, in reasonable detail and certified
by a financial officer of MPAN that they fairly present the financial
condition of Mariner Post-Acute Network, Inc. and its Subsidiaries as at
the dates indicated and the results of their operations and their cash
flows for the periods indicated;
(p) the Lenders shall have received (i) a detailed written
description of all outstanding claims asserted by, and disputes with, the
United States with respect to Medicare and/or under the False Claims Act or
with any State or with any fiscal intermediary or agent for any of the
foregoing, in any such case involving or against any of the MHG Companies
and their Subsidiaries, and the amounts involved or claimed, (ii) a copy of
the Settlement Letter, which Settlement Letter shall be in full force and
effect, with no modifications thereto, and (iii) a copy of the HHS
Stipulation, which shall be duly executed by all parties purported to be
bound thereby;
(q) the Agents shall have received a written instrument, in form and
substance satisfactory to the Agents, executed by MPAN for the benefit of
the Agents and Lenders (i) evidencing MPAN's acknowledgment of and
agreement to the provisions of Sections 5.13 and 7.07 and (ii) undertaking
to comply with the obligations of the Borrowers and MPAN set forth in such
Sections;
(r) the Agents shall have received (i) the Cash Budget and (ii) the
Year 2000 DIP Budget, in each case in form and substance satisfactory to
the Agents;
(s) the LC Issuing Bank shall have received a counterpart to the LC
Issuing Bank Fee Letter, signed by each of the Borrowers;
(t) the Agents shall have received the Credit and Collection Policy,
in form and substance satisfactory to the Agents;
(u) the Agents shall have received a schedule of actions, suits or
proceedings pending or threatened against the Borrowers as of the Closing
Date, which schedule shall be in form and substance satisfactory to the
Agents; and
(v) the Agents shall have received all other documents that any Agent
may reasonably request relating to the existence of the MHG Companies, the
corporate or other authority for and the validity of the Financing
Documents, the creation and perfection
44
<PAGE>
of the Liens contemplated by the Collateral Documents and any other matters
relevant thereto, all in form and substance satisfactory to the Agents.
Promptly after the Closing occurs, the Agents shall notify the Borrowers and the
Lenders thereof, and such notice shall be conclusive and binding on all parties
hereto.
Section 3.02 Credit Events. The obligations (i) of each Lender to
-------------
make a Loan on the occasion of each Borrowing, (ii) of an LC Issuing Bank to
sell and of each Lender to purchase each participation in a Letter of Credit as
and when provided in Section 2.05, and (iii) of each LC Issuing Bank to extend
(or allow the extension of) the expiry date of a Letter of Credit issued by it
hereunder as and when provided in Section 2.05 are each subject to the
satisfaction (or waiver in accordance with the terms hereof) of the following
conditions:
(a) the fact that the Closing Date shall have occurred;
(b) receipt by the Administrative Agent of notice of the relevant
Credit Event as required by Section 2.02 or 2.05(c), as the case may be;
(c) the fact that, immediately before and after such Credit
Event, no Default shall have occurred and be continuing;
(d) the fact that each of the representations and warranties made
by any of the Borrowers in or pursuant to any Financing Document to which
it is a party shall be true on and as of the date of such Credit Event as
if made on and as of such date, unless such representation or warranty was
expressly made solely as of an earlier date, in which case such
representation or warranty was true and correct on such earlier date;
(e) no order, judgment or decree of any court (including, without
limitation, the Court), arbitrator or governmental authority shall purport
to enjoin or restrain such Lender from making any such Loan or extending or
issuing any such Letter of Credit on the date of such Credit Event;
(f) immediately after giving effect to such Credit Event, the
limitations on borrowing set forth in Section 2.01(c) shall have been
complied with;
(g) the making of the Loans requested in connection with any such
Borrowing shall not violate any law including Regulation T, Regulation U or
Regulation X of the Board of Governors of the Federal Reserve System;
(h) no pleading, application or objection sought by any party in
interest (including any Existing Lender) shall have been filed with and
granted by the Court (or shall have been filed with the Court by or on
behalf of an official committee of creditors) which has not been withdrawn,
stayed, dismissed or denied seeking (i) to dismiss or convert any of the
Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code, (ii) the
appointment of a Chapter 11 trustee in any of the Chapter 11 Cases or of a
trustee of any Borrower under Chapter 7, (iii) the appointment of an
examiner (with expanded powers beyond those set
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forth in Sections 1106(a)(3) and (4) of the Bankruptcy Code) for any
Borrower under Section 1106(b) of the Bankruptcy Code, (iv) the granting of
an administrative expense or priority claim or a Lien in either case pari
passu or senior to that of the Collateral Agent granted pursuant to the
Collateral Documents, the Interim Borrowing Order and the Borrowing Order,
other than the Carve-Out, (v) to stay, reverse, vacate, or otherwise modify
the Interim Borrowing Order or the Borrowing Order, as the case may be,
without the prior written consent of the Agents and Required Lenders, or
(vi) relief from the automatic stay (or any other injunction having similar
effect) so as to allow a third party to proceed against any property or
assets of the Borrowers having an aggregate value in excess of $500,000;
(i) there shall not be pending or, to the knowledge of any
Executive Officer of the Borrowers, threatened, any action, suit,
proceeding, governmental investigation or arbitration against or affecting
any MHG Company that would be required to be, but has not been, disclosed
by the Borrowers in writing pursuant to Section 4.06 or 5.01(h) prior to
the making of the last preceding Loans (or, in the case of the initial
Loans, prior to the execution of this Agreement), and there shall have
occurred no development not so disclosed in any such action, suit,
proceeding, governmental investigation or arbitration whether or not
required to be so disclosed, that, in either event, in the opinion of
Required Lenders, in any manner questions the validity of any Financing
Document or could be expected to have a Material Adverse Effect or in which
there is a reasonable possibility of an adverse decision that could be
expected to have a Material Adverse Effect seeking to enjoin or otherwise
prevent the consummation of, or to recover any damages or obtain relief as
a result of, the transactions contemplated by this Agreement or the making
of Loans hereunder; and
(j) The Interim Borrowing Order and/or the Borrowing Order, as
the case may be, shall be Final Orders.
Each Credit Event under this Agreement shall be deemed to be a
representation and warranty by the Borrowers on the date of such Credit Event
that all of the conditions set forth in this Section 3.02 have been satisfied
and that each certification contained in the relevant Notice of Borrowing or LC
Request, as the case may be, is true, correct and complete on the date of such
Credit Event.
ARTICLE 4. Representations and Warranties
Each of the Borrowers represents and warrants to the Lender Parties that:
Section 4.01 Corporate Existence and Power. Each MHG Company is a
-----------------------------
corporation, limited liability company or partnership duly incorporated,
organized or formed, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization, and, subject to compliance with
any applicable provisions of the Bankruptcy Code, has all corporate or other
powers and all material Governmental Approvals (including without limitation
those required by Medicaid Regulations and Medicare Regulations) required to
carry on its business as now
46
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conducted and as proposed to be conducted, except for such Governmental
Approvals the failure of which to have in the aggregate could not be expected to
have a Material Adverse Effect. Each Borrower is in compliance with its
Organizational Documents and all orders of the Court.
Section 4.02 Corporate and Governmental Authorization; No
--------------------------------------------
Contravention. The execution and delivery by each MHG Company of the Financing
- -------------
Documents to which it is a party, its performance of its obligations thereunder
and, with respect to each of the Borrowers, the issuance and payment of the
Notes are within its corporate, partnership or limited liability company or
other powers, have been duly authorized by all necessary corporate, partnership,
limited liability company or other action, require no action by or in respect
of, or filing with, any governmental body, agency or official (except for the
Court and such as shall have been made at or before the time required by the
Financing Documents and shall be in full force and effect on and after the date
when made to the extent required by the Financing Documents) and do not
contravene or violate any Applicable Laws (including an applicable order of the
Court) or any provision of its Organizational Documents, or contravene or
constitute a default under any agreement or other instrument binding upon it
(which contravention or default, in the case of such instruments or agreements,
would give rise to rights enforceable on a post-Petition Date basis) or result
in or require the imposition of any Lien (other than the Liens created by the
Collateral Documents) on any of its assets.
Section 4.03 Binding Effect. This Agreement constitutes a valid and
--------------
binding agreement of the Borrowers, and the other Financing Documents, when
executed and delivered as contemplated by this Agreement, will constitute valid
and binding obligations of each MHG Company that is a party thereto, in each
case enforceable in accordance with its terms, except as limited by general
principles of equity.
Section 4.04 Security Interests. On the Closing Date, the Collateral
------------------
Documents will create valid Security Interests in the Collateral to the extent
set forth therein. At all times after the Closing, the Collateral Documents, in
conjunction with the entry of the Interim Borrowing Order and/or the Borrowing
Order, will create valid and perfected Security Interests in the Collateral of
the Borrowers from time to time covered or purportedly covered thereby. Such
Security Interests will be prior to all other Liens (except as set forth in the
Interim Borrowing Order and the Borrowing Order) on such Collateral until the
applicable Security Interest is released pursuant to Section 18 of the Security
Agreement.
Section 4.05 Financial Information.
---------------------
(a) The Most Recent Audited Financial Statements, reported on by Ernst
& Young, LLP, fairly present in all material respects, in conformity with GAAP,
the consolidated financial position of MHG and its Consolidated Subsidiaries as
of December 31, 1998 and their consolidated results of operations and cash flows
for the twelve-month period ending as of such date.
(b) The unaudited consolidated balance sheets of MHG and its
Consolidated Subsidiaries as of September 30, 1999 and October 31, 1999 and the
related unaudited consolidated statements of operations, cash flows and
shareholders' equity for the nine-month period and one-month period then ended,
respectively, as delivered to the Lenders on or prior to the Closing Date,
47
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fairly present in all material respects, in conformity with GAAP, the
consolidated financial position of MHG and its Consolidated Subsidiaries as of
such dates and their consolidated results of operations and cash flows for such
periods, subject to audit and normal year-end adjustments.
(c) Since the date of the Most Recent Audited Financial Statements, no
event has occurred and no condition has come into existence which has had, or is
likely to have, a Material Adverse Effect.
Section 4.06 Litigation. Except as disclosed in the schedule
----------
delivered on or prior to the Closing Date pursuant to Section 3.01(u) or
pursuant to Section 5.01(h), there is no action, suit or proceeding pending
against, or to the knowledge of any Executive Officer of the Borrowers
threatened against or affecting, any MHG Company before any court or arbitrator
or any governmental body, agency or official (i) in which there is a reasonable
possibility of an adverse decision that could be expected to have a Material
Adverse Effect or (ii) which in any manner questions the validity of any
Financing Document.
Section 4.07 Compliance with ERISA. Each member of the ERISA Group
---------------------
has fulfilled its obligations under the minimum funding standards of ERISA and
the Internal Revenue Code with respect to each Plan and is in compliance in all
material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan. No member of the ERISA Group
has (i) sought a waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multiemployer Plan or made any amendment
to any Plan, which has resulted or could result in the imposition of a Lien or
the posting of a bond or other security under ERISA or the Internal Revenue Code
or (iii) incurred any liability under Title IV of ERISA other than a liability
to the PBGC for premiums under Section 4007 of ERISA.
Section 4.08 Taxes. The MHG Companies have filed all United States
-----
federal income tax returns that are required to be filed by them (or have filed
appropriate extensions for filing such tax returns) and have paid all taxes due
pursuant to such returns or pursuant to any assessment received by any of them,
except (i) such taxes, if any, as are being contested in good faith and as to
which reserves have been provided and (ii) taxes the liability for which does
not exceed, in the aggregate, $50,000. The charges, accruals and reserves on
the books of the MHG Companies in respect of taxes or other similar governmental
charges are, in the opinion of MHG, adequate.
Section 4.09 Compliance with Laws. (a) The MHG Companies are in
--------------------
compliance in all material respects with all Applicable Laws (including without
limitation Medicaid Regulations and Medicare Regulations), other than such laws,
rules or regulations (i) the validity or applicability of which the relevant MHG
Company is contesting in good faith or (ii) the failure to comply with which
could not, in the aggregate, reasonably be expected to have a Material Adverse
Effect.
(b) As of the date hereof Schedule 9 hereto lists the following
----------
contracts relating to the business operations of the MHG Companies: (i) all
employee benefit plans, employment agreements where the compensation paid by any
MHG Company exceeds $250,000 in any fiscal year, collective bargaining
agreements and labor contracts (the "Labor Contracts"), (ii) all written
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provider or similar agreements (the "Provider Agreements") pursuant to which the
MHG Companies have received or may claim any entitlement to receive
reimbursement from or as a result of (1) Medicaid, Medicare or Blue Cross
programs, or (2) any other public or private reimbursement programs where the
payments received by any MHG Company exceeded or are expected to exceed
$6,000,000 in the current fiscal year; (iii) all leases of real property where
the payments made by any MHG Company in the current fiscal year exceed or are
expected to exceed $250,000, (iv) any contract or series of contracts with the
same person for the furnishing or purchase of machinery, equipment, goods or
services, where the payments made by any MHG Company exceeded or are expected to
exceed $1,000,000 in the aggregate in the current fiscal year; (v) all
management contracts pursuant to which any MHG Company provides management
services to any other person where the payments received or expected to be
received by any MHG Company exceed $500,000 in the current fiscal year, and all
other Management and Service Agreements; and (vi) all material contracts filed
as exhibits to any report filed by MHG with the SEC during the past twelve
months. All contracts listed on Schedule 9 and any Provider Agreements which
----------
provide for annual payments in excess of $6,000,000 which are not listed on
Schedule 9 are valid, binding and enforceable upon each of the parties thereto
- ----------
in accordance with their respective terms and there is no default thereunder.
There are no patient care agreements with patients or any other person or
organization which deviate in such a material respect from the standard patient
care forms used by the MHG Companies.
(c) As of the date hereof, Schedule 12 hereto sets forth an accurate
-----------
description of all of the Healthcare Facilities (including without limitation
all of the Nursing Home Facilities) together with a list of their location and a
general description of the services provided by each such Healthcare Facility.
Except as set forth on Schedule 9, each MHG Company has all material
----------
accreditations, authorizations, approvals, certificates of need, consents,
agreements, licenses, permits and qualifications (collectively, "Approvals")
required for them to (i) construct, acquire, own, manage, lease and/or operate
their facilities and services, and (ii) receive payment and reimbursement from
any patient or third party payor. The MHG Companies have all other material
Approvals required for the lawful operation of their businesses. All material
Approvals of each MHG Company are in full force and effect and have not been
amended or otherwise modified (except for modifications which would not have a
material adverse effect upon any MHG Company) rescinded, revoked or assigned,
and no notice has been received of any violation of Applicable Laws or any
refusal to renew any Approval which could reasonably be expected to cause any of
such Approvals to be modified, rescinded or revoked (except for modifications,
rescissions or revocations which could not reasonably be expected have a
Material Adverse Effect). No MHG Company knows of any reason why any of them
will not be able to maintain all material Approvals necessary or appropriate to
construct, own, lease, manage and operate all of their facilities and to
otherwise conduct their businesses as now conducted and presently proposed to be
conducted. There are no deficiencies to the conditions for participation by any
MHG Company in any Medicare, Medicaid, Veterans Administration or other
reimbursement programs which would preclude such participation.
Section 4.10 No Regulatory Restrictions on Borrowing. No MHG Company
---------------------------------------
is (i) an "investment company", within the meaning of the Investment Company Act
of 1940, as amended, (ii) a "holding company", or an "affiliate" of a "holding
company" or a "subsidiary company" of a "holding company", within the meaning of
the Public Utility Holding Company Act of 1935, as
49
<PAGE>
amended or (iii) otherwise subject to any regulatory scheme (other than the
Bankruptcy Code) which restricts its ability to incur Debt hereunder.
Section 4.11 Environmental Matters.
---------------------
(a) From time to time after the Closing, MHG will review the effect of
Environmental Laws on the business, operations and properties of the MHG
Companies, in the course of which reviews it will identify and evaluate
associated liabilities and costs. On the basis of such reviews, MHG has
reasonably concluded that the foregoing associated liabilities and costs are
unlikely to have a Material Adverse Effect.
(b) Except to the extent that the Environmental Liabilities of the MHG
Companies that relate to or could result from the matters referred to in this
Section 4.11(b) would not exceed $1,000,000 for any one occurrence, no material
notice, notification, demand, request for information, citation, summons,
complaint or order with respect to Hazardous Substances or any violation of
Environmental Laws is in existence or, to the knowledge of MHG, proposed,
threatened or anticipated with respect to or in connection with the operation of
any properties to be owned, leased or operated after the Closing Date by any MHG
Company.
Section 4.12 Full Disclosure. All information heretofore furnished
---------------
in writing by any MHG Company to any Agent or any Lender for purposes of or in
connection with this Agreement or any transaction contemplated hereby was, and
all such information hereafter furnished in writing by the MHG Companies to any
Agent or Lender will be, true and accurate in every material respect or based on
reasonable estimates on the date as of which such information is or was stated
or certified. MHG has disclosed to the Lenders in writing any and all facts
which are known to it and which have had or could be expected to have a Material
Adverse Effect.
Section 4.13 Information as to Equity Interests and Instruments
--------------------------------------------------
Owned by MHG Companies. Schedule 3 hereto sets forth a correct and complete list
- ----------------------- ----------
of each Subsidiary of MHG, its outstanding Equity Interests, the owner thereof
and the percentage thereof owned by such owner. Neither MHG nor any of its
Subsidiaries owns any interest in any Subsidiary which is not a Borrower (other
than the Excluded Subsidiaries). Except for the notes specified on Schedule 1 to
the Security Agreement, no Debt (including Permitted Intercompany Debt) owed to
any Grantor is evidenced by an instrument (as such term is defined in the UCC)
that is not held in a Concentration Account or pledged to the Collateral Agent
as part of the Collateral.
Section 4.14 Representations in Other Financing Documents. The
--------------------------------------------
representations of each Grantor in Section 2 of the Security Agreement are true
and correct in all material respects.
Section 4.15 Year 2000 Compliance. The MHG Companies have completed
--------------------
all remediation and upgrades of their respective computer hardware and software,
information systems and devices incorporating embedded chips so that all such
systems, equipment and applications (including those of its suppliers and
vendors) that are material to any MHG Company's businesses and operations will
be able to perform properly date-sensitive functions for all dates before and
after January 1, 2000.
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Section 4.16 Margin Stock. The Borrowers do not, as of the date
------------
hereof, expect that the MHG Companies will acquire any Margin Stock in the
future. Even if they do, Margin Stock will not at any time represent more than
25% of the value (as determined by any reasonable method) of the assets subject
to any provision of the Financing Documents that restricts the right or ability
of the MHG Companies to sell, pledge or otherwise dispose of Margin Stock owned
by them or requires a prepayment of Loans upon the exercise of any such right.
Section 4.17 Representations Concerning Cash Management System;
--------------------------------------------------
Credit and Collection Policy. The summaries of the Cash Management System set
- ----------------------------
forth in Schedule 10 and the Credit and Collection Policy are accurate and
-----------
complete in all material respects as of the Closing Date and do not omit to
state any material fact necessary to make the statements set forth therein not
misleading. No Borrower owns any Deposit Account (other than Patient Trust
Accounts) which is not subject to the liens granted under the Security
Agreement. There has been no material change to the Cash Management System or
Credit and Collection Policy since the Closing Date except such changes as have
been disclosed to and approved by the Agents in writing.
Section 4.18 Prepetition Indebtedness. All Prepetition Indebtedness
------------------------
as of the Petition Date, including, without limitation, the Debt under the
Existing Credit Facilities and the Existing Notes, is set forth on Schedule 6
----------
hereto. All such amounts in respect of the Existing Credit Facilities are
absolute, due and owing as of the Closing Date and are not subject to any
defense, setoff, counterclaim, or reduction of any kind.
Section 4.19 Chapter 11 Cases. The Chapter 11 Cases were commenced
----------------
on the Petition Date in accordance with Applicable Law and proper notice thereof
has been given to third-party health insurers and creditors to the extent
required by Applicable Law. The Borrowers constitute all debtors and debtors-in-
possession subject to the Chapter 11 Cases.
Section 4.20 Cash Budget; Year 2000 DIP Budget. The Borrowers have,
---------------------------------
in connection with the preparation of the Cash Budget and the Year 2000 DIP
Budget, made all investigations and inquiries as the Borrowers deem necessary
and prudent therefor. A summary of the significant assumptions upon which the
Cash Budget and the Year 2000 DIP Budget are based are stated therein. The
projections and financial information contained in the Cash Budget and the Year
2000 DIP Budget are based upon good faith estimates and assumptions believed by
the Borrowers to be reasonable at the time made, it being recognized by the
Lender Parties that such financial information as it relates to future
performance is not to be viewed as fact and that actual results during the
period or periods covered by such financial information may differ from the
projected results set forth therein by a material amount.
Section 4.21 Liens. As of the Closing Date, the Liens created in
-----
favor of the Existing Lenders under the Existing Credit Facilities in accounts
receivable of the Borrowers are not subject to defenses, claims of set-off or
recoupment or consensual encumbrances or Liens of any kind except for the Liens
described on Schedule 13 hereto with respect to the Healthcare Facilities
-----------
described thereon. As of the Closing Date, (a) the Borrowers have no knowledge
of any adverse interests (except for the Liens described on such Schedule and
the Liens created in favor of the Existing Lenders under the Existing Credit
Facilities) with respect to such accounts receivable, and (b) the
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<PAGE>
Borrowers (1) have not created or suffered to exist any Liens on their
respective property other than as set forth on Schedule 7 hereto and Permitted
----------
Encumbrances and (2) are not subject to any unpaid judgments in excess of
$1,000,000 in the aggregate.
Section 4.22 Government Claims. As of the date hereof, all cost
-----------------
reports of the MHG Companies and their Subsidiaries have been audited for all
periods ending on or prior to December 31, 1996.
Section 4.23 Management Employees. Each Person serving as (or
--------------------
performing the functions of) a facility administrator or director of nursing for
any of the Healthcare Facilities (any such Person serving in such capacity as of
any date of determination being referred to herein as a "Management Employee")
is an employee of an MHG Company and performs such services exclusively for
and/or on behalf of such MHG Company and accepts no compensation for employment
from any Person other than an MHG Company and other than as set forth on
Schedule 4 hereto. Each Management Employee as of the Closing Date and the MHG
- ----------
Company which employs such Person on the Closing Date are set forth on Schedule
--------
15 annexed hereto. To the best of the Borrowers' knowledge after due inquiry,
- --
during the 90-day period preceding the Closing Date no Person who was a
Management Employee during such period became an employee of or rendered
services of a similar nature to MPAN.
ARTICLE 5. Affirmative Covenants
Each of the Borrowers agrees that, so long as any Lender has any
Credit Exposure hereunder or any Obligation remains unpaid:
Section 5.01 Information. MHG and the other Borrowers will maintain
-----------
(i) a system of accounting (including complete and accurate records of all
intercompany accounts) established and administered in accordance with sound
business practices to permit preparation of financial statements in conformity
with GAAP and preparation of the other statements and reports required under
Sections 5.01(a), (b) and (c), and (ii) separate books and records (including
but not limited to separate financial and accounting records, patient
information, personnel information and census information) for each Healthcare
Facility, which books and records, together with any applicable computer
programs and computer materials, shall be at all times owned by (or, in the case
of computer programs, licensed to) the relevant Healthcare Facility and copies
of which shall be kept at the relevant Healthcare Facility to the extent
consistent with practices of the Borrowers in effect on the Petition Date. MHG
will deliver the following information to the Administrative Agent (with copies
thereof for each Lender) and, promptly upon receipt thereof, the Administrative
Agent will deliver a copy thereof to each Lender (provided that the items
described in Sections 5.01(a), (b), (c), (d), (j), (q), (r) and (s) shall be
delivered by MHG directly to the Administrative Agent and each Lender, and not
solely to the Administrative Agent):
(a) (i) as soon as available and in any event not later than 5:00
p.m. (Eastern Time) on the 15/th/ day of each calendar month commencing February
15, 2000, consolidated cash flow reports for MHG and its Consolidated
Subsidiaries, consistent with the Cash Budget and
52
<PAGE>
otherwise substantially in the form and scope of the Cash Budget reflecting on a
line-item basis cash receipts and disbursements for the Borrowers for the
preceding four weeks, and (ii) on a monthly basis after the Closing Date, as
soon as available and in any event not later than 5:00 p.m. (Eastern Time) on
the monthly due date for such information set forth below in each case for the
month preceding such due date (A) a detailed inpatient income statement and (B)
a detailed income statement for each Healthcare Facility, all of the foregoing
to be satisfactory in form and substance to Administrative Agent:
-------------------------------------------------------------
Information Monthly Due Date
----------- ----------------
-------------------------------------------------------------
Inpatient income statement 25/th/
-------------------------------------------------------------
Healthcare Facility income statement 25/th/
-------------------------------------------------------------
(b) as soon as available and in any event no later than the forty-
fifth (45/th/) day after the end of each month for the first two calendar months
ending after the Closing Date and the thirtieth (30/th/) day after the end of
each month ending thereafter, (i) an unaudited condensed consolidated balance
sheet of MHG and its Consolidated Subsidiaries and the related condensed
consolidated statements of operations for such month, and for the portion of the
Fiscal Year ended at the end of such month, and of cash flows for the portion of
the Fiscal Year ended at the end of such month, setting forth in each case in
comparative form the unaudited consolidated statements of operations and cash
flows (to the extent available) for the corresponding month and the
corresponding portion of the previous Fiscal Year, all prepared in accordance
GAAP, (ii) a calculation of the Net Amount of Eligible Accounts as of the end of
the preceding month, and (iii) a certificate (subject to normal year-end
adjustments) of the Financial Officer as to the fairness of presentation and
consistency of such financial statements;
(c) as soon as available and in any event within 90 days after the end
of each Fiscal Year (including the Fiscal Year ended December 31, 1999), (i) the
consolidated balance sheet of MHG and its Consolidated Subsidiaries as at the
end of such Fiscal Year and the related consolidated statements of income,
stockholders' equity and cash flows of MHG and its Consolidated Subsidiaries for
such Fiscal Year, all in reasonable detail and certified by a Financial Officer
of MHG that they fairly present the financial condition of MHG and its
Consolidated Subsidiaries as at the dates indicated and the results of their
operations and their cash flows for the periods indicated and (ii) a report
thereon of Ernst & Young, LLP or other nationally recognized firm of independent
public accountants, which report shall state that such consolidated financial
statements fairly present the consolidated financial position of MHG and its
Consolidated Subsidiaries as at the dates indicated and the results of their
operations and their cash flows for the periods indicated in conformity with
GAAP (except as otherwise disclosed in such financial statements) and that the
examination by such accountants in connection with such consolidated financial
statements has been made in accordance with generally accepted auditing
standards;
(d) simultaneously with the delivery of each set of financial
statements referred to in Section 5.01(b) and (c), a certificate of a Financial
Officer of MHG, substantially in the form of
53
<PAGE>
Exhibit G hereto, (i) setting forth in reasonable detail such calculations as
- ---------
are required to establish whether the Borrowers were in compliance with the
requirements of Article 6 on the date of such financial statements, (ii) stating
whether, to the knowledge of such Financial Officer, any Default exists on the
date of such certificate and, if any Default then exists, setting forth the
details thereof and the action that MHG is taking or proposes to take with
respect thereto, (iii) stating whether, since the date of the Most Recent
Audited Financial Statements, an event has occurred or condition arisen which
has had a Material Adverse Effect which is not reflected in the financial
statements delivered simultaneously therewith and, if so, the nature of such
Material Adverse Effect, and (iv) stating whether, since the date of the Most
Recent Audited Financial Statements, there has been a change in the GAAP applied
in preparing the financial statements then being delivered from those applied in
preparing the Most Recent Audited Financial Statements which is material to the
financial statements then being delivered;
(e) within two Business Days after any Executive Officer or a
Financial Officer of MHG obtains knowledge of any Default, if such Default is
then continuing, a certificate of a Financial Officer or Executive Officer
setting forth the details thereof and the action that the Borrowers are taking
or propose to take with respect thereto;
(f) within two Business Days after any Executive Officer or a
Financial Officer of MHG obtains knowledge of any failure by a MHG Company to
comply with the provisions (enforceable or actionable on a post-Petition Date
basis) of any third party lease or mortgage and such failure could be expected
to result in an Event of Default or Material Adverse Effect, if such failure is
then continuing, a certificate of a Financial Officer or Executive Officer
setting forth the details thereof and the action that such MHG Company is taking
or proposes to take with respect thereto;
(g) promptly after any member of the ERISA Group (i) gives or is
required to give notice to the PBGC of any "reportable event" (as defined in
Section 4043 of ERISA) with respect to any Plan which might constitute grounds
for a termination of such Plan under Title IV of ERISA, or knows that the plan
administrator of any Plan has given or is required to give notice of any such
reportable event, a copy of the notice of such reportable event given or
required to be given to the PBGC; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA or notice that any Multiemployer
Plan is in reorganization, is insolvent or has been terminated, a copy of such
notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent
to terminate, impose liability (other than for premiums under Section 4007 of
ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of
such notice; (iv) applies for a waiver of the minimum funding standard under
Section 412 of the Internal Revenue Code, a copy of such application; (v) gives
notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of
such notice and other information filed with the PBGC; (vi) gives notice of
withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such
notice; or (vii) fails to make any payment or contribution to any Plan or
Multiemployer Plan or makes any amendment to any Plan which has resulted or
could result in the imposition of a Lien or the posting of a bond or other
security, a certificate of the Financial Officer setting forth details as to
such occurrence and the action, if any, which the Borrowers or the applicable
member of the ERISA Group is required or proposes to take;
54
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(h) as soon as reasonably practicable after any Executive Officer
obtains knowledge of the commencement of an action, suit or proceeding against
any MHG Company before any court or arbitrator or any governmental body, agency
or official in which there is a reasonable possibility of an adverse decision
which could have a Material Adverse Effect or which in any manner questions the
validity of any Financing Document, a certificate of the Financial Officer
setting forth the nature of such action, suit or proceeding and such additional
information as may be reasonably requested by any Lender through the
Administrative Agent;
(i) promptly upon MHG's receipt from its independent public
accountants of any management letter which indicates a material weakness in the
reporting practices of any MHG Company, a description of such material weakness
and any action being taken with respect thereto;
(j) promptly upon their becoming available, copies of all press
releases and other statements made available generally by any MHG Company to the
public concerning material developments in its business;
(k) promptly after the same is completed and prior to the filing
thereof, all pleadings, motions, applications, judicial information, financial
information and other documents (with a copy to counsel to the Administrative
Agent) proposed to be filed by or on behalf of the Borrowers with the Court or
the United States Trustee in the Chapter 11 Cases or distributed by or on behalf
of Borrowers to any official committee appointed in the Chapter 11 Cases; and
without limiting the generality of the foregoing, the Borrowers shall promptly
deliver to, and discuss with, the Administrative Agent and its counsel any and
all information and developments in connection with any event or condition which
is likely to have a material effect on the Borrowers or the Chapter 11 Cases,
including, without limitation, the progress of any disclosure statement or any
proposed Chapter 11 plan of reorganization, except where such information is
protected as attorney work product or is attorney-client privileged;
(l) no later than 5:00 p.m. (Eastern Time) of the second Business Day
of each month following the Closing Date, (i) a status report indicating (x) any
Healthcare Facilities which are subject to terminated Medicare or Medicaid
contracts, "fast track" 23-day termination of Medicare or Medicaid contracts or
denial of payment for new Medicare or Medicaid admissions or are subject to or
under involuntary receivership or involuntary management and (y) any admissions
hold or current civil money penalties in excess of $2,000 per day or are
operating under involuntary receivership or involuntary management, in
substantially the form of Exhibit L hereto (a "Healthcare Status Report", and
---------
any of the foregoing events required to be disclosed thereon being a "Reporting
Event") and (ii) a report indicating (x) any Asset Sales, the dates of such
sales, the gross proceeds and Net Cash Proceeds received from each such sale and
any Asset Sales which are being negotiated or are otherwise pending on the date
of such report and (y) any properties subject to a Casualty Event or a
Condemnation Event, the amount of any Casualty Proceeds from any Casualty Event
received by the Borrowers, and the date of receipt thereof;
(m) within two Business Days after any Executive Officer or a
Financial Officer of MHG obtains knowledge of a change in status with respect to
any Reporting Event (other than current civil money penalties) or any Healthcare
Facility becoming subject to an additional
55
<PAGE>
Reporting Event (other than a current civil money penalty), written notice
thereof setting forth the nature of such Reporting Event and what action the
Borrowers have taken, are taking or propose to take with respect thereto;
(n) with reasonable notice and upon the reasonable request of any
Lender from time to time, each MHG Company shall make available for inspection
by such Lender at the chief executive office or the Houston, Texas office of
MHG, promptly after the same is available or received, (a) copies of each cost
report or interim cost report filed by any Borrower with Medicare, Medicaid or
any other third party payor or any summaries thereof prepared by any Borrower
and a copy, when received, of any response to such reports by the recipient
thereof; (b) copies of any and all statements, audits, studies or reports
submitted by or on behalf of any Borrower to any Governmental Authority or any
nationally-recognized accreditation association or commission; (c) copies of any
and all audits, studies, or reports prepared by any Governmental Authority or
nationally recognized accreditation association or commission relating
specifically to the business or operations of any Borrower; and (d) any claims
by any Governmental Authority for Medicaid/Medicare overpayments or under the
False Claims Act, in each case except to the extent that making such items or
information available for such inspection is prohibited by Applicable Laws
(notwithstanding the above, neither the Agents, the Lenders nor any of their
respective advisors shall be given access to any attorney work product, or any
attorney-client privileged communication);
(o) promptly upon any Person becoming or ceasing to be a Subsidiary of
MHG, an update to Schedule 3 hereto setting forth the information described in
----------
Section 4.13 with respect to each Subsidiary of MHG (it being understood that
nothing in this Section 5.01(o) shall be deemed to permit or authorize the
creation, dissolution, liquidation or acquisition of a Subsidiary of MHG not
otherwise permitted under this Agreement);
(p) from time to time such additional information regarding the
financial position, results of operations or business of any MHG Company or the
Chapter 11 Cases or such other matters relating to any MHG Company as any Lender
may reasonably request through the Administrative Agent;
(q) promptly after the same is available but in no event later than
5:00 p.m. (Eastern time) (i) on the fifteenth day of every calendar month
commencing February 15, 2000, (ii) five Business Days after a Financial Officer
of MHG has delivered a statement pursuant to Section 5.01(r)(ii)(B) indicating
that the Borrowers believe that the projections and financial information set
forth in the Cash Budget do not represent reasonable good faith estimates as of
the date of such statement, and (iii) on the fifth Business Day after the end of
each week ending after November 30, 2000, a supplement to the Cash Budget
setting forth, for the period commencing the week immediately following the date
such delivery is required and ending thirteen weeks later (or on the Stated
Maturity Date, if earlier), a consolidated cash forecast for the Borrowers in
substantially the form of the Cash Budget and in substance satisfactory to
Required Lenders;
(r) as soon as available and in any event not later than 5:00 p.m.
(Eastern Time) on the second Business Day of each week after the Closing Date,
(i) a report setting forth the weekly
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average census (the "Nursing Home Census") in each Nursing Home Facility (other
than any Managed Facilities) and the Nursing Home Occupancy (all such
calculations to be made in a manner consistent with MHG's historical practices
in compiling and reporting such data), and (ii) a report setting forth
cumulative net cash flow of the Borrowers for the preceding week, together with
a statement of a Financial Officer of MHG as to (A) whether the "Cash Receipts"
amount set forth in such report varies adversely from the amount of the
corresponding "Cash Receipts" amount set forth in the Cash Budget for the
corresponding week by an amount exceeding 20% of such amount set forth in the
Cash Budget, and (B) whether the Borrowers believe that the projections and
financial information set forth in the Cash Budget with respect to periods
following such date represent, as of such date, reasonable good faith estimates
and that the estimates and assumptions on which the Cash Budget is based are
reasonable as of such date, all of the foregoing to be in form and substance
satisfactory to Administrative Agent; and
(s) promptly after the filing thereof, copies of (i) all pleadings,
motions, applications and other documents filed by or on behalf of MPAN with the
United States Bankruptcy Court with jurisdiction over MPAN's bankruptcy cases or
the United States trustee in such cases and (ii) all pleadings served on the
debtors in such cases; provided, however, that in the case of any such pleading,
motion or application described in clause (i) which affects any of the MHG
Companies, a copy of such filing shall be provided to the Administrative Agent
promptly after the same is completed and prior to the filing thereof.
Section 5.02 Maintenance of Property. Each MHG Company will keep all
-----------------------
property useful and necessary in its business in good working order and
condition, ordinary wear and tear and casualty excepted. Each MHG Company will
maintain all property leased to it and all property operated by it under a
management contract as required by the provisions of the applicable lease or
management contract.
Section 5.03 Insurance.
---------
(a) Each MHG Company will maintain insurance with responsible
companies in such amounts and against such risks as is usually carried by owners
of similar businesses and properties in the same general areas in which it
operates, including self-insurance consistent with past practice. In addition,
each MHG Company will insure all property leased to it and all property operated
by it under a management contract as required by the provisions of the
applicable lease or management contract.
(b) If any MHG Company fails to maintain any insurance policy required
to be maintained under this Section 5.03, the Collateral Agent shall have the
right to maintain such policy or obtain a comparable policy, and in either case
pay the premiums therefor. If the Collateral Agent maintains or obtains any
such policy and pays the premiums therefor, Borrowers will reimburse the
Collateral Agent upon demand for its expenses in connection therewith, including
interest thereon for each day at a rate per annum equal to the Default Rate.
Section 5.04 Compliance with Law. Each MHG Company will comply in
-------------------
all material respects with all Applicable Laws (including Medicare Regulations,
Medicaid Regulations,
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Environmental Laws and ERISA and the rules and regulations thereunder), except
where (i) the necessity of compliance therewith is contested in good faith by
appropriate measures or proceedings, in which case adequate and reasonable
reserves will be established in accordance with GAAP and notice of each such
contest relating to Medicare Regulations, Medicaid Regulations, Environmental
Regulations and ERISA (other than contests in the ordinary course of business
set forth in the form of footnotes to cost reports) shall be given to the
Administrative Agent, or (ii) failures to comply therewith could not, in the
aggregate, be expected to have a Material Adverse Effect.
Section 5.05 Maintenance of Existence, Rights, Etc. Each MHG Company
-------------------------------------
will preserve, renew and keep in full force and effect its existence and its
rights, privileges, licenses and franchises necessary or desirable in the normal
conduct of business; provided, however, that MHG Companies may consolidate or
merge to the extent permitted under Section 7.03.
Section 5.06 Use of Proceeds and Letters of Credit. Subject to the
-------------------------------------
provisions of this Section 5.06, the proceeds of all Loans shall be applied in
accordance with this Agreement and the Cash Budget. The proceeds of the Loans
and the benefits of the Letters of Credit shall be applied to fund working
capital requirements and general corporate purposes relating to Borrowers' post-
Petition Date operations, all in accordance with, and limited by, those items
set forth in the Cash Budget; provided that no portion of the Loans or any cash
Collateral or the benefits of the Letters of Credit shall be used, directly or
indirectly, to (i) finance or make or support any Restricted Payment except as
permitted under Section 7.15; (ii) make or support any payment or prepayment
that is prohibited under this Agreement, including any payment or prepayment in
respect of Prepetition Indebtedness to the extent prohibited hereunder; (iii)
make or support any payment in settlement of any pre-Petition Date claim, action
or proceeding, before any court, arbitrator or other governmental body other
than as permitted by a First Day Order or Required Lenders; (iv) make or support
any payment on behalf or for the benefit of any Excluded Subsidiary (except
Investments permitted under Section 7.04(f) and reflected in the Cash Budget) or
(v) make or support any payment in respect of (y) (a) investigating, objecting
to, challenging in any manner, or raising any defenses to, the validity,
perfection, priority or enforceability of the security interests granted in
favor of the Existing Lenders and Lenders pursuant to the Existing Credit
Facilities, the Financing Documents or any order of the Court or (b) the
enforceability of any of the obligations of any Borrower owing to the Existing
Lenders, the agents of the Existing Lenders, the Agents or Lenders under the
Existing Credit Facilities or the Financing Documents (although, subject to the
Carve-Out, the professionals for an official creditors' committee may be paid
(to the extent allowed by the Court) fees and expenses incurred in analyzing
such liens or claims under the Existing Credit Facilities in an aggregate amount
not to exceed $25,000), or (z) otherwise investigating, commencing or
prosecuting any claim or cause of action against any Agent, Existing Lender, or
DIP Lender.
Section 5.07 Future Actions with Respect to Collateral.
-----------------------------------------
(a) Subject to obtaining any third party approvals which are required
under the Bankruptcy Code, the Borrowers shall as soon as reasonably practicable
after the Closing Date deliver to the Collateral Agent a Fee Mortgage or
Leasehold Mortgage with respect to any real property interest (whether owned or
leased) of any of the MHG Companies that the Collateral Agent
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shall request from time to time on or after the Closing Date, and the
appropriate UCC form for the related fixture filing, all in form and substance
satisfactory to the Collateral Agent.
(b) Without expense or cost to any Agent or Lenders, each Borrower
shall from time to time hereafter execute, acknowledge, file, record, do and
deliver all and any further acts, deeds, conveyances, mortgages, deeds of trust,
deeds to secure debt, security agreements, hypothecations, pledges, charges,
assignments, financing statements and continuations thereof, notices of
assignment, transfers, certificates, assurances and other instruments as any
Agent may from time to time reasonably request and that do not involve a
material expansion of the Borrowers' obligations or liabilities hereunder in
order to carry out more effectively the purposes of this Agreement, the other
Financing Documents, the Interim Borrowing Order or the Borrowing Order,
including to subject any Collateral, intended to now or hereafter be covered, to
the Liens created by the Collateral Documents, to perfect and maintain such
Liens, and to assure, convey, assign, transfer and confirm unto the Collateral
Agent the property and rights thereby conveyed and assigned or intended to now
or hereafter be conveyed or assigned or that any Borrower may be or may
hereafter become bound to convey or to assign to the Collateral Agent or for
carrying out the intention of or facilitating the performance of the terms of
this Agreement, any other Financing Documents, the Interim Borrowing Order or
the Borrowing Order, registering or recording this Agreement or any other
Financing Document. Without limiting the generality of the foregoing, the
Borrowers shall deliver to the Collateral Agent, promptly upon receipt thereof,
all promissory notes or similar instruments received by the Borrowers after the
Closing Date and take all actions and execute all endorsements or documents
necessary or reasonably requested by the Collateral Agent to perfect the
Collateral Agent's Liens in any such promissory note or other instrument or any
other Investment acquired by any Borrower.
(c) The Borrowers shall jointly and severally pay all filing,
registration and recording fees and all expenses incident to the execution and
acknowledgement of any Mortgage or other Financing Document, including any
instrument of further assurance described in Section 5.07(b), and shall pay all
fees and expenses, mortgage recording taxes, transfer taxes, general intangibles
taxes and governmental stamp and other taxes, duties, imposts, assessments and
charges arising out of or in connection with the execution, delivery, filing,
recording or registration of any Mortgage or other Financing Document, including
any instrument of further assurance described in Section 5.07(b), or by reason
of its interest in, or measured by amounts payable under, the Notes, the
Mortgages or any other Financing Document, including any instrument of further
assurance described in Section 5.07(b), (excluding income, franchise and doing
business Taxes), and shall pay all stamp Taxes and other Taxes required to be
paid on the Notes or any other Financing Document; provided, however, that such
Borrower may contest in good faith and through appropriate proceedings, any such
Taxes, duties, imposts, assessments and charges; provided further, however, that
such Borrower shall pay all such Taxes, duties, imposts and charges when due to
the appropriate taxing authority during the pendency of any such proceedings if
required to do so to stay enforcement thereof. If any Borrower fails to make
any of the payments described in the preceding sentence within 10 days after
notice thereof from the Collateral Agent (or such shorter period as is necessary
to protect the loss of or diminution in value of any Collateral by reason of tax
foreclosure or otherwise, as determined by the Collateral Agent) accompanied by
documentation verifying the nature and amount of such payments, the Collateral
Agent may (but shall not be obligated to) pay the
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amount due and Borrowers shall jointly and severally reimburse all amounts in
accordance with the terms hereof.
(d) The Collateral Agent may, upon at least five days' prior written
notice to the Borrowers, (i) appear in and defend any action or proceeding, in
the name and on behalf of the Administrative Agent, Lenders or any Borrower, in
which any Agent or any Lender is named or which the Collateral Agent in its sole
discretion determines is likely to materially adversely affect any Collateral,
any Collateral Document, the Lien thereof or any other Financing Document and
(ii) institute any action or proceeding which the Collateral Agent determines
should be instituted to protect the interest or rights of the Administrative
Agent and Lenders in any Collateral or under this Agreement or any other
Financing Document. The Borrowers, jointly and severally, agree that all
reasonable and actual costs and expenses expended or otherwise incurred pursuant
to this subsection (including reasonable attorneys' fees and disbursements) by
any Agent shall be paid pursuant to Section 11.03 hereof.
(e) Whenever any asset is added to the Collateral pursuant to this
Section 5.07, the Borrowers shall deliver to the Agents such legal opinions and
other documents as any Agent may reasonably request relating to the existence of
the relevant Grantor, the corporate or other authority for and validity of the
Collateral Documents applicable thereto, the creation and perfection (or proper
place and form for filing or recordation) of the Lien purportedly created
thereby and any other matters relevant thereto, all in form and substance
reasonably satisfactory to the Agents.
Section 5.08 Casualty Events.
---------------
(a) All Casualty Proceeds received by the Collateral Agent or any MHG
Company shall be deposited in the appropriate Casualty Proceeds Account (as
defined in the Security Agreement) established pursuant to Section 7(b) of the
Security Agreement and applied as follows:
(i) such Casualty Proceeds will be released by the Collateral
Agent from time to time, in accordance with Section 18 of the Security
Agreement, to restore, repair, replace or rebuild the asset in respect of
which such Casualty Proceeds were received; and
(ii) if within 60 days after such Casualty Proceeds are received,
the relevant MHG Company shall not have expended or committed to expend the
full amount of such Casualty Proceeds to restore, repair, replace or
rebuild the asset in respect of which such Casualty Proceeds were received
(the excess of the amount of such Casualty Proceeds over the amount of such
expenditures and commitments, being "Excess Casualty Proceeds"), then such
Excess Casualty Proceeds shall be applied to prepay Loans to the extent
required pursuant to Section 2.08(e) within two Business Days after the end
of such 60-day period.
(b) If any Condemnation Event occurs with respect to property owned or
leased by any MHG Company, or if any negotiation or proceeding is commenced
which might result in such a Condemnation Event, or if any such Condemnation
Event is proposed or threatened, such MHG Company (i) will, promptly after
receiving notice or obtaining knowledge thereof, do all
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things deemed necessary or appropriate by it to preserve its interest in such
property and promptly make claim for awards payable with respect thereto and
diligently pursue to conclusion such claim and any suit, action or other
proceeding necessary or appropriate to obtain payment thereof and (ii) will not
settle any such claim, negotiation or proceeding without the consent of the
Collateral Agent if an Enforcement Notice is in effect.
Section 5.09 Cash Management System; Credit and Collection Policy. The
----------------------------------------------------
Borrowers shall maintain the Cash Management System (including through timely
compliance with their obligations to pay returned items and other Obligations
arising in the ordinary course of operation of the Cash Management System) and
the Credit and Collection Policy.
Section 5.10 Certain Orders. On or before the date which is four months
--------------
after the Petition Date, the Borrowers shall file with the Court a joint plan of
reorganization and disclosure statement for the Borrowers and an appropriate
motion, application or other pleading and other material documents requesting
(i) the confirmation and consummation of a joint plan of reorganization for the
Borrowers, all of the foregoing (including without limitation the terms and
conditions of such plan of reorganization and all payments and distributions to
be made in connection therewith) to be in form and substance satisfactory to
Required Lenders in their sole discretion or (ii) definitive agreements for the
sale of all, substantially all, or a material portion of their assets, all in
form and substance satisfactory to Required Lenders in their sole discretion.
Section 5.11 Inspection Rights; Lender Meeting.
---------------------------------
(a) Each Borrower shall permit, and shall cause each of its Subsidiaries
to permit any authorized representatives designated by any Lender and
consultants and advisors identified by the Administrative Agent or Required
Lenders to visit and inspect any of the properties of Borrowers, to inspect,
copy and take extracts from its and their books and records (including but not
limited to separate financial and accounting records, patient information (to
the extent such information is of the type customarily disclosed in connection
with a disposition of a healthcare facility), personnel information (to the
extent permitted under Applicable Law) and census information), and to discuss
its and their affairs, finances and accounts with its and their officers,
employees, consultants (including, without limitation, any personnel or
consultants engaged for the benefit or on behalf of any Borrower) and
independent public accountants (provided that Borrowers may, if they choose, be
present at or participate in any such discussion), all upon reasonable notice
and at such reasonable times during normal business hours and as often as may
reasonably be requested; provided that any such consultants and advisors
identified by the Administrative Agent or Required Lenders shall have signed a
written agreement to comply with Section 11.11. In addition to the foregoing,
the Borrowers will, as promptly as practicable after any request therefor by the
Administrative Agent, provide to the Administrative Agent and the Lenders copies
of the records of any Healthcare Facility referred to in clause (ii) of the
first sentence of Section 5.01.
(b) The Borrowers and each of their Subsidiaries will, upon the request of
the Administrative Agent or Required Lenders, participate in meetings of the
Agents and Lenders to be held at Borrowers' corporate offices (or at such other
location as may be agreed to by Borrowers and
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the Administrative Agent) at such times as may be agreed to by Borrowers and the
Administrative Agent.
Section 5.12 Creditor Schedule. The Borrowers, promptly from time to time
-----------------
upon the request of the Administrative Agent, shall provide to the
Administrative Agent a schedule describing the creditors (in detail (including
names and addresses thereof) reasonably satisfactory to the Administrative
Agent) of any MHG Company or Healthcare Facility specified by the Administrative
Agent in such request and the amount and nature of the obligations owed to each
such creditor.
Section 5.13 Transition Management.
---------------------
(a) The Borrowers shall not permit MPAN to cease for any reason to
supervise those aspects of the management of each Healthcare Facility which MPAN
supervises as of the Closing Date in substantially the same manner in which MPAN
supervises such aspects of management as of the Closing Date, except as set
forth in this Section 5.13.
(b) In the event that (i) the Required Lenders or the Administrative
Agent on behalf of the Required Lenders shall have notified the Borrowers that
MPAN is to be replaced in its supervisory capacity with respect to any or all
Healthcare Facilities (the date of any such notice with respect to any
Healthcare Facility being a "Lender Termination Notice Date"), or (ii) MPAN
shall have notified the Borrowers and the Administrative Agent that MPAN intends
to cease acting in its supervisory capacity with respect to any or all
Healthcare Facilities (the date of any such notice with respect to any
Healthcare Facility being a "MPAN Termination Notice Date"), the Borrowers shall
cause MPAN to cease performing its functions as such supervisor of the relevant
Healthcare Facility or Healthcare Facilities 90 days after the relevant Lender
Termination Notice Date or the relevant MPAN Termination Notice Date, subject in
each case to receipt of the approval from any regulatory agency (if such
approval is required) (such date of cessation being the "Termination Effective
Date" with respect to such Healthcare Facility); provided, that no such notice
may be given until after the date which is five months after the Petition Date.
The Borrowers hereby agree that on a Termination Effective Date with respect to
a Healthcare Facility with respect to which an MPAN Termination Notice Date has
occurred, the automatic stay of Section 362 of the Bankruptcy Code with respect
to such Healthcare Facility (and all Collateral related thereto) in favor of the
Collateral Agent shall be deemed terminated for the benefit of the Lenders and
in favor of the Existing Lenders. At all times after the Petition Date until
MPAN is permitted under this Section to cease performing its supervisory
services with respect to any Healthcare Facility, the Borrowers shall and shall
cause MPAN to (A) without limiting Section 5.11, cooperate fully with the
Administrative Agent and the Required Lenders and any consultants or advisors or
other Persons identified by the Administrative Agent or the Required Lenders in
providing reasonable access to such Healthcare Facility, employees of the
Borrowers and the Borrowers' books and records, and (B) supervise aspects of the
management of such Healthcare Facility with substantially the same diligence and
standard of care which MPAN exercises with respect to its own healthcare
facilities similar to such Healthcare Facility, including with respect to
providing for the proper care, safety, and well being of the patients in such
Healthcare Facility.
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(c) At all times after a Lender Termination Notice Date or a MPAN
Termination Notice Date with respect to a Healthcare Facility, the Borrowers
shall and shall cause MPAN to (i) consent to the entry of an order reasonably
satisfactory to the Administrative Agent in the Chapter 11 Cases authorizing the
retention of a Replacement Manager (as defined below) with respect to such
Healthcare Facility and (ii) promptly perform or cause to be performed any and
all acts which are reasonably necessary or that Agent may reasonably request to
transfer as of the Termination Effective Date the supervisory and management
functions performed by MPAN and MHG in an orderly and effective manner to any
Person or Persons identified by the Administrative Agent or the Required Lenders
with respect to such Healthcare Facility (such Person or Persons so identified
being the "Replacement Manager" with respect to such Healthcare Facility).
Without limiting the generality of the foregoing, the Borrowers shall not permit
any of the books and records (including but not limited to separate financial
and accounting records, patient information, personnel information and census
information) or any applicable computer programs and computer materials for any
such Healthcare Facility to be removed from such Healthcare Facility. After a
MPAN Termination Notice Date with respect to any Healthcare Facility, the
Borrowers shall and shall cause MPAN to, at the request of the Administrative
Agent or the Required Lenders, promptly perform or cause to be performed any all
acts which are reasonably necessary or that the Administrative Agent may
reasonably request to sell or otherwise dispose of such Healthcare Facility (and
all Collateral related thereto) under Section 363 of the Bankruptcy Code or
otherwise as of the Termination Effective Date with respect thereto.
(d) Anything contained herein or in any Financing Document to the contrary
notwithstanding, no provision of this Agreement or any other Financing Document
shall be construed as or deemed a waiver, release or discharge by any Agent or
Lender of any right or claim against MPAN based upon or arising out of its
supervision of any aspect of the management of any of the Healthcare Facilities
or any other event, occurrence, act or omission, in each case whether before or
after the Closing Date.
Section 5.14 Overhead Payments. The Borrowers shall make Overhead
-----------------
Payments to MPAN at the times and in accordance with the terms set forth in
Section 7.07 so long as and to the extent that MPAN provides supervisory
services with respect to certain aspects of the management of the Healthcare
Facilities in substantially the same manner in which MPAN supervises such
aspects of management as of the Closing Date.
Section 5.15 Post Closing Deliveries. The Borrowers shall deliver to the
-----------------------
Administrative Agent as soon as possible after receipt by the Borrowers and in
any event within 30 days after the Closing Date, to the extent not delivered on
or prior to the Closing Date, personal property Lien and tax and judgment Lien
searches with respect to all personal, mixed and real properties of the
Borrowers in all jurisdictions and filing offices where, in the case of personal
property Liens, the filing of a financing statement is required in order to
perfect a security interest in such property and, in the case of tax Liens and
judgment Liens, recordation of such Liens is necessary to give notice to other
creditors. The results of such searches shall not reflect any Liens not
described in Schedule 7 hereto and shall otherwise be reasonably satisfactory to
----------
the Administrative Agent. The Borrowers shall also deliver to the
Administrative Agent promptly after the Closing Date copies of the management
agreements relating to the Oakwood Facilities.
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ARTICLE 6. Financial Covenants
Each of the Borrowers agrees that, so long as any Lender has any Credit
Exposure hereunder or any interest or fee accrued hereunder remains unpaid:
Section 6.01 Consolidated EBITDAR.
--------------------
Consolidated EBITDAR, calculated on a cumulative basis from January 1, 2000
through the last day of each month set forth below, shall not be less than the
amount set forth below opposite such month:
Month Amount
----- ------
January 2000 $ 2,934,000
February 2000 $ 6,879,000
March 2000 $11,890,000
April 2000 $16,339,000
May 2000 $20,558,000
June 2000 $24,577,000
July 2000 $28,547,000
August 2000 $32,226,000
September 2000 $35,552,000
October 2000 $40,378,000
November 2000 $45,233,000
December 2000 $49,710,000
Section 6.02 Nursing Home Occupancy. The Borrowers shall not permit
----------------------
Nursing Home Occupancy as of any week during any month set forth below to be
less than the minimum Nursing Home Occupancy amount corresponding to such month
as set forth below:
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Month Minimum Nursing
----- ---------------
Home Occupancy
--------------
January 2000 87.40%
February 2000 87.79%
March 2000 88.04%
April 2000 88.17%
May 2000 88.22%
June 2000 88.09%
July 2000 88.87%
August 2000 88.20%
September 2000 88.49%
October 2000 88.00%
November 2000 88.00%
December 2000 88.00%
Section 6.03 Receivables. The Borrower shall not permit the Net Amount
-----------
of Eligible Accounts at any time to be less than $40,000,000.
Section 6.04 Compliance with Cash Budget. Each Borrower agrees that if
---------------------------
the "Cash Receipts" amount set forth in the report for any four consecutive week
period delivered pursuant to Section 5.01(a)(i) (it being understood that only a
four-week period covered by such a report shall be the basis for determining
compliance with this Section 6.04) varies adversely from the amount of the
corresponding "Cash Receipts" amount set forth in the Cash Budget (the "Required
Cash Receipts Amount") for each of the corresponding weeks by an amount
exceeding 20% of the Required Cash Receipts Amount for each of the corresponding
weeks, such variance shall constitute an immediate Event of Default under this
Agreement.
Section 6.05 Capital Expenditures. The Borrowers shall not make any
--------------------
Consolidated Capital Expenditures, calculated on a cumulative basis from January
1, 2000 through the last day of each month set forth below, in excess of the
correlative maximum amount set forth below:
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Maximum Consolidated
--------------------
Month Capital Expenditures
----- --------------------
Amount
------
March 2000 $4,777,000
June 2000 $6,021,000
September 2000 $7,653,000
December 2000 $9,285,000
; provided, that the Borrowers shall not make any Consolidated Capital
Expenditures other than (i) necessary maintenance capital expenditures, (ii)
capital expenditures which are (x) required as a result of surveys, inspections
or reviews of such properties by Governmental Authorities or (y) necessary to
avoid negative results of such surveys, inspections or reviews, which results
would require such expenditures, (iii) capital expenditures with respect to
"owned buildings" of the Borrowers so long as such expenditures are disclosed
and reasonably identified in advance to the Lenders and the Administrative Agent
or the Required Lenders do not determine, in their sole discretion, that such
expenditures would not be favorable to the economic interests of the Lenders and
the Existing Lenders, and (iv) other capital expenditures with the prior written
approval of the Required Lenders; and provided further, that, in any event, all
Consolidated Capital Expenditures shall be set forth in the Cash Budget.
ARTICLE 7. Negative Covenants
Each of the Borrowers agrees that, so long as any Lender has any Credit
Exposure hereunder or any Obligation remains unpaid:
Section 7.01 Limitation on Debt. The Borrowers and their Subsidiaries
------------------
(other than the Excluded Subsidiaries) will not incur or be liable with respect
to (i) any Debt of a type described in clause (i), (ii) or (iv) of the
definition of "Debt" in Section 1.01 or (ii) any Guarantee of any such Debt,
except:
(a) Debt outstanding under the Financing Documents;
(b) Permitted Intercompany Debt;
(c) Prepetition Indebtedness without giving effect to any extensions,
renewals, refinancings, supplemental borrowings or other incurrences thereof;
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(d) Debt consisting of trade obligations arising in the ordinary course of
business after the Petition Date; and
(e) Guarantees by MHG of post-Petition Date obligations of other Borrowers
in the ordinary course of business;
(f) Debt incurred in connection with the rejection of unexpired leases
and executory contracts in the Chapter 11 Cases; provided, that the obligation
of any Borrower in respect of such Debt shall qualify as a general, unsecured,
non-priority claim pursuant to appropriate order of the Court;
(g) Not more than $500,000 of unsecured Debt at any time outstanding
which is not otherwise permitted pursuant to this Section 7.01; and
(h) Debt (x) in respect of Capital Leases or (y) secured by Liens
permitted under Section 7.02(g), provided that (i) such Debt is incurred to
finance necessary capital expenditures of the MHG Companies in the ordinary
course of business, (ii) the aggregate principal amount of such Debt, together
(without duplication) with any Consolidated Capital Expenditures made during the
relevant period, shall not exceed the maximum amount set forth in Section 6.05
for the relevant period, and (iii) the incurrence of such Debt and the
expenditures made in connection therewith shall be set forth in the Cash Budget.
Section 7.02 Negative Pledge. No MHG Company (other than the Excluded
---------------
Subsidiaries) will create, assume or suffer to exist any Lien on any asset now
owned or hereafter acquired by it (or any income therefrom or any right to
receive income therefrom), or apply to the Court for authority to do any of
the foregoing, except:
(a) Liens existing as of the Petition Date which (i) were created in
favor of the Existing Lenders under the Existing Credit Facilities or (ii) are
set forth on Schedule 7 hereto;
----------
(b) Permitted Encumbrances;
(c) Liens (i) created in favor of the Collateral Agent (for the benefit of
Lenders) pursuant to the Collateral Documents or (ii) authorized by the
Interim Borrowing Order or the Borrowing Order;
(d) the Existing Lender Lien;
(e) Permitted Adequate Protection Liens;
(f) Liens arising in connection with Capital Leases permitted under
Section 7.01(h)(x); provided that no such Lien shall extend to or cover any
Collateral or assets other than the assets subject to such Capital Leases; and
(g) Liens securing Debt permitted by Section 7.01(h)(y) incurred to
finance the acquisition, construction or improvement of any real property or
tangible personal property
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assets acquired or held by any MHG Company in the ordinary course of business;
provided that (1) such Liens shall be created within 30 days after the
acquisition, construction or improvement of such assets, and (2) the principal
amount of Debt secured by any such Liens shall at no time exceed 100%, and the
proceeds of such Debt shall be used to provide not less than 75%, of the
original purchase price of such asset or the amount expended to construct or
improve such asset, as the case may be; and provided further, (i) such Liens
attach solely to the assets financed with such Debt, (ii) no recourse may be
had under the Debt secured by such Lien against any Person other than the
borrower of such Debt for the payment of principal, interest, fees, costs or
premium on such Debt or for any claim based thereon, and (iii) the financial
covenants under any Debt secured by such Liens are, in each case, no more
restrictive than those set forth in this Agreement.
Section 7.03 Consolidations, Mergers and Asset Sales. No MHG Company
---------------------------------------
will consolidate or merge with or into, or sell, lease or otherwise dispose of
any Healthcare Facility or any of its other assets outside the ordinary course
of business to any other Person without (i) prior written approval of Required
Lenders and (ii) an appropriate approval of the Court, to the extent such Court
approval is required pursuant to the Bankruptcy Code or any order of the Court;
provided that (i) any Borrower may merge or consolidate with and into any other
Borrower or any Borrower may be liquidated, wound up or dissolved, or all or
substantially all of any Borrower's business, property or assets may be
conveyed, sold, leased, transferred or otherwise disposed of, to any Borrower,
so long as the Borrowers shall have taken all actions and executed all documents
necessary or reasonably requested by the Collateral Agent to preserve and
protect the Collateral Agent's Lien (and the perfection and priority thereof) in
the assets of such Borrower after giving effect to such transaction, and such
transaction shall not adversely affect the Collateral Agent's Lien in the assets
of the MHG Companies involved in such transaction or the value thereof and (ii)
Borrowers may sell Healthcare Facilities, so long as such sales are approved by
Required Lenders, for purchase prices acceptable to Required Lenders (subject to
customary purchase price adjustments and allowances for transaction expenses)
pursuant to asset sale agreements and an order of the Court in each case in form
and substance satisfactory to Required Lenders and as long as the Net Cash
Proceeds of such Asset Sale are applied as required by Section 2.08(a).
Section 7.04 Limitations on Investments. After the Closing, neither the
--------------------------
Borrowers nor any of their Subsidiaries (other than the Excluded Subsidiaries)
will make, acquire or hold any Investment, except:
(a) Investments (including Investments in Excluded Subsidiaries)
existing on the Closing Date and set forth in Schedule 8 hereto;
----------
(b) Investments by the Borrowers in any of the other Borrowers;
(c) advances to employees of the MHG Companies to meet expenses incurred
by such employees in the ordinary course of business;
(d) trade credit extended on usual and customary terms in the ordinary
course of business;
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(e) Investments consisting of contributions, loans or advances to Excluded
Subsidiaries, provided that the aggregate amount so contributed, loaned or
advanced after the Closing Date shall not exceed $1,000,000; and
(f) Temporary Cash Investments.
Section 7.05 Limitations on Transactions with Affiliates. No MHG Company
-------------------------------------------
will, directly or indirectly, pay any funds to or for the account of, make any
Investment in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with any joint enterprise or other joint arrangement with, any
Affiliate; provided that the foregoing shall not prohibit any MHG Company from
(a) engaging in transactions with any other MHG Company; (b) engaging in
transactions described on Schedule 4 hereto; (c) making sales to or purchases
----------
from any Affiliate and, in connection therewith, extending credit or making
payments, or from making payments for services rendered by any Affiliate (other
than payments to MPAN for supervising the management of Healthcare Facilities)
if such sales or purchases are made or such services are (i) rendered in the
ordinary course of business and on terms and conditions at least as favorable to
such MHG Company as the terms and conditions which would apply in a similar
transaction with a Person not an Affiliate; (ii) approved in writing by Required
Lenders (which approval may relate to categories or groups of transactions); and
(iii) are approved by the Court to the extent such approval is required pursuant
to the Bankruptcy Code or an order of the Court; or (d) making payments to MPAN
permitted under Section 7.07.
Section 7.06 Limitation on Restrictions Affecting Subsidiaries. No MHG
-------------------------------------------------
Company will enter into, or suffer to exist, any agreement (other than the
Financing Documents) which is binding or enforceable after the Petition Date,
which prohibits or limits the ability of any Subsidiary of the Borrowers (except
an Excluded Subsidiary) to (i) pay dividends or make other distributions or pay
any Debt owed to any MHG Company, (ii) make loans or advances to any MHG Company
or (iii) create, incur, assume or suffer to exist any Lien upon any of its
property, assets or revenues, whether now owned or hereafter acquired, to secure
the obligations of any MHG Company under any Financing Document, except
agreements for Debt permitted under Section 7.01(h) which prohibit the creation
of Liens upon the property securing such Debt.
Section 7.07 Restricted Payments. No MHG Company will declare or make
-------------------
any Restricted Payment on or after the Closing Date other than (i) as permitted
by Section 7.15 and clauses (a), (b) and (c) of the proviso to Section 7.05; and
(ii) as long as no Specified Default has occurred and is continuing or would
result therefrom, MHG may make weekly payments to MPAN on the last Business Day
of each of the first four weeks of each month after the Closing Date, in an
amount in each such week not to exceed 1.25% of "Revenues" projected in the Year
2000 DIP Budget for the month in which such week occurs (the amount so payable
in each such week being the "Overhead Payment" payable for such week); provided,
however, that (a) in the event 5% of "net inpatient revenues" of the Borrowers
for any month, as reflected in the inpatient income statement delivered pursuant
to Section 5.01(a)(ii)(A), exceeds the aggregate amount of Overhead Payments
payable during such month, the Borrowers shall pay the amount of such excess to
MPAN at the time of the next Overhead Payment, and (b) in the event 5% of "net
inpatient revenues" of the Borrowers for any month, as reflected in the
inpatient income statement delivered pursuant to
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Section 5.01(a)(ii)(A), is less than the aggregate amount of Overhead Payments
payable during such month, the Borrowers shall deduct the amount of the
difference from the payments of the next succeeding Overhead Payment or Overhead
Payments payable to the full extent thereof; provided, that if the Borrowers
fail to deliver the inpatient income statement required at the time required
pursuant to Section 5.01(a)(ii)(A), no further payment of Overhead Payments
shall be made until such statement is delivered; provided, further, that if
payment of Overhead Payments shall be prohibited hereunder solely pursuant to
the preceding proviso or due to the occurrence and the continuation of a
Specified Default, the amount of such prohibited payments may accrue at the rate
set forth above and may be deemed owing and may be paid only at any subsequent
time that no Specified Default shall have occurred and be continuing or the
statement referred to in the preceding proviso is delivered, as the case may be;
and provided, further, that the calculation of the total Overhead Payments
payable in any given month for purposes of the first proviso to this Section
shall not give effect to any payment pursuant to clause (a) of such proviso made
in such month or any deduction pursuant to clause (b) of such proviso made in
such month, or any payment of Overhead Payments accrued in respect of a prior
month pursuant to the third proviso to this Section but paid during the given
month; and (iii) payment to MPAN of any management fees from the Oakwood
Facilities as and when received by the Borrowers, net of any costs of the
Borrowers incurred with respect to the Oakwood Facilities. In the event of a
sale of or other termination of MPAN's supervisory services with respect to any
Healthcare Facility in any month, the aggregate amount of any Overhead Payments
payable with respect to such month shall be adjusted to reflect the exclusion of
the "Revenues" attributable to such Healthcare Facility from the amount of
"Revenues" on which Overhead Payments are calculated. Anything contained herein
or in any other Financing Document to the contrary notwithstanding, the
provisions of this Section 7.07 restricting payment of Overhead Payments by the
Borrowers during the continuance of Specified Defaults and permitting payment of
Overhead Payments by the Borrowers during the continuance of other Events of
Default shall not be deemed or construed as in any way limiting the rights and
remedies otherwise available to the Agents and the Lenders under the Financing
Documents and under Applicable Law upon and after the occurrence of any Default
or Event of Default. Nothing in this Agreement or any of the other Financing
Documents shall be construed as or deemed a waiver, release or discharge by any
party hereto of any right to modify, assume or assign the management agreement
of the Borrowers with respect to the Oakwood Facilities. The Borrowers shall not
make any Investments (including any working capital investments) in the Oakwood
Facilities after the Closing Date.
Section 7.08 No Modification of Certain Documents Without Consent.
----------------------------------------------------
(a) No MHG Company will consent to or solicit any amendment or
supplement to, or any waiver or other modification of, any Management and
Service Agreement or enter into any new Management and Service Agreement without
the prior written consent of Required Lenders.
(b) Without the prior written consent of the Required Lenders, the
Borrowers will not modify or amend, or waive or solicit any waiver of, any
provision of the Existing Note Indenture or the Existing Credit Facilities in
any manner that could be expected to be adverse in any material respect to the
interests of the Lenders under the Financing Documents.
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Section 7.09 No Change of Fiscal Periods. MHG will not change the date
---------------------------
on which any of its Fiscal Years or Fiscal Quarters ends, unless the Required
Lenders shall have consented to such change (which consent may be conditioned on
the amendment of any covenant herein that would be affected by such change to
eliminate the effect thereof).
Section 7.10 Margin Stock. None of the proceeds of the Loans or the
------------
Letters of Credit will be used in violation of any applicable law or regulation
and, without limiting the generality of the foregoing, no use of any such
proceeds or Letters of Credit will include any use thereof, directly or
indirectly, for the purpose, whether immediate, incidental or ultimate, of
buying or carrying any Margin Stock.
Section 7.11 Limitation on Business.
----------------------
(a) MHG will at all times own, directly or indirectly, 100% of the
outstanding Equity Interests of the Borrowers and will not engage in any
activities other than owning such Equity Interests and Equity Interests in other
MHG Subsidiaries and financing activities and other activities reasonably
related to such ownership.
(b) Not more than 10% of the consolidated assets of the MHG Companies
(excluding assets used in connection with the institutional pharmacy business
line of the Borrowers) shall be used in any business or businesses other than
the business of owning, operating or managing Healthcare Facilities (including
accepting risk for the cost of long term care) and not more than 10% of their
consolidated revenues in any Fiscal Quarter shall be attributable to such other
businesses (excluding the institutional pharmacy business).
(c) The Borrowers shall not consent to, cause or (to the extent it is
within the control of any Borrower) permit the Excluded Subsidiaries to, engage
in any activities other than in the ordinary course of the Excluded
Subsidiaries' respective businesses, consistent with their respective past
practices.
Section 7.12 Leases. No MHG Company shall lease or sublease any facility
------
pursuant to any lease agreement entered into after the Closing Date except on
arm's length terms; provided that this Section 7.12 shall not apply to any lease
or sublease from a Borrower to any other Borrower.
Section 7.13 Limitation on Cash Not Held in Collateral Accounts or
-----------------------------------------------------
Concentration Accounts. The Borrowers will not permit the aggregate amount of
- ----------------------
all collected funds and Temporary Cash Investments held by the MHG Companies in
accounts, other than the Collateral Accounts (as defined in the Security
Agreement) and the Concentration Accounts, to exceed $4,000,000 at the close of
business on any two consecutive Business Days.
Section 7.14 Chapter 11 Claims. Without limiting the provisions of
-----------------
Section 7.02 hereof, no Borrower shall incur, create, assume, suffer or permit
any claim or Lien or encumbrance against it or any of its property or assets in
any Chapter 11 Case (other than (i) the claims specifically referred to in
Section 2.13, the Interim Borrowing Order and the Borrowing Order but only to
the extent therein described and (ii) Permitted Encumbrances) to be pari passu
---- -----
with or senior to the
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claims of the Agents and Lenders against any Borrower in respect of the
Obligations hereunder, or apply to the Courts for authority to do so, except to
the extent permitted herein.
Section 7.15 Limitation on Repayments; Prepetition Obligations. The
-------------------------------------------------
Borrowers shall not, except as otherwise allowed pursuant to the Interim
Borrowing Order or the Borrowing Order, (i) make any payment or prepayment on or
redemption or acquisition for value (including, without limitation, by way of
depositing with the trustee with respect thereto money or securities before due
for the purpose of paying when due) of any Prepetition Indebtedness or other
pre-Petition Date obligations of any Borrower, (ii) pay any interest on any
Prepetition Indebtedness of any Borrower (whether in cash, in kind securities or
otherwise), or (iii) except as provided in the Interim Borrowing Order or the
Borrowing Order, make any payment or create or permit any Lien pursuant to
Section 361 of the Bankruptcy Code (or pursuant to any other provision of the
Bankruptcy Code authorizing adequate protection), or apply to the Court for the
authority to do any of the foregoing; provided that (a) the Borrowers may make
payments permitted under Section 2.14, (b) the Borrowers may make payments for
administrative expenses that are allowed and payable under Sections 330 and 331
of the Bankruptcy Code, (c) the Borrowers may make payments permitted by the
First Day Orders, (d) the Borrowers may make rental payments with respect to
leased properties to the extent permitted under Section 7.12, (e) the Borrowers
may permit Permitted Adequate Protection Liens, and (f) the Borrowers may make
payments to such other claimants and in such amounts as may be consented to by
the Required Lenders and approved by the Court.
Section 7.16 Agreements. Without the consent of Required Lenders, the
----------
Borrowers shall not assume, reject, cancel, terminate or modify (whether
pursuant to Section 365 of the Bankruptcy Code, or any other applicable law),
(i) any Prepetition Indebtedness or (ii) any Material Contract.
Section 7.17 Management Employees. The Borrowers shall not, without the
--------------------
written consent (not to be unreasonably withheld) of the Agents, (i) cause or
permit the transfer of any Management Employee to MPAN and (ii) enter into any
new employment agreement with, or make any change in the compensation or other
terms of employment of, any Management Employee other than changes consistent
with the normal business practices of the Borrowers prior to the Petition Date
or consistent with changes made by MPAN with respect to comparable employees of
MPAN; provided that, in any event, no retention or severance policy may be
implemented after the Closing Date without written approval of the Agents.
ARTICLE 8. Defaults
Section 8.01 Events of Default. If one or more of the following events
-----------------
(each, an "Event of Default") shall have occurred and be continuing:
(a) any principal of any Loan or LC Reimbursement Obligation shall not be
paid when due, or any interest thereon or any fee or other amount payable
hereunder to or for the account of any Agent or any Lenders shall not be paid
within two Business Days after the due date thereof; or
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(b) the Borrowers shall fail to observe or perform any covenant contained
in Section 5.01(d), Section 5.10, Article 6 or Article 7; or
(c) any MHG Company shall fail to observe or perform any of its covenants
or agreements contained in the Financing Documents (other than those covered by
clause (a) or (b) above) for 30 days after written notice thereof has been given
to the Borrowers by the Administrative Agent at the request of any Lender; or
(d) any representation, warranty, certification or statement made by any
MHG Company in any Financing Document or in any certificate, financial statement
or other document delivered pursuant thereto shall prove to have been incorrect
in any material respect when made; or
(e) any event or condition shall occur that (i) results in the
acceleration of the maturity of any Financial Accommodation which is binding or
enforceable on a post-Petition Date basis or (ii) enables (or, with the giving
of notice or lapse of time or both, would enable) the holder or holders of such
Financial Accommodation or any Person acting on behalf of such holder or holders
to accelerate the maturity thereof (where such acceleration would be binding or
enforceable on a post-Petition Date basis), and the aggregate amount that would
be payable by the MHG Companies upon the acceleration of all Financial
Accommodations referred to in clauses (i) and (ii) above equals or exceeds
$1,000,000; or
(f) any member of the ERISA Group shall fail to pay when due an amount or
amounts aggregating in excess of $1,000,000 which it shall have become liable to
pay under Title IV of ERISA; or notice of intent to terminate a Material Plan
shall be filed under Title IV of ERISA by any member of the ERISA Group, any
plan administrator or any combination of the foregoing; or the PBGC shall
institute proceedings under Title IV of ERISA to terminate, to impose liability
(other than for premiums under Section 4007 of ERISA) in respect of, or to cause
a trustee to be appointed to administer any Material Plan; or a condition shall
exist by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated; or there shall occur a
complete or partial withdrawal from, or a default, within the meaning of Section
4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which
could cause one or more members of the ERISA Group to incur a current payment
obligation in excess of $1,000,000; or
(g) one or more Enforceable Judgments for the payment of money aggregating
in excess of $1,000,000 shall be rendered against one or more of the MHG
Companies and shall not have been satisfied; or
(h) any Lien created by any of the Collateral Documents shall at any time
fail to constitute a valid and perfected Lien on all of the Collateral purported
to be subject to such Lien, subject to no prior or equal Lien (except as set
forth in the Interim Borrowing Order and the Borrowing Order, and except Liens
permitted to be equal or prior to such Liens by this Agreement), or any MHG
Company shall so assert in writing; or
(i) the obligations of each MHG Company with respect to the Existing Notes
shall, for any reason, not be or cease to be validly subordinated as provided in
the Existing Note
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Indenture to the monetary obligations of such MHG Companies under the Existing
Credit Facilities; or
(j) With respect to the Chapter 11 Cases, (i) the entry of an order which
has not been stayed, withdrawn, dismissed or reversed (a) authorizing any
Borrower in any of the Chapter 11 Cases to obtain additional financing under
Section 364(c) or (d) of the Bankruptcy Code except for financings permitted
under Section 7.01, or (b) (1) authorizing any Person to recover from any
portion of the Collateral any costs or expenses of preserving or disposing of
such Collateral under Section 506(c) of the Bankruptcy Code, or (2) (except as
provided in the Interim Borrowing Order or the Borrowing Order) authorizing the
use of cash collateral under Section 363(c) of the Bankruptcy Code; (c)
appointing an interim or permanent trustee in any of the Chapter 11 Cases or the
appointment of an examiner with expanded powers in any of the Chapter 11 Cases
beyond those set forth in Sections 1106(a)(3) and (4) of the Bankruptcy Code;
(d) dismissing any of the Chapter 11 Cases or converting any of the Chapter 11
Cases to a case under Chapter 7 of the Bankruptcy Code; (e) granting relief from
or modifying the automatic stay of Section 362 of the Bankruptcy Code (x) to
allow any creditor to execute upon or enforce a Lien on any Collateral or on any
other property or assets of any Borrower the aggregate value of which, together
with the value of any other property or assets subject to such executed or
enforced Liens, exceeds $500,000 or (y) with respect to any Lien of, or the
granting of any Lien on any Collateral or any other property or assets of any
Borrower to, any State or local environmental or regulatory agency or authority,
where the aggregate value of such property or assets, together with the value of
any other property or assets subject to such a Lien, exceeds $500,000; (f)
staying, reversing, vacating, amending, supplementing, or otherwise modifying
any of the Interim Borrowing Order or the Borrowing Order, or any of any Agent's
or Lender's rights, benefits, privileges or remedies under the Interim Borrowing
Order or the Borrowing Order; (g) staying, reversing, vacating, amending,
supplementing or otherwise modifying this Agreement or any other Financing
Document or any of Agent's or Lenders' rights, benefits, privileges or remedies
under this Agreement or any other Financing Document; (h) consolidating or
combining any Borrower with any other Person (other than another Borrower)
except pursuant to a confirmed plan of reorganization as contemplated in the
plan of reorganization; or (i) approving any other administrative expense claim
(other than those specifically referred to in Section 2.13) having any priority
over, or being pari passu with the administrative expense priority of the
---- -----
Obligations in respect of any of the Chapter 11 Cases; or (ii) termination of
the Borrowers' exclusive right to file a plan or plans of reorganization in any
of the Chapter 11 Cases other than as a result of the filing of a plan or plans
of reorganization in the Chapter 11 Cases acceptable to the Required Lenders; or
(iii) the filing by any Borrower of a motion, application or other petition to
effect or consent to any order referred to in clause (i) of this subsection (j);
or (iv) the filing of any plan of reorganization or any modification to any
previously filed plan of reorganization, in any such case without the prior
written approval of Required Lenders; or
(k) (i) any Healthcare Event shall have occurred; or (ii) any Governmental
Authority shall (y) assert any claim against any MHG Company with respect to any
healthcare regulatory violation, overpayment (including without limitation with
respect to Medicare or the False Claims Act) or similar violation or liability
in excess of $4,000,000, individually or in the aggregate (exclusive of claims
which are subject to the provisions of the HHS Stipulation) or (z) make or give
notice (which notice shall not be rescinded or withdrawn within 15 days) of its
intent or
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right to make any reduction from or otherwise withhold through setoff,
recoupment or otherwise, an amount in excess of $1,000,000 in the aggregate from
any account receivable arising from healthcare services; or (iii) any MHG
Company shall settle any dispute with any Governmental Authority or any claim
asserted by a Governmental Authority against any MHG Company with respect to any
healthcare regulatory violation, overpayment (other than routine, periodic
settlements of overpayments in the ordinary course) or similar violation or
liability in excess of $100,000 in any individual case or $1,000,000 in the
aggregate (x) in a manner not approved in writing by Required Lenders or (y)
with respect to the claims and disputes which are the subject of the Settlement
Letter, other than in accordance with the terms of the Settlement Letter; or
(iv) any Governmental Authority shall act in a manner which constitutes a breach
or violation of any term of the Settlement Letter or the HHS Stipulation, where
such breach or violation could reasonably be expected to have a Material Adverse
Effect, and such breach or violation is not cured within 30 days after the
occurrence thereof; or (v) the HHS Stipulation shall fail to be approved by the
Court on or before the entry by the Court of the Borrowing Order; or
(l) any Person employed by MPAN and performing services as a regional
manager with respect to the operations of the Healthcare Facilities (any such
Person being a "Regional Manager") shall enter into or be bound by any
contractual arrangement or agreement that has the effect of prohibiting such
Regional Manager from accepting employment with the Borrowers or the Healthcare
Facilities; or
then, and in every such event:
(i) if requested by the Required Lenders, the Administrative Agent shall
(notwithstanding the provisions of Section 362 of the Bankruptcy Code and
without application or motion to, or order from, the Court) by notice to the
Borrowers terminate the Commitments and they shall thereupon terminate;
(ii) if requested by the Required Lenders, the Administrative Agent
shall (notwithstanding the provisions of Section 362 of the Bankruptcy Code and
without application or motion to, or order from, the Court) by notice to each LC
Issuing Bank instruct such LC Issuing Bank not to extend the expiry date of any
outstanding Letter of Credit, whereupon such LC Issuing Bank shall deliver
notice to that effect promptly (or as soon thereafter as is permitted by the
provisions of the relevant Letter of Credit) to the beneficiary of each such
Letter of Credit and the Borrowers; and
(iii) if requested by the Required Lenders, the Administrative Agent shall
(notwithstanding the provisions of Section 362 of the Bankruptcy Code and
without application or motion to, or order from, the Court) by notice to the
Borrowers declare the Loans, all amounts in respect of the Letters of Credit and
all other amounts in respect of the Obligations (in each case together with
accrued interest thereon) to be, and they shall thereupon become, immediately
due and payable without presentment, demand, protest or other notice of any
kind, all of which are hereby waived by the Borrowers.
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Section 8.02 Notice of Default. The Administrative Agent shall give
-----------------
notice to the Borrowers under Section 8.01 promptly upon being requested to do
so by the Required Lenders and shall thereupon notify all the Lenders thereof.
Section 8.03 Enforcement Notice. If the Administrative Agent is (i)
------------------
instructed to do so by the Required Lenders at any time after the Loans become
immediately due and payable pursuant to Section 8.01, or (ii) instructed to do
so by the Required Lenders at any time after the Loans have been declared due
and payable pursuant to Section 8.01, the Administrative Agent shall deliver to
the Collateral Agent an Enforcement Notice directing the Collateral Agent to
exercise one or more specific remedies under the Collateral Documents, the
Interim Borrowing Order, the Borrowing Order, or any other right or remedy
available at law or in equity; provided that, any other provision of this
Agreement or any other Financing Document to the contrary notwithstanding, with
respect to the foregoing, the Collateral Agent shall give the Borrowers and
counsel to any official committees in respect of the Chapter 11 Cases and the
office of the United States Trustee five Business Days' prior written notice
(which notice shall be delivered by facsimile or overnight courier) of the
exercise of its rights and remedies with respect to the Collateral (excluding
the acceleration of the Loans or other Obligations and the termination of the
Commitments, but including exercise of any rights of set-off or counterclaim
hereunder or under any other Financing Document) and file a copy of such notice
with the Clerk of the Court. Neither any Agent nor any Lender shall have any
obligation of any kind to make a motion or application to the Court to exercise
their rights and remedies set forth or referred to in this Agreement or in the
other Financing Documents. Concurrently with the delivery of any such
Enforcement Notice to the Collateral Agent, all outstanding Loans and other
amounts in respect of the Obligations not theretofore declared due and payable
shall (notwithstanding the provisions of Section 362 of the Bankruptcy Code and
without application or motion to, or order from, the Court) automatically become
immediately due and payable.
Other than the notice to the Borrowers described in the preceding
paragraph, Borrowers waive (i) presentment, demand and protest and notice of
presentment, dishonor, notice of intent to accelerate, notice of acceleration,
protest, default, nonpayment, maturity, release, compromise, settlement,
extension or renewal of any or all commercial paper, accounts, contract rights,
documents, instruments, chattel paper and guaranties or other property at any
time held by any Agent or any Lender on which Credit Parties may in any way be
liable and hereby ratify and confirm whatever any Agent and any Lender may
lawfully do in this regard, (ii) subject to the notice provisions of the
preceding paragraph, all rights to notice and hearing prior to any Agent's
taking possession or control of, or to any Agent's or any Lender's reply,
attachment or levy upon, the Collateral, or any bond or security which might be
required by any court prior to allowing any Agent or any Lender to exercise any
of their remedies, and (iii) the benefit of all valuation, appraisal and
exemption laws. Borrowers acknowledge they have been advised by counsel of
their choice with respect to the effect of the foregoing waivers and this
Agreement, the other Financing Documents and the transactions evidenced by this
Agreement and the other Financing Documents.
Section 8.04 Cash Cover. The Borrowers agree that, if any Event of
----------
Default shall have occurred and be continuing, the Borrowers shall, if requested
by the Administrative Agent upon instruction from the Required Lenders, pay to
the Collateral Agent an amount in immediately
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available funds equal to 105% of the then aggregate amount available for
subsequent drawings under all outstanding Letters of Credit to be held for the
benefit of the Lenders and the LC Issuing Banks in accordance with the
Collateral Documents to secure the payment of all LC Reimbursement Obligations
arising from subsequent drawings under such Letters of Credit.
ARTICLE 9. The Agents
Section 9.01 Appointment and Authorization.
-----------------------------
(a) Each Lender irrevocably designates, appoints and authorizes the
Administrative Agent, the Collateral Agent and the Syndication Agent to act as
its agent in connection herewith and authorizes the Administrative Agent, the
Collateral Agent and the Syndication Agent to take such action as agent on such
Lender's behalf, to execute and deliver or accept on behalf of the Lenders the
other Financing Documents and to exercise such powers under the Financing
Documents as are delegated to the Administrative Agent, the Collateral Agent and
the Syndication Agent, respectively, by the terms thereof, together with all
such powers as are reasonably incidental thereto. Notwithstanding anything
contained herein to the contrary, the Co-Arrangers shall not have any rights
(other than the right to receive and retain the fees described in Section 2.06
payable to it), duties or obligations hereunder or under the other Financing
Documents solely in such capacity.
(b) Each of the Lenders, the LC Issuing Banks and the Agents irrevocably
authorize, and each holder of a Note by its acceptance of such Note shall be
deemed to irrevocably authorize, the Collateral Agent to execute the Collateral
Documents and irrevocably appoints and authorizes the Collateral Agent to take
such action as agent on its behalf and to exercise such powers and perform such
duties under the Collateral Documents as are delegated to the Collateral Agent
by the terms thereof, together with all such powers as are reasonably incidental
thereto.
Section 9.02 Agents and Affiliates. Each of PNC and First Union
---------------------
shall have the same rights and powers under the Financing Documents as any other
Lender and may exercise or refrain from exercising the same as though it were
not the Administrative Agent and the Collateral Agent, in the case of PNC, or
the Syndication Agent, in the case of First Union. Each of PNC, First Union and
their respective affiliates may accept deposits from, lend money to, and
generally engage in any kind of business with any of the MHG Companies or their
Affiliates as if it were not the Administrative Agent and the Collateral Agent,
in the case of PNC, or the Syndication Agent, in the case of First Union.
Section 9.03 Action by Agents.
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(a) The obligations of each of the Agents under the Financing Documents
are only those expressly set forth therein with respect to it. Without limiting
the generality of the foregoing, none of the Agents shall be required to take
any action with respect to any Default, except as expressly provided in Article
8 hereof and in the Collateral Documents. The Agents shall have no duties or
responsibilities except those expressly set forth in this Agreement and no
implied covenants, functions, responsibilities, duties, obligations, or
liabilities shall be read into this
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Agreement or otherwise exist. The duties of the Agents shall be mechanical and
administrative in nature; the Agents shall not have by reason of this Agreement
a fiduciary or trust relationship in respect of any Lender; and nothing in this
Agreement, expressed or implied, is intended to or shall be so construed as to
impose upon any Agent any obligations in respect of this Agreement except as
expressly set forth herein. Without limiting the generality of the foregoing,
the use of the term "agent" in this Agreement with reference to any of the
Agents is not intended to connote any fiduciary or other implied (or express)
obligations arising under agency doctrine of any Applicable Law. Instead, such
term is used merely as a matter of market custom, and is intended to create or
reflect only an administrative relationship between independent contracting
parties.
(b) As to any matters not expressly provided for in the Financing
Documents (including the timing and methods of realization upon the Collateral),
the Agents shall act or refrain from acting in accordance with written
instructions from the Required Lenders or, in the absence of such instructions,
in accordance with its discretion; provided that no Agent shall be obligated to
take any action if such Agent believes that such action is or may be contrary to
any applicable law or might cause such Agent to incur any loss or liability for
which it has not been indemnified to its satisfaction.
(c) The Collateral Agent shall not be responsible for the existence,
genuineness or value of any of the Collateral or for the validity, perfection,
priority or enforceability of any Lien on any of the Collateral, whether
impaired by operation of law or by reason of any action or omission to act on
its part under the Collateral Documents. The Collateral Agent shall have no
duty to ascertain or inquire as to the performance or observance of any of the
terms of the Collateral Documents by the MHG Companies.
Section 9.04 Delegation of Duties; Consultation with Experts. Each of
-----------------------------------------------
the Agents may perform any of its duties hereunder or under any other Financing
Document through agents or employees. Each of the Agents may consult with legal
counsel (who may be counsel for any MHG Company), independent public accountants
and other experts selected by it and shall not be liable for any action taken or
omitted to be taken by it in good faith in accordance with the advice of such
counsel, accountants or experts.
Section 9.05 Liability of Agents. None of the Agents or their respective
-------------------
affiliates or their respective directors, officers, attorneys, agents or
employees shall be liable for any action taken or not taken by it in connection
with the Financing Documents (A) with the consent or at the request of the
Required Lenders or (B) in the absence of its own gross negligence or willful
misconduct. None of the Agents or their respective affiliates or their
respective directors, officers, attorneys, agents or employees shall be
responsible for or have any duty to ascertain, inquire into or verify (i) any
statement, recital, warranty or representation made in connection with any
Financing Document or any Credit Event; (ii) the performance or observance of
any of the terms, conditions, covenants or agreements of any MHG Company under
any Financing Document or the financial condition of any Credit Party or the
existence or possible existence of any Event of Default; (iii) the satisfaction
of any condition specified in Article 3 except, in the case of any of the
Agents, receipt of items required to be delivered to it; (iv) the validity,
effectiveness, enforceability, due execution or genuineness of any Financing
Document or any other instrument or writing furnished in connection therewith;
or (v)
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the existence, genuineness or value of any of the Collateral or the validity,
perfection, recordation, priority or enforceability of any Lien on any of the
Collateral. None of the Agents shall incur any liability by acting in reliance
upon any notice, consent, certificate, statement, or other writing (which may be
a bank wire, telex, facsimile copy or similar writing) believed by it to be
genuine or to be signed by the proper party or parties. No claim may be made by
any MHG Company, any Lender, any Agent or any of their respective Subsidiaries
against the Agents, any Lender or any of their respective directors, officers,
employees, agents, attorneys or Affiliates, or any of them, for any special,
indirect or consequential damages or, to the fullest extent permitted by Law,
for any punitive damages in respect of any claim or cause of action (whether
based on contract, tort, statutory liability, or any other ground) based on,
arising out of or related to any Financing Document or the transactions
contemplated hereby or any act, omission or event occurring in connection
therewith, including the negotiation, documentation, administration or
collection of the Loans, and each of the Borrowers (for itself and on behalf of
each of its Subsidiaries), the Agents and the Lenders hereby waives, releases
and agrees never to sue upon any claim for any such damages, whether such claim
now exists or hereafter arises and whether or not it is now known or suspected
to exist in its favor. Each Lender agrees that, except for notices, reports and
other documents expressly required to be furnished to the Lender by the Agents
hereunder or given to the Agents for the account of or with copies for the
Lenders, the Agents and each of their directors, officers, employees, agents,
attorneys or Affiliates shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the business operations,
property, condition (financial or otherwise), prospects or creditworthiness of
the Borrowers which may come into the possession of any Agent or any of their
directors, officers, employees, agents, attorneys or Affiliates.
Section 9.06 Indemnification. The Lenders shall, ratably in accordance
---------------
with their respective Credit Exposures, reimburse and indemnify each Agent,
their respective affiliates and their respective directors, officers, agents and
employees (to the extent not reimbursed by the MHG Companies and without
limiting the obligation of the MHG Companies to do so) against any cost, expense
(including reasonable counsel fees and disbursements and reasonable fees and
costs of appraisers, accountants and consultants), claim, demand, action,
obligations, damages, penalties, judgments, suits, disbursements, loss or
liability (except such as result from such indemnitee's gross negligence or
willful misconduct) that such indemnitee may suffer or incur in connection with
the Financing Documents or any action taken or omitted by such indemnitees
thereunder.
Section 9.07 Credit Decision. Each Lender acknowledges (i) that the
---------------
Agents have not made any representations or warranties to it and that no act by
the Agents hereafter taken, including any review of the affairs of the
Borrowers, shall be deemed to constitute any representation or warranty by the
Agents to any Lender and (ii) that it has, independently and without reliance on
any Agent or any other Lender, and based on such documents and information as it
has deemed appropriate, made its own credit analysis and decision to enter into
this Agreement. Each Lender also acknowledges that it will, independently and
without reliance upon the Administrative Agent or any other Lender, and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking any action
under the Financing Documents and except as expressly provided herein, that the
Agents shall have no duty or responsibility, either initially or on a continuing
basis, to provide any Lender with any credit or other
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information with respect thereto, whether coming into its possession before the
making of any Loan or at any time or times thereafter.
Section 9.08 Successor Agents. Any Agent may resign at any time (a
----------------
"Retiring Agent") by giving notice thereof to the Lenders, the other Agents and
the Borrowers. Upon any such resignation, the Required Lenders shall have the
right to appoint a successor for the Retiring Agent (a "Successor Agent"). If
no Successor Agent shall have been so appointed by the Required Lenders, and
shall have accepted such appointment, within 30 days after the Retiring Agent
gives notice of resignation, then the Retiring Agent may, on behalf of the
Lenders, appoint a Successor Agent, which shall be a Lender or any other
commercial bank organized or licensed under the laws of the United States or any
State thereof and having a combined capital and surplus of at least
$500,000,000. Upon the acceptance of its appointment as a Successor Agent, such
Successor Agent shall thereupon, without order of the Court, succeed to and
become vested with all the rights and duties of the Retiring Agent, and the
Retiring Agent shall be discharged from its duties and obligations hereunder.
After any Retiring Agent resigns as an Agent hereunder, the provisions of this
Article 9 shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was one of the Agents.
ARTICLE 10. Changes In Circumstances
Section 10.01 Increased Cost and Reduced Return.
---------------------------------
(a) If, on or after the date hereof, the adoption of any applicable law,
rule or regulation, or any change in any applicable law, rule or regulation, or
any change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Lender Party (other than the
Administrative Agent in its capacity as such) with any request or directive
(whether or not having the force of law) of any such authority, central bank or
comparable agency, shall impose, modify or deem applicable any reserve, special
deposit, insurance assessment or similar requirement (including any such
requirement imposed by the Board of Governors of the Federal Reserve System)
against assets of, deposits with or for the account of, or credit extended by,
any Lender Party (other than the Administrative Agent in its capacity as such)
or shall impose on any Lender Party (other than the Administrative Agent in its
capacity as such) any other condition affecting its Notes or its obligation to
participate in any Letter of Credit, and the result of any of the foregoing is
to increase the cost to such Lender Party of participating in any Letter of
Credit or to reduce the amount of any sum received or receivable by such Lender
Party under this Agreement or under its Notes with respect thereto, by an amount
deemed by such Lender Party to be material, then, within 15 days after demand by
such Lender Party (with a copy to the Administrative Agent), the Borrowers shall
pay to such Lender Party such additional amount or amounts as will compensate
such Lender Party for such increased cost or reduction; provided that the
Borrowers shall not be liable to any Lender Party in respect of any such
increased cost or reduction with respect to any period of time more than three
months before the Borrowers receive the notice required by the first sentence of
Section 10.01(c) or more than six months before the Borrowers receive the
relevant certificate referred to in the second sentence of Section 10.01(c).
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(b) If any Lender Party (other than the Administrative Agent in its
capacity as such) shall have determined that, after the date hereof, the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change in any such law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or any request or directive regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on capital
of such Lender Party (or its Parent) as a consequence of such Lender Party's
obligations hereunder to a level below that which such Lender Party (or its
Parent) could have achieved but for such adoption, change, request or directive
(taking into consideration its policies with respect to capital adequacy) by an
amount deemed by such Lender Party to be material, then from time to time,
within 15 days after demand by such Lender Party (with a copy to the
Administrative Agent), the Borrowers shall pay to such Lender Party such
additional amount or amounts as will compensate it for such reduction; provided
that the Borrowers shall not be liable to any Lender Party in respect of any
such reduction with respect to any period of time more than three months prior
to the date of the notice required by the first sentence of Section 10.01(c).
(c) Each Lender Party (other than the Administrative Agent in its
capacity as such) will promptly notify the Borrowers and the Administrative
Agent of any event of which it has knowledge, occurring after the date hereof,
which will entitle it to compensation pursuant to this Section and will
designate a different Lending Office or LC Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Lender Party, be otherwise disadvantageous to it. A
certificate of any such Lender Party claiming compensation under this Section
10.01 and setting forth the additional amount or amounts to be paid to it
hereunder, showing the calculation thereof in reasonable detail, shall be
conclusive in the absence of manifest error. In determining such amount, such
Lender Party may use any reasonable averaging and attribution methods.
Section 10.02 Taxes.
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(a) Any and all payments by the MHG Companies to or for the account
of any Lender Party under any Financing Document shall be made free and clear of
and without deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of each Lender Party, taxes imposed on its net income,
and franchise or similar taxes imposed on it, by (i) the jurisdiction under the
laws of which it is organized or any political subdivision thereof, (ii) in the
case of each Lender, the jurisdiction of its Lending Office or any political
subdivision thereof and (iii) in the case of each LC Issuing Bank, the
jurisdiction of its LC Office or any political subdivision thereof (all such
non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings
and liabilities being hereinafter referred to as "Taxes"). If any MHG Company
shall be required by law to deduct any Taxes from or in respect of any sum
payable under any Financing Document to any Lender Party, (i) the sum payable
shall be increased as may be necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 10.02) such Lender Party receives an amount equal to the sum it
would have received had no such deductions been made, (ii) the relevant MHG
Company shall make such deductions, (iii) such MHG Company shall pay the full
amount
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deducted to the relevant taxation authority or other authority in accordance
with applicable law, and (iv) such MHG Company shall furnish to the
Administrative Agent, at its address specified in or pursuant to Section 11.01,
the original or a certified copy of a receipt evidencing payment thereof.
(b) In addition, the Borrowers agree to pay any present or future
stamp or documentary taxes or any other excise or property taxes, or charges or
similar levies which arise from any payment made hereunder or under any other
Financing Document or from the execution or delivery of, or otherwise with
respect to, any Financing Document (hereinafter referred to as "Other Taxes").
(c) The Borrowers agree to indemnify each Lender Party for the full
amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed or
asserted by any jurisdiction on amounts payable under this Section 10.02) paid
by such Lender Party and any liability (including penalties, interest and
expenses) arising therefrom or with respect thereto. This indemnification shall
be made within 15 days from the date such Lender Party makes demand therefor.
(d) Each Lender Party organized under the laws of a jurisdiction
outside the United States, on or prior to the date of its execution and delivery
of this Agreement in the case of each Lender Party listed on the signature pages
hereof and on or prior to the date on which it becomes a Lender Party in the
case of each other Lender Party, and from time to time thereafter if requested
in writing by the Borrowers (but only so long as such Lender Party remains
lawfully able to do so), shall provide the Borrowers and the Administrative
Agent with (i) Internal Revenue Service form 1001 or 4224, as appropriate, or
any successor form prescribed by the Internal Revenue Service, certifying that
such Lender Party is entitled to benefits under an income tax treaty to which
the United States is a party which reduces the rate of withholding tax on
payments of interest under the Financing Documents or certifying that the income
receivable pursuant to the Financing Documents is effectively connected with the
conduct of a trade or business in the United States or (ii) if such Lender is
not a "bank" within the meaning of Section 881(c)(3)(A) of the Internal Revenue
Code, Internal Revenue Service form W-8 or any successor form prescribed by the
Internal Revenue Service claiming complete exemption from, or a reduced rate of,
withholding tax on payments of interest under the Financing Documents. If the
form provided by a Lender Party at the time such Lender Party first becomes a
party to this Agreement indicates a United States interest withholding tax rate
in excess of zero, withholding tax at such rate shall be excluded from "Taxes"
as defined in Section 10.02(a).
(e) For any period with respect to which a Lender Party has failed to
provide the Borrowers and the Administrative Agent with the appropriate form
pursuant to Section 10.02(d) (unless such failure is due to a change in treaty,
law or regulation occurring subsequent to the date on which a form originally
was required to be provided), such Lender Party shall not be entitled to
indemnification under Section 10.02(a) with respect to Taxes imposed by the
United States; provided that should a Lender Party, which is otherwise exempt
from or subject to a reduced rate of withholding tax, become subject to Taxes
because of its failure to deliver a form required hereunder, the relevant MHG
Company shall take such steps as such Lender Party shall reasonably request to
assist such Lender Party to recover such Taxes.
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(f) If any MHG Company is required to pay additional amounts to or
for the account of any Lender Party pursuant to this Section 10.02, then such
Lender Party will change the jurisdiction of its Lending Office or LC Office, as
the case may be, so as to eliminate or reduce any such additional payment which
may thereafter accrue if such change, in the sole judgment of such Lender Party,
is not otherwise disadvantageous to such Lender Party.
(g) Without prejudice to the survival of any other agreement of the
Borrowers hereunder, the agreements and obligations of the MHG Companies
contained in this Section 10.02 shall survive the payment in full of the
principal of and interest on the Loans and the LC Reimbursement Obligations.
ARTICLE 11. Miscellaneous
Section 11.01 Notices. Unless otherwise specified herein, all notices,
-------
requests and other communications to any party under any Financing Document
shall be in writing (including bank wire, facsimile copy or similar writing) and
shall be given to such party at its address or facsimile number set forth on the
signature pages hereof (or, in the case of any Lender, in its Administrative
Questionnaire) or such other address or facsimile number as such party may
hereafter specify for the purpose by notice to the Administrative Agent and the
Borrowers. Each such notice, request or other communication shall be effective
(i) if given by facsimile transmission, when transmitted to the facsimile number
specified in or pursuant to this Section 11.01 and confirmation of receipt is
received, (ii) if given by mail, ten days after such communication is deposited
in the mails with first class postage prepaid, addressed as aforesaid, or (iii)
if given by any other means, when delivered at the address specified in or
pursuant to this Section 11.01, provided that notices and requests to any Agent
under Article 2, 8 or 10 shall not be effective until received. NOTICE TO UNDER
THIS AGREEMENT OR UNDER ANY OTHER FINANCING DOCUMENT SHALL CONSTITUTE NOTICE TO
ALL BORROWERS FOR ALL PURPOSES HEREUNDER AND THEREUNDER, AND NOTICE FROM UNDER
THIS AGREEMENT OR UNDER ANY OTHER FINANCING DOCUMENT PURPORTING TO BE NOTICE
FROM ALL BORROWERS SHALL CONSTITUTE NOTICE FROM ALL BORROWERS FOR ALL PURPOSES
HEREUNDER AND THEREUNDER.
Section 11.02 No Waiver. No failure or delay by the Lender Parties, or
---------
any of them, in exercising any right, power or privilege under any Financing
Document shall operate as a waiver thereof nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies provided in the
Financing Documents shall be cumulative and not exclusive of any rights or
remedies provided by law.
Section 11.03 Expenses; Indemnification.
-------------------------
(a) In addition to any expenses set forth in and required to be paid
to any Persons pursuant to the Interim Borrowing Order or the Borrowing Order or
any other applicable order of the Court, the Borrowers shall pay on demand all
the actual and reasonable costs, fees and expenses of
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(i) preparation of the Financing Documents and any consents, amendments, waivers
or other modifications thereto; (ii) furnishing all opinions by counsel for MHG
and its Subsidiaries (including any opinions reasonably requested by the
Administrative Agent or Required Lenders as to any legal matters arising
hereunder) and of MHG's and its Subsidiaries' performance of and compliance with
all agreements and conditions on its part to be performed or complied with under
this Agreement and the other Financing Documents, including with respect to
confirming compliance with environmental and insurance requirements; (iii)
counsel to the Administrative Agent (including allocated costs of internal
counsel and fees and expenses of O'Melveny & Myers LLP, counsel to the Agents,
Lenders and Existing Lenders, Buchanan Ingersoll, P.C., special counsel to the
Administrative Agent and the administrative agent under the Existing Credit
Facilities, and Kennedy Covington Lobdell & Hickman, L.L.P., special counsel to
the Syndication Agent and the syndication agent under the Existing Credit
Facilities) in connection with the negotiation, preparation, execution,
administration and enforcement of the Financing Documents and any consents,
amendments, waivers or other modifications thereto and any other documents or
matters requested by MHG or its Subsidiaries; (iv) creating and perfecting Liens
in favor of Collateral Agent on behalf of Lenders pursuant to any Collateral
Document, including filing and recording fees, expenses and taxes, stamp or
documentary taxes, search fees, and reasonable fees, expenses and disbursements
of counsel to any Agent and of counsel providing any opinions that any Agent or
Required Lenders may reasonably request in respect of the Collateral Documents
or the Liens created pursuant thereto; (v) any advisors, auditors, accountants
or appraisers or other consultants or agents employed or retained by any Agent,
the Lenders or their counsel or the Existing Lenders or their counsel,
including, without limitation, Houlihan Lokey Howard & Zukin, Care Consulting,
L.L.C. and any other financial, accounting or valuation advisors; (vi) the
Collateral Agent in connection with the custody or preservation of any of the
Collateral; (vii) any Agent in connection with the syndication of the
Commitments and the negotiation, preparation and execution of the Financing
Documents and any consents, amendments, waivers or other modifications thereto
and the transactions contemplated thereby, and (viii) if any Event of Default
occurs, any Lender Party, including actual and reasonable costs, fees and
expenses of counsel, in connection with such Event of Default and collection,
bankruptcy, insolvency (including pursuant to the Chapter 11 Cases) and other
enforcement proceedings resulting therefrom, including the negotiation of any
plan of reorganization, restructuring or "workout" of the Borrowers' obligations
under the Financing Documents. Without limiting the generality of the foregoing,
if, at any time or times, regardless of the existence of an Event of Default,
any Agent or any Lender or any of the Existing Lenders or their counsel shall
incur actual and reasonable fees, costs and expenses itself or employ counsel or
other professional advisors, including, but not limited to, Houlihan Lokey
Howard & Zukin, Care Consulting, L.L.C. and other environmental, financial and
management consultants, for advice or other representation or shall incur legal,
appraisal, accounting, consulting or other actual and reasonable fees, costs and
expenses in connection with:
(i) any litigation, contest, dispute, suit, proceeding or action
(whether instituted by any Agent, any Lender, any Existing Lender, any
Borrower or any other Person) in any way relating to the Collateral, any of
the Financing Documents, or any other agreements to be executed or
delivered in connection therewith or herewith, including any litigation,
contest, dispute, suit, case, proceeding or action, and any appeal or
review thereof, in
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connection with a case or proceeding commenced by or against any Borrower
or any other Person that may be obligated to any Agent or any Lender or any
Existing Lender by virtue of the Financing Documents, under the Bankruptcy
Code, or any other applicable Federal, state, or foreign bankruptcy or
other similar law;
(ii) any attempt to enforce any rights or remedies of any Agent, any
Lender or any Existing Lender against any Borrower, or any other Person
that may be obligated to any Agent, any Lender or any Existing Lender by
virtue of being a party to any of the Financing Documents;
(iii) any attempt by any Person (including, without limitation, the
Agents and the Lenders) (A) to appraise, inspect, verify, protect, collect,
sell, liquidate or otherwise dispose of the Collateral, including any
Healthcare Facility, or (B) to negotiate the terms of, and to facilitate
and implement, the replacement of MPAN in its supervisory capacity with
respect to any Healthcare Facility; or
(iv) any Chapter 11 Case (including, without limitation, (A) the on-
going monitoring by any Agent, any Lender or any Existing Lender of any
Chapter 11 Case, including attendance by any Agent and its counsel at
hearings or other proceedings, (B) the on-going review of documents filed
with a Court in respect thereof, and (C) the negotiation, preparation and
development of a plan or plans of reorganization) and each Agent's and the
Lenders' and the Existing Lenders' interests with respect to any Borrower
(including, without limitation, the on-going review of any Borrower's
business, assets, operations, prospects or financial condition as any Agent
shall deem necessary), the Collateral or the Obligations;
then, and in any such event, the actual and reasonable fees and expenses
incurred by any Agent, such Lender, such Existing Lender and such attorneys and
other professional advisors and consultants arising from such services,
including those of any appellate proceedings, and all actual and reasonable
expenses, costs, charges and other fees incurred by such counsel or other
professionals in any way or respect arising in connection with or relating to
any of the events or actions described in this Section 11.03 shall be payable,
on demand, by the Borrowers to any Agent, such Lender and such Existing Lender
and shall be additional Obligations secured under the Collateral Documents and
the other Financing Documents. Without limiting the generality of the
foregoing, such expenses, costs, charges and fees may include: paralegal fees,
costs and expenses; accountants' and experts' fees, costs and expenses;
appraisers' fees, costs and expenses; management and other consultants' fees,
costs and expenses; court costs and expenses; photocopying and duplicating
expenses; court reporter fees, costs and expenses; long distance telephone
charges; communication charges, air express charges; telegram charges;
secretarial overtime charges; and expenses for travel, lodging and food paid or
incurred in connection with the performance of such legal or other professional
services.
(b) In addition to the payment of expenses pursuant to Section
11.03(a), whether or not the transactions contemplated hereby shall be
consummated, the Borrowers agree to defend (subject to Indemnitee's selection of
counsel), indemnify, pay and hold harmless each Agent, each of
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the Lenders and their counsel and each of the Existing Lenders and their counsel
(including, without limitation, O'Melveny & Myers LLP, counsel to the Agents,
Lenders and Existing Lenders, Buchanan Ingersoll, P.C., special counsel to the
Administrative Agent and the administrative agent under the Existing Credit
Facilities, and Kennedy Covington Lobdell & Hickman, L.L.P. special counsel to
the Syndication Agent and the syndication agent under the Existing Credit
Facilities), and the officers, directors, employees, advisors, auditors,
accountants, appraisers, consultants (including, without limitation, Houlihan
Lokey Howard & Zukin and Care Consulting, L.L.C.), agents and affiliates of each
Agent, each of the Lenders and their counsel and each of the Existing Lenders
and their counsel (collectively called the "Indemnitees"), from and against any
and all Indemnified Liabilities (as hereinafter defined); provided, that the
Borrowers shall not have any obligation to any Indemnitee hereunder with respect
to any Indemnified Liabilities to the extent such Indemnified Liabilities arise
solely from the gross negligence or willful misconduct of that Indemnitee as
determined by a final judgment of a court of competent jurisdiction.
As used herein, "Indemnified Liabilities" means, collectively, any and
all liabilities, obligations, losses, damages (including natural resource
damages), penalties, actions, judgments, suits, claims (including environmental
claims), costs (including the costs of any investigation, study, sampling,
testing, abatement, clean-up, removal, remediation or other response action
necessary to remove, remediate, clean up or abate any hazardous materials
activity), expenses and disbursements of any kind or nature whatsoever
(including the actual and reasonable fees and disbursements of counsel for
Indemnitees in connection with any investigative, administrative or judicial
proceeding commenced or threatened by any Person, whether or not any such
Indemnitee shall be designated as a party or a potential party thereto, and any
fees or expenses incurred by Indemnitees in enforcing this indemnity), whether
direct, indirect or consequential and whether based on any federal, state or
foreign laws, statues, rules or regulations (including securities and commercial
laws, statutes, rules or regulations and environmental laws), on common law or
equitable cause or on contract or otherwise, that may be imposed on, incurred
by, or asserted against any such Indemnitee, in any manner relating to or
arising out of (i) this Agreement or the other Financing Documents or the
transactions contemplated hereby or thereby including Lenders' agreement to make
the Loans hereunder or the use or intended use of the proceeds thereof or the
issuance of letters of credit hereunder or the use or intended use of any
thereof, or any enforcement of any of the Financing Documents including any sale
of, collection from, or other realization upon any of the Collateral, or (ii)
any environmental claim or any hazardous materials activity relating to or
arising from, directly or indirectly, any past or present activity, operation,
land ownership, or practice of Borrowers and their Subsidiaries.
To the extent that the undertakings to defend, indemnify, pay and hold
harmless set forth in this Section 11.03(b) may be unenforceable in whole or in
part because they are violative of any law or public policy, the Borrowers shall
contribute the maximum portion that it is permitted to pay and satisfy under
applicable law to the payment and satisfaction of all Indemnified Liabilities
incurred by Indemnitees or any of them. Without prejudice to the survival of any
other agreement of the Borrowers hereunder, the agreements and obligations of
the Borrowers contained in this Section 11.03 shall survive termination of the
Commitments, the payment in full of the principal of and interest on the Loans
and the LC Reimbursement Obligations.
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Section 11.04 Sharing of Set-offs.
-------------------
(a) Each Lender agrees that if it shall, by exercising any right of
set-off or counterclaim or otherwise, or as adequate protection of a deposit
treated as cash collateral under the Bankruptcy Code, receive payment of a
proportion of the aggregate amount of principal and interest then due (or
overdue) with respect to the Loans and participations in LC Reimbursement
Obligations (if any) held by it which is greater than the proportion received by
any other Lender in respect of the aggregate amount of principal and interest
then due (or overdue) with respect to the Loans and participations in LC
Reimbursement Obligations (if any) held by such other Lender, the Lender
receiving such proportionately greater payment shall purchase such
participations in the Loans and participations in LC Reimbursement Obligations
(if any) held by the other Lenders, and such other adjustments shall be made, as
may be required so that all such payments of principal and interest with respect
to the Loans and participations in LC Reimbursement Obligations held by the
Lenders shall be shared by the Lenders pro rata, subject to Section 2.11.
(b) Nothing in this Section 11.04 shall impair the right of any
Lender, and notwithstanding the provisions of Section 362 of the Bankruptcy Code
and without application or motion to, or order from, the Court, to exercise any
right of set-off or counterclaim it may have and to apply the amount subject to
such exercise to the payment of indebtedness of the relevant MHG Company other
than its indebtedness in respect of the Loans and LC Reimbursement Obligations.
(c) The Borrowers agree, to the fullest extent they may effectively
do so under applicable law, that any holder of a participation in a Loan or LC
Reimbursement Obligation, whether or not acquired pursuant to the foregoing
arrangements, may exercise rights of set-off or counterclaim and other rights
with respect to such participation as fully as if such holder of a participation
were a direct creditor of the Borrowers in the amount of such participation.
Section 11.05 Amendments and Waivers.
----------------------
(a) Neither this Agreement nor any other Financing Document, nor any
terms hereof or thereof, may be amended, supplemented or modified except in
accordance with the provisions of this Section 11.05.
(b) Except as set forth in subsections (c) through (j) of this
Section 11.05, the Required Lenders (or the Administrative Agent with their
written consent) may from time to time (i) enter into written amendments,
supplements or modifications of any Financing Document (which shall not be
effective unless signed by each MHG Company party thereto) for the purpose of
adding any provisions to such Financing Document or changing in any manner the
rights or obligations of the parties hereunder or thereunder or (ii) waive, on
such terms and conditions as the Required Lenders (or the Administrative Agent
with their written consent) may specify in such instrument, any of the
requirements of any Financing Document or any Default or Event of Default and
its consequences (any such amendment, supplement, modification or waiver, a
"Specified Change"); provided that
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(1) without the written consent of the relevant LC Issuing Bank,
no Specified Change shall amend, supplement or otherwise modify any
Letter of Credit or any provision of this Agreement governing the
rights or obligations of such LC Issuing Bank;
(2) without the written consent of the then Administrative
Agent, no Specified Change shall amend, modify or waive any provision
of Article 9 or any other provision of this Agreement governing the
rights or obligations of the Administrative Agent; and
(3) without the written consent of all the Lenders, no Specified
Change shall reduce the percentage specified in the definitions of
"Required Lenders", and "Supermajority Lenders".
(c) Without the written consent of the Required Lenders, no Specified
Change shall (i) waive any of the conditions precedent set forth in Section 3.01
(except that the making of a Loan by any Lender on the date of initial Borrowing
shall be deemed to constitute a waiver of such conditions precedent by such
Lender), (ii) waive any Default or Event of Default and its consequences or
(iii) amend, supplement or otherwise modify any provision of Section 8.01.
(d) Without the written consent of all the Lenders, no Specified
Change shall take any action which has the effect of releasing all or
substantially all of the Collateral, except as expressly provided or permitted
in this Agreement or any Collateral Document.
(e) Without the written consent of all the Lenders, no Specified
Change shall (i) consent to the assignment or transfer by any Borrower of any of
its rights and obligations under the Financing Documents, other than in
connection with any merger or consolidation permitted by this Agreement, (ii)
increase the aggregate amount of the Credit Exposure of all Lenders or include,
as indebtedness under this Agreement, any indebtedness of the MHG Companies
other than the Borrowers' indebtedness under the Credit Facilities, (iii) permit
the Tranche A Loans and Tranche A Commitment of any Lender, on the one hand, and
the Tranche B Loans and Tranche B Commitment of such Lender, on the other hand,
to be assigned on a non-pro rata basis, (iv) change the definition of "Tranche B
Commencement Date", or (v) change the priority claim status of the Obligations.
(f) Without the written consent of each Lender directly affected
thereby, no Specified Change shall reduce the amount or extend the scheduled
date of maturity of any Loan, or reduce the stated rate of any interest or fee
payable hereunder or extend the scheduled date of any payment thereof, or
increase the amount or extend the expiration date of any Commitment (it being
understood that no amendment, modification or waiver of any condition precedent,
covenant or Default shall (subject to clause (h) below) constitute an increase
in or extension of the expiration date of any Commitment of any Lender, and that
no increase in the available portion of any Commitment of any Lender shall
constitute an increase in such Commitment of such Lender) or amend, modify or
waive any provision of this subsection (f).
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(g) Without the written consent of each Lender directly affected
thereby, no Specified Change shall change (i) any provision hereof requiring
payments with respect to the Tranche A Commitments and the Tranche A Loans to be
allocated on a pro rata basis among the Lenders having Tranche A Exposure or
(ii) any provision hereof requiring payments with respect to the Tranche B
Commitments and the Tranche B Loans to be allocated on a pro rata basis among
the Lenders having Tranche B Exposure.
(h) Without the written consent of Supermajority Lenders, no
Specified Change shall (i) waive, reduce or postpone any Unscheduled Mandatory
Prepayment or unscheduled mandatory reduction of the Tranche A Commitments or
the Tranche B Commitments pursuant to Section 2.08, (ii) change the definition
of "Commitment Termination Date" if the effect of such change would be to extend
the date of termination of the Commitments beyond the date on which the
Commitments would terminate in the absence of such change, except as such dates
may be extended by Required Lenders as expressly provided in such definition,
(iii) increase the amount set forth in the definition of "Borrowing Base" for
any period, or (iv) change Section 5.10 if the effect of such change would be to
extend the date for filing a joint plan of reorganization acceptable to the
Required Lenders to a date later than four months after the Petition Date.
(i) Any such waiver and any such amendment, supplement or
modification shall apply equally to each of the Lenders and shall be binding
upon the Lenders, the Administrative Agent, all future holders of the Loans, and
the Borrowers.
Section 11.06 Successors and Assigns.
----------------------
(a) The provisions of this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, except that the Borrowers may not assign or otherwise transfer any of
their rights under this Agreement (other than in connection with any merger or
consolidation permitted by this Agreement) without the prior written consent of
all the Lenders and the LC Issuing Banks. Any attempted assignment or transfer
in contravention of the foregoing shall be null and void.
(b) Any Lender may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in any or all of its
Loans and/or its Tranche A Commitment and its Tranche B Commitment (on a pro
rata basis) or its LC Exposure. If any Lender grants a participating interest
to a Participant, whether or not upon notice to the MHG Companies and the
Administrative Agent, such Lender shall remain responsible for the performance
of its obligations hereunder, and the Borrowers and the Administrative Agent
shall continue to deal solely and directly with such Lender in connection with
such Lender's rights and obligations under the Financing Documents. Any
agreement pursuant to which any Lender may grant such a participating interest
shall provide that such Lender shall retain the sole right and responsibility to
enforce the obligations of the MHG Companies or any other party under the
Financing Documents, including the right to approve any Specified Change;
provided that such participation agreement may provide that (A) such Lender will
not agree to any Specified Change described in Section 11.05(f) without the
consent of the Participant and (B) such Lender will agree to vote the
Participant's participating interest with respect to any matter requiring a vote
of all Lenders under the Security Agreement as
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the Participant may direct. Each of the Borrowers agrees that each Participant
shall, to the extent provided in its participation agreement, be entitled to the
benefits of Section 2.05(k) and Article 10 with respect to its participating
interest. An assignment or other transfer which is not permitted by Section
11.06(c) or (d) shall be given effect for purposes of this Agreement only to the
extent of a participating interest granted in accordance with this subsection
(b).
(c) Any Lender may at any time on or after the Closing Date assign
to one or more (x) Eligible Assignees or (y) affiliates or Related Funds of such
transferor Lender (each such Eligible Assignee, affiliate or Related Fund being
an "Assignee") all, or a ratable portion (i.e., a pro rata assignment (based on
the respective principal amounts thereof then outstanding or in effect) of both
the Tranche A Commitment and the Tranche A Loans of the assigning Lender, on the
one hand, and the Tranche B Commitment and the Tranche B Loans of such assigning
Lender, on the other hand) of all, of its rights and obligations under the
Credit Facilities, and such Assignee shall assume such rights and obligations,
with notice to the Borrowers and with (and subject to) the consent of the
Administrative Agent and each LC Issuing Bank (each such consent to be given or
withheld in the sole discretion of the Administrative Agent or such LC Issuing
Bank, as the case may be); provided that:
(i) any assignment of only a ratable portion of the transferor
Lender's rights and obligations shall be equivalent, in the case of each
Assignee, to an initial Tranche A Commitment and Tranche B Commitment of not
less than $5,000,000 in the aggregate;
(ii) no such consent shall be required if (x) the Assignee is an
affiliate or Related Fund of such transferor Lender, (y) the Assignee is already
a Lender immediately prior to such assignment or (z) an Event of Default shall
have occurred and be continuing when such assignment is made; provided that in
each of the foregoing cases written notice of such assignment shall be given to
the Administrative Agent and the Borrowers;
(iii) such assignment may be made to an Assignee that is already a
Lender, or made by a Lender to one of its Related Funds, without regard to the
foregoing minimum assignment amount;
(iv) the parties to each such assignment shall execute and deliver to
the Administrative Agent an Assignment Agreement for its acceptance and
recording in the Register at least two Business Days prior to the proposed
effective date of such assignment; and
(v) the Assignee under each such assignment (unless it is already a
Lender) shall deliver to the Administrative Agent a completed Administrative
Questionnaire.
When (A) such an Assignment Agreement (together with an Administrative
Questionnaire, if required) has been delivered to the Administrative Agent, (B)
such assignment has been recorded in the Register, and (C) such Assignee has
paid to such transferor Lender an amount equal to the purchase price agreed
between them, such Assignee shall be a Lender party to this Agreement and shall
have all the rights and obligations of a Lender with outstanding Loans and/or
Commitments as set forth in such instrument of assignment, and the transferor
Lender shall be released from its
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obligations hereunder to a corresponding extent, and no further consent or
action by any party shall be required. Upon the consummation of any assignment
pursuant to this subsection (c), (x) the Administrative Agent shall notify the
Collateral Agent thereof and (y) the transferor Lender, the Administrative Agent
and the Borrowers shall make appropriate arrangements so that, if required, a
new Tranche A Note and a new Tranche B Note complying with the provisions of
Section 2.03 is issued to the Assignee. In connection with any such assignment,
the transferor Lender shall pay to the Administrative Agent an administrative
fee for processing such assignment in the amount of $3,500. If the Assignee is
organized under the laws of a jurisdiction outside the United States, it shall
deliver to the Borrowers and the Administrative Agent certification as to
exemption from deduction or withholding of United States federal income taxes in
accordance with Section 10.02. Anything contained herein to the contrary
notwithstanding, the Administrative Agent shall not be required to accept and
record assignments hereunder on more than one day during each week, and each
assigning Lender shall coordinate each assignment with the Administrative Agent
so that the proposed effective date of such assignment shall be the same date as
the effective date of each other assignment during the relevant week by each
other assigning Lender.
(d) Any Lender may at any time assign all or any portion of its Loans
or its Notes as security to a Federal Reserve Bank. No such assignment or
pledge shall release the transferor Lender from its obligations hereunder.
(e) The Administrative Agent shall maintain at its address at which
notices are to be given to it pursuant to Section 11.01 a copy of each
instrument of assignment delivered to it pursuant to subsection (c) of this
Section 11.06 and a register for the recordation of the names and addresses of
the Lenders, their respective Tranche A Commitments and Tranche B Commitments
and the principal amounts of their respective Tranche A Loans and Tranche B
Loans outstanding from time to time (the "Register"). The entries in the
Register shall be conclusive, in the absence of manifest error, and the
Borrowers, the Administrative Agent and the Lenders may treat each Person whose
name is recorded in the Register as a Lender for all purposes of this Agreement.
The Register shall be available for inspection by the Borrowers or any Lender
Party at any reasonable time and from time to time upon reasonable prior notice.
(f) No Assignee, Participant or other transferee of any Lender's
rights shall be entitled to receive any greater payment under Section 2.05(k),
10.01 or 10.02 than such Lender would have been entitled to receive with respect
to the rights transferred, unless such transfer is made with the Borrowers'
prior written consent or by reason of the provisions of Section 10.01, or 10.02
requiring such Lender to designate a different Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
Section 11.07 Margin Stock. Each of the Lenders represents to the
------------
Administrative Agent and each of the other Lenders that it in good faith is not
relying upon any Margin Stock as collateral in the extension or maintenance of
the credit provided for in this Agreement.
Section 11.08 Governing Law; Submission to Jurisdiction. THIS
-----------------------------------------
AGREEMENT, THE NOTES AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND
THEREUNDER SHALL BE GOVERNED BY, AND SHALL BE
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CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE BANKRUPTCY CODE (WITH RESPECT
ONLY TO THOSE PROVISIONS OF THIS AGREEMENT WHICH, BY THEIR EXPRESS TERMS, ARE
GOVERNED BY THE BANKRUPTCY CODE) AND THE INTERNAL LAWS OF THE STATE OF NEW YORK
(INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. SUBJECT TO THE
JURISDICTION OF THE COURT, EACH OF THE BORROWERS HEREBY SUBMITS TO THE
NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY
FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO ANY OF THE
FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. EACH OF THE
BORROWERS IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY
SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING
BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
Section 11.09 Counterparts; Integration. This Agreement and any
-------------------------
amendment to this Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
were upon the same instrument. This Agreement (together with the other Financing
Documents) constitutes the entire agreement and understanding among the parties
hereto and supersedes any and all prior agreements and understandings, oral or
written, relating to the subject matter hereof.
Section 11.10 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY
--------------------
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED THEREBY. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE,
AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE
BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS, AS
APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN
THIS SECTION 11.10.
Section 11.11 Confidentiality. Each Lender Party agrees to keep any
---------------
non-public information delivered or made available by any MHG Company to it
confidential and to use such information only for the purpose of evaluating,
approving, structuring and administering the Loans and Letters of Credit and
negotiating and effectuating any plan of reorganization or any sale of assets
under Bankruptcy Code Section 363; provided that nothing herein shall prevent
any Lender Party from disclosing such information (i) to Persons employed or
retained by such Lender Party who are engaged or expected to be engaged in
evaluating, approving, structuring or administering the Loans and Letters of
Credit or evaluating, negotiating or effectuating any plan of reorganization or
any sale
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of assets under Bankruptcy Code Section 363, (ii) to any other Person if
reasonably incidental to the administration of the Loans or Letters of Credit,
(iii) to any other Lender Party or to any Existing Lender, (iv) pursuant to any
subpoena or express direction of any court or other authorized government agency
or as otherwise required by law, (v) upon the request or demand of any bank
regulatory agency, bank examiner or comparable authority, (vi) which has
theretofore been publicly disclosed or is otherwise available to such Lender
Party on a non-confidential basis from a source that is not, to its knowledge,
subject to a confidentiality agreement with any MHG Company, (vii) in connection
with any litigation to which any Lender Party or its subsidiaries or Parent may
be a party, (viii) to the extent necessary in connection with the exercise of
any remedy hereunder, (ix) to such Lender Party's affiliates, legal counsel and
independent auditors, (x) to any actual or proposed Participant or Assignee that
has signed a written agreement containing provisions substantially similar to
this Section 11.11; (xi) any prospective acquirer of any Borrower, Healthcare
Facility or other assets of any Borrower provided such Person agrees to keep
such information confidential and use the same only for the purpose of
evaluating and implementing such prospective acquisition; (xii) so long as
consistent with Section 5.13, any replacement manager or potential replacement
manager for any of the Healthcare Facilities that has signed a written agreement
containing provisions substantially similar to this Section 11.11; or (xiii) any
other Person approved by the Borrowers in writing. Any Lender Party that
discloses confidential information to other Persons as contemplated by clause
(i), (ii) or (ix) of the foregoing proviso shall inform such other Persons of
the confidential nature of such information and shall instruct them to keep such
information confidential (except for disclosures permitted by the foregoing
proviso). Before any Lender Party discloses confidential information pursuant to
clause (iv) or (vii) of the foregoing proviso, such Lender Party shall, to the
extent permitted by law, use its best efforts to advise MHG of such proposed
disclosure so that MHG may, in its discretion, seek an appropriate protective
order. If and to the extent requested to do so by the Borrowers, the
Administrative Agent may deliver copies of information supplied to it pursuant
to Section 5.01 to any Person referred to in clause (x) or (xi) of the foregoing
proviso. Anything herein to the contrary notwithstanding, no Lender Party shall
have any liability with respect to disclosure of confidential information by
electronic transmission, including, without limitation, facsimile, e-mail and
internet communication, as long as such Lender Party exercises reasonable care
in effecting such transmission.
Section 11.12 Parties Including Trustees; Court Proceedings. This
---------------------------------------------
Agreement and the other Financing Documents shall be binding upon, and inure to
the benefit of, the successors of each Agent and each Lender, and the assigns,
transferees and endorsees of each Agent and each Lender. The security interests
and Liens created in this Agreement, the Collateral Documents and the other
Financing Documents shall be and remain valid and perfected, and the claims of
the Agents and Lenders hereunder valid and enforceable in accordance with the
terms hereof, notwithstanding the discharge of any Borrower pursuant to 11
U.S.C. (S) 1141, the conversion of any Chapter 11 Case or any other bankruptcy
case of any Credit Party to a case under Chapter 7 of the Bankruptcy Code, the
dismissal of any Chapter 11 Case or any subsequent Chapter 7 case or the release
of any Collateral from the property of any Credit Party. The security interests
and Liens created in this Agreement, the Collateral Documents and the other
Financing Documents shall be and remain valid and perfected without the
necessity that any Agent or any Lender file financing statements or otherwise
perfect its security interests or Liens under applicable law. This Agreement,
the claims of
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the Agents and Lenders hereunder, and all security interests or Liens created
hereby or pursuant hereto or by or pursuant to the Collateral Documents or any
other Financing Document shall at all times be binding upon Credit Parties, the
estates of Credit Parties and any trustee appointed in any Chapter 11 Case or
any Chapter 7 case, or any other successor in interest to Borrowers. This
Agreement shall not be subject to Section 365 of the Bankruptcy Code.
Section 11.13 MHG Appointed Attorney-In-Fact. Each Borrower other than
------------------------------
MHG hereby irrevocably appoints MHG as such Borrower's agent and attorney-in-
fact, with full authority in the place and stead of such Borrower and in the
name of such Borrower, the Borrowers, MHG or otherwise, from time to time in 's
discretion to execute and deliver (and receive, where applicable) Notices of
Borrowing, LC Requests, Prepayment Notices and other written notices and
communications hereunder on behalf of the Borrowers to the Administrative Agent
and the Lenders, and to deliver written and unwritten notices and communications
to the foregoing effect, and each Lender Party shall be entitled to rely upon
any such Notice of Borrowing, LC Request, Prepayment Notice, notice or
communication as a notice, communication or consent, as the case may be, of the
Borrowers, and shall incur no liability to any Borrower or the Borrowers in
acting upon any such notice or communication, that such Lender Party believes in
good faith to have been given by a duly authorized officer or other person
authorized by MHG.
Section 11.14 No Waiver. Anything contained herein or in any other
---------
Financing Document to the contrary notwithstanding, no provision of this
Agreement or any other Financing Document shall be construed as or deemed a
waiver of (i) any claim by the Existing Lenders for substantive consolidation of
MPAN and any of the MHG Companies or (ii) any defense to substantive
consolidation of MPAN and any of the MHG Companies.
Section 11.15 Survival of Agreements. The Borrowers hereby agree that,
----------------------
notwithstanding anything contained herein or in any other Financing Document and
the repayment of the Obligations hereunder, (a) no Borrower shall obtain any
additional financing in any of the Chapter 11 Cases under Section 364(d) of the
Bankruptcy Code, and (b) the agreements of the Borrowers set forth in the
preceding clause (a) and in Sections 5.01(k), 5.01(s), 5.11, 5.13, 7.05, 7.07,
7.17 and 11.03 shall survive the payment in full of the Obligations and the
termination of the Commitments and shall not terminate until the effective date
of a plan of reorganization in the Chapter 11 Cases.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
BORROWERS: Mariner Health Group, Inc.
Aid & Assistance, Inc.
Beechwood Heritage Retirement Community, Inc.
Bride Brook Nursing & Rehabilitation Center,
Inc.
Compass Pharmacy Services, Inc.
Compass Pharmacy Services of Maryland, Inc.
Compass Pharmacy Services of Texas, Inc.
Cypress Nursing Facility, Inc.
Long Ridge Nursing and Rehabilitation Center,
Inc.
Longwood Rehabilitation Center, Inc.
Mariner Health at Bonifay, Inc.
Mariner Health Care, Inc.
Mariner Health Care of Atlantic Shores, Inc.
Mariner Health Care of Deland, Inc.
Mariner Health Care of Fort Wayne, Inc.
Mariner Health Care of Greater Laurel, Inc.
Mariner Health Care of Inverness, Inc.
Mariner Health Care of Lake Worth, Inc.
Mariner Health Care of MacClenny, Inc.
Mariner Health Care of Metrowest, Inc.
Mariner Health Care of Nashville, Inc.
Mariner Health Care of North Hills, Inc.
Mariner Health Care of Orange City, Inc.
Mariner Health Care of Palm City, Inc.
Mariner Health Care of Pinellas Point, Inc.
Mariner Health Care of Port Orange, Inc.
Mariner Health Care of Southern Connecticut,
Inc.
Mariner Health Care of Toledo, Inc.
Mariner Health Care of Tuskawilla, Inc.
Mariner Health Care of West Hills, Inc.
Mariner Health Central, Inc.
Mariner Health Home Care, Inc.
Mariner Health of Florida, Inc.
Mariner Health of Jacksonville, Inc.
Mariner Health of Maryland, Inc.
Mariner Health of Orlando, Inc.
Mariner Health of Palmetto, Inc.
Mariner Health of Seminole County, Inc.
Mariner Health of Tampa, Inc.
Mariner Health Resources, Inc.
Mariner Physician Services, Inc.
Mariner Practice Corporation
S-1
<PAGE>
Mariner - Regency Health Partners, Inc.
MarinerSelect Staffing Solutions, Inc.
Mariner Supply Services, Inc.
MedRehab, Inc.
MedRehab of Indiana, Inc.
MedRehab of Louisiana, Inc.
MedRehab of Missouri, Inc.
Merrimack Valley Nursing & Rehabilitation
Center, Inc.
Methuen Nursing & Rehabilitation Center, Inc.
MHC Rehab. Corp.
MHC Transportation, Inc.
Mystic Nursing & Rehabilitation Center, Inc.
National Health Strategies, Inc.
Park Terrace Nursing & Rehabilitation Center,
Inc.
Pendleton Nursing & Rehabilitation Center,
Inc.
Pinnacle Care Corporation
Pinnacle Care Corporation of Huntington
Pinnacle Care Corporation of Nashville
Pinnacle Care Corporation of Seneca
Pinnacle Care Corporation of Sumter
Pinnacle Care Corporation of Williams Bay
Pinnacle Care Corporation of Wilmington
Pinnacle Care Management Corporation
Pinnacle Pharmaceuticals, Inc.
Pinnacle Pharmaceutical Services, Inc.
Pinnacle Rehabilitation, Inc.
Pinnacle Rehabilitation of Missouri, Inc.
Prism Care Centers, Inc.
Prism Health Group, Inc.
Prism Home Care Company, Inc.
Prism Home Care, Inc.
Prism Home Health Services, Inc.
Prism Hospital Ventures, Inc.
Prism Rehab Systems, Inc.
Regency Health Care Center of Seminole County
Inc.
Sassaquin Nursing & Rehabilitation Center,
Inc.
Tampa Medical Associates, Inc.
The Ocean Pharmacy, Inc.
Tri-State Health Care, Inc.
Windward Health Care, Inc.
By: ________________________________________
Boyd P. Gentry
Vice President for each of the foregoing
Borrowers
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<PAGE>
IHS Rehab Partnership, Ltd.
By: Mariner Health Care of Nashville, Inc.,
its General Partner
By:___________________________________
Name:
Title:
Mariner Health Properties IV, Ltd.
By: Mariner Health of Florida, Inc., its
General Partner
By:___________________________________
Name:
Title:
Mariner Health Properties VI, Ltd.
By: Mariner Health of Florida, Inc., its
General Partner
By:___________________________________
Name:
Title:
Seventeenth Street Associates Limited
Partnership
By: Tri-State Health Care, Inc., its General
Partner
By:___________________________________
Name:
Title:
S-3
<PAGE>
Allegis Health and Living Center at Heritage
Harbour, L.L.C.
By: Mariner Health of Maryland, Inc., its
General Partner
By:___________________________________
Name:
Title:
Notice Address for each Borrower:
Mariner Post-Accute Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, GA 30346
Attention: Boyd Gentry
Facsimile: (678) 443-6874
with copies to:
Powell, Goldstein, Frazer & Murphy, LLP
191 Peachtree Street
16/th/ Floor
Atlanta, GA 30303
Attention: Robert C. Lewinson, Esq.
Facsimile: (404) 572-6999
and
Stutman, Treister & Glatt
Professional Corporation
3699 Wilshire Boulevard
Suite 900
Los Angeles, CA 90010
Attention: Jeffrey H. Davidson, Esq.
K. John Shaffer, Esq.
Facsimile: (213) 251-5288
S-4
<PAGE>
AGENTS AND LENDERS: PNC Bank, National Association, individually
and as Administrative Agent, Collateral Agent
and LC Issuing Bank
By:___________________________________
Name:
Title:
Notice Address:
One PNC Plaza
249 Fifth Avenue
Pittsburgh, PA 15222-2707
Attention: Nancy Chiles
Facsimile: (412) 762-2760
with a copy to:
Buchanan Ingersoll
Professional Corporation
One Oxford Centre
301 Grant Street, 20/th/ Floor
Pittsburgh, PA 15219-1410
Attention: Paula Zawadski, Esq.
Facsimile: (412) 562-1041
S-5
<PAGE>
First Union National Bank,
individually and as Syndication Agent
By:___________________________________
Name:
Title:
Notice Address:
First Union Securities, Inc.
First Union Securities
NC0737
301 South College Street, TW5
Charlotte, NC 28288-0737
Attention: Christian Ullrich
Facsimile: (704) 383-6249
with a copy to:
Kennedy Covington Lobdell & Hickman, LLP
Nations Bank Corporate Center
Suite 4200
100 N. Tryon Street
Charlotte, NC 28202-4006
Attention: Dean Warren, Esq.
Facsimile: (704) 331-7598
S-6
<PAGE>
[INTENTIONALLY DELETED]
S-7
<PAGE>
[INTENTIONALLY DELETED]
S-8
<PAGE>
Bank One, N.A., as a Lender
By:___________________________________
Name:
Title:
Notice Address:
American National Bank
120 South LaSalle Street, 6/th/ Floor
Chicago, IL 60603
Attention: Geraldine King
Facsimile: (312) 661-5906
S-9
<PAGE>
Comerica Bank,
as a Lender
By:___________________________________
Name:
Title:
Notice Address:
500 Woodward Avenue, 9/th/ Floor
Detroit, MI 48226
Attention: David Day
Facsimile: (313) 961-1447
S-10
<PAGE>
Credit Lyonnais New York Branch,
as a Lender
By:___________________________________
Name:
Title:
Notice Address:
1301 Sixth Avenue, 20/th/ Floor
New York, NY 10019
Attention: John-Charles van Essche
Facsimile: (212) 261-3259
S-11
<PAGE>
[INTENTIONALLY DELETED]
S-12
<PAGE>
Bank Austria Creditanstalt-Corporate Finance,
Inc.,
as a Lender
By:___________________________________
Name:
Title:
Notice Address:
Two Greenwich Plaza
Greenwich, CT 06830
Attention: Jane E. Orndahl
Facsimile: (203) 861-6413
S-13
<PAGE>
[INTENTIONALLY DELETED]
S-14
<PAGE>
EXHIBIT 10.96
================================================================================
REVOLVING CREDIT AND GUARANTY AGREEMENT
================================================================================
Among
MARINER POST-ACUTE NETWORK, INC.
a Debtor and a Debtor-in-Possession under Chapter 11 of the Bankruptcy Code
as Borrower
-----------
and
THE SUBSIDIARIES OF THE BORROWER NAMED HEREIN,
each a Debtor and a Debtor-in-Possession under Chapter 11 of the Bankruptcy Code
as Guarantors
-------------
and
THE BANKS PARTY HERETO,
and
THE CHASE MANHATTAN BANK,
as Administrative Agent, Documentation Agent
--------------------------------------------
and Collateral Agent
--------------------
CHASE SECURITIES INC.,
as Book Manager
---------------
and
---
Lead Arranger
-------------
================================================================================
Dated as of January 18, 2000
================================================================================
<PAGE>
REVOLVING CREDIT AND GUARANTY AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
SECTION 1. DEFINITIONS...................................................................... 3
SECTION 1.01 Defined Terms..................................................... 3
SECTION 1.02 Terms Generally................................................... 21
SECTION 2. AMOUNT AND TERMS OF CREDIT....................................................... 21
SECTION 2.01 Commitment of the Banks........................................... 21
SECTION 2.02 Borrowing Base.................................................... 22
SECTION 2.03 Letters of Credit................................................. 22
SECTION 2.04 Issuance.......................................................... 24
SECTION 2.05 Nature of Letter of Credit Obligations Absolute................... 24
SECTION 2.06 Making of Loans................................................... 24
SECTION 2.07 Repayment of Loans; Evidence of Debt.............................. 25
SECTION 2.08 Interest on Loans................................................. 26
SECTION 2.09 Default Interest.................................................. 26
SECTION 2.10 Optional Termination or Reduction of Commitment................... 26
SECTION 2.11 Mandatory Prepayment; Commitment Termination;
Cash Collateral................................................... 27
SECTION 2.12 Optional Prepayment of Loans...................................... 27
SECTION 2.13 Reserve Requirements; Change in Circumstances..................... 27
SECTION 2.14 Pro Rata Treatment, etc........................................... 28
SECTION 2.15 Taxes............................................................. 28
SECTION 2.16 Certain Fees...................................................... 31
SECTION 2.17 Commitment Fee.................................................... 31
SECTION 2.18 Letter of Credit Fees............................................. 31
SECTION 2.19 Nature of Fees.................................................... 31
SECTION 2.20 Priority and Liens................................................ 32
SECTION 2.21 Right of Set-Off.................................................. 33
SECTION 2.22 Security Interest in Letter of Credit Account..................... 34
SECTION 2.23 Payment of Obligations............................................ 34
SECTION 2.24 No Discharge; Survival of Claims.................................. 34
SECTION 2.25 Use of Cash Collateral............................................ 34
SECTION 3. REPRESENTATIONS AND WARRANTIES................................................... 34
SECTION 3.01 Organization and Authority........................................ 34
SECTION 3.02 Due Execution..................................................... 35
SECTION 3.03 Statements Made................................................... 35
SECTION 3.04 Financial Statements.............................................. 36
SECTION 3.05 Ownership......................................................... 36
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 3.06 Liens............................................................. 36
SECTION 3.07 Compliance with Law............................................... 37
SECTION 3.08 Insurance......................................................... 37
SECTION 3.09 The Orders........................................................ 37
SECTION 3.10 Use of Proceeds................................................... 37
SECTION 3.11 Litigation........................................................ 38
SECTION 3.12 Year 2000 Matters................................................. 38
SECTION 3.13 Health Care Permits............................................... 38
SECTION 4. CONDITIONS OF LENDING............................................................ 39
SECTION 4.01 Conditions Precedent to Initial Loans and
Initial Letters of Credit......................................... 39
SECTION 4.02 Conditions Precedent to Each Loan and Each
Letter of Credit.................................................. 43
SECTION 5. AFFIRMATIVE COVENANTS............................................................ 45
SECTION 5.01 Financial Statements, Reports, etc................................ 45
SECTION 5.02 Corporate Existence............................................... 47
SECTION 5.03 Insurance......................................................... 48
SECTION 5.04 Obligations and Taxes............................................. 48
SECTION 5.05 Notice of Event of Default, Investigations,
Violations, etc................................................... 48
SECTION 5.06 Borrowing Base Certificate........................................ 49
SECTION 5.07 Maintenance of Concentration Accounts............................. 49
SECTION 5.08 Books and Records, Inspection and Collateral
Review Rights..................................................... 49
SECTION 5.09 Conduct of Business and Maintenance of Existence,................. 50
etc.
SECTION 5.10 Health Care Permits and Approvals................................. 50
SECTION 5.11 Financial Advisor................................................. 51
SECTION 6. NEGATIVE COVENANTS............................................................... 51
SECTION 6.01 Liens............................................................. 51
SECTION 6.02 Merger, etc....................................................... 51
SECTION 6.03 Indebtedness...................................................... 51
SECTION 6.04 Capital Expenditures.............................................. 52
SECTION 6.05 EBITDA............................................................ 52
SECTION 6.06 Guarantees and Other Liabilities.................................. 53
SECTION 6.07 Chapter 11 Claims................................................. 53
SECTION 6.08 Dividends; Capital Stock.......................................... 53
SECTION 6.09 Transactions with Affiliates...................................... 53
SECTION 6.10 Investments, Loans and Advances................................... 53
SECTION 6.11 Disposition of Assets............................................. 53
SECTION 6.12 Nature of Business................................................ 54
SECTION 6.13 Health Care Permits and Approvals................................. 54
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 6.14 Census............................................................ 54
SECTION 6.15 Assumption of Provider Agreements................................. 55
SECTION 7. EVENTS OF DEFAULT................................................................ 55
SECTION 7.01 Events of Default................................................. 55
SECTION 8. THE AGENT........................................................................ 59
SECTION 8.01 Administration by Agent........................................... 59
SECTION 8.02 Advances and Payments............................................. 59
SECTION 8.03 Sharing of Setoffs................................................ 59
SECTION 8.04 Agreement of Required Banks....................................... 60
SECTION 8.05 Liability of Agent................................................ 60
SECTION 8.06 Reimbursement and Indemnification................................. 61
SECTION 8.08 Independent Banks................................................. 61
SECTION 8.09 Notice of Transfer................................................ 61
SECTION 8.10 Successor Agent................................................... 62
SECTION 9. GUARANTY......................................................................... 62
SECTION 9.01 Guaranty.......................................................... 62
SECTION 9.02 No Impairment of Guaranty......................................... 63
SECTION 9.03 Subrogation....................................................... 63
SECTION 10. MISCELLANEOUS.................................................................... 64
SECTION 10.01 Notices........................................................... 64
SECTION 10.02 Survival of Agreement, Representations and
Warranties, etc................................................... 64
SECTION 10.03 Successors and Assigns............................................ 64
SECTION 10.04 Confidentiality................................................... 67
SECTION 10.05 Expenses.......................................................... 67
SECTION 10.06 Indemnity......................................................... 67
SECTION 10.07 CHOICE OF LAW..................................................... 68
SECTION 10.08 No Waiver......................................................... 68
SECTION 10.09 Extension of Maturity............................................. 68
SECTION 10.10 Amendments, etc................................................... 68
SECTION 10.11 Severability...................................................... 69
SECTION 10.12 Headings.......................................................... 69
SECTION 10.13 Execution in Counterparts......................................... 70
SECTION 10.14 Prior Agreements.................................................. 70
SECTION 10.15 Further Assurances................................................ 70
SECTION 10.16 WAIVER OF JURY TRIAL.............................................. 70
</TABLE>
iii
<PAGE>
ANNEX A - Commitment Amounts
EXHIBIT A-1- Form of First Day Order
EXHIBIT A-2- Form of Interim Order
EXHIBIT A-3- Form of Final Order
EXHIBIT B - Form of Security and Pledge Agreement
EXHIBIT C - Form of Opinion of Counsel
EXHIBIT D - Form of Assignment and Acceptance
EXHIBIT E - Form of Borrowing Base Certificate
SCHEDULE 1.01 - Existing Agreements
SCHEDULE 3.05 - Subsidiaries
SCHEDULE 3.06 - Liens
SCHEDULE 6.09 - Transactions with Affiliates
iv
<PAGE>
REVOLVING CREDIT AND GUARANTY AGREEMENT
Dated as of January 18, 2000
REVOLVING CREDIT AND GUARANTY AGREEMENT, dated as of January 18, 2000,
among MARINER POST-ACUTE NETWORK, INC., a Delaware corporation (the "Borrower"),
--------
a debtor and debtor-in-possession in a case pending under Chapter 11 of the
Bankruptcy Code, and each of the direct or indirect subsidiaries of the Borrower
signatory hereto (each a "Guarantor" and collectively, the "Guarantors"), each
--------- ----------
of which Guarantors referred to in this paragraph is a debtor and debtor-in-
possession in a case pending under Chapter 11 of the Bankruptcy Code (the cases
of the Borrower and the Guarantors, each a "Case" and collectively, the
----
"Cases"), THE CHASE MANHATTAN BANK, a New York banking corporation ("Chase"),
----- -----
each of the other financial institutions from time to time party hereto
(together with Chase, the "Banks") and THE CHASE MANHATTAN BANK, as agent (in
-----
such capacity, the "Agent") for the Banks.
-----
INTRODUCTORY STATEMENT
----------------------
On January 18, 2000, the Borrower and the Guarantors filed voluntary
petitions with the Bankruptcy Court initiating the Cases and have continued in
the possession of their assets and in the management of their business pursuant
to Sections 1107 and 1108 of the Bankruptcy Code.
The Borrower has applied to the Banks for a revolving credit and
letter of credit facility in an aggregate principal amount not to exceed
$100,000,000, all of the Borrower's obligations under which are to be guaranteed
by the Guarantors.
The proceeds of the Loans will be used for working capital and other
general corporate purposes of the Borrower and the Guarantors consistent with
the Budget hereinafter referred to (including periodic updates thereof).
To provide guarantees and security for the repayment of the Loans, the
reimbursement of any draft drawn under a Letter of Credit and the payment of the
other obligations of the Borrower and the Guarantors hereunder and under the
other Loan Documents (including, without limitation, the Obligations of the
Borrower under Section 6.03(vi)), the Borrower and the Guarantors will provide
to the Agent and the Banks the following (each as more fully described herein):
(1) a guaranty from each of the Guarantors of the due and punctual
payment and performance of the obligations of the Borrower hereunder;
(2) an allowed administrative expense claim in each of the Cases
pursuant to Section 364(c)(1) of the Bankruptcy Code having priority over all
administrative expenses of the kind specified in Sections 503(b) and 507(b) of
the Bankruptcy Code;
(3) perfected first priority Liens, pursuant to Section 364(c)(2) of
the Bankruptcy Code, upon all unencumbered property of the Borrower and the
Guarantors (including, without limitation, all Accounts arising on and after the
Filing Date (except as otherwise provided in the
<PAGE>
Orders, it being understood that any such Accounts on which the Agent and the
Banks do not have such perfected first priority Liens shall be excluded from the
Borrowing Base) but excluding assets subject to Permitted Adequate Protection
Liens and other Permitted Liens and also excluding bankruptcy causes of action
(it being understood that, notwithstanding such exclusion, the proceeds of such
causes of action shall be available for the repayment of the Obligations)) and
on all cash and cash equivalents in the Letter of Credit Account, provided that
--------
following the Termination Date, amounts in the Letter of Credit Account shall
not be subject to the Carve-Out hereinafter referred to;
(4) perfected Liens, pursuant to Section 364(c)(3) of the Bankruptcy
Code, upon all property of the Borrower and the Guarantors (other than the
property referred to in paragraph (e) below that is subject to the existing
Liens that presently secure the Borrower's and Guarantors' pre-petition
Indebtedness under the Existing Agreements) that is subject to valid and
perfected Liens in existence on the Filing Date (including without limitation,
Accounts in existence as of the Filing Date that are subject to valid and
perfected Liens in favor of the Real Estate Financiers) and to Permitted Liens,
junior to such valid and perfected Liens; and
(5) perfected first priority priming Liens, pursuant to Section
364(d)(1) of the Bankruptcy Code, upon all property of the Borrower and the
Guarantors that is subject to (A) the existing Liens that presently secure the
Borrower's and Guarantors' pre-petition Indebtedness under or in connection with
(x) the Existing Credit Agreement (y) the Synthetic Guarantee and (z) the
Deficiency Note (but subject to any Liens to which the Liens being primed hereby
are subject on the Filing Date) and (B) any Liens granted after the Filing Date
to provide adequate protection in respect of the Existing Agreements, which
first priority priming Liens in favor of the Agent and the Banks shall be senior
in all respects to all of such existing Liens under or in connection with the
Existing Agreements, and to any Liens granted after the Filing Date to provide
adequate protection in respect thereof.
All of the claims and the Liens granted hereunder in the Cases to the
Agent and the Banks shall be subject to the Carve-Out to the extent provided in
Section 2.20.
Accordingly, the parties hereto hereby agree as follows:
SECTION 2. DEFINITIONS
SECTION 2.1 Defined Terms
-------------
As used in this Agreement, the following terms shall have the meanings
specified below:
"Account" means with respect to any Account Debtor, any right to
-------
payment for goods sold or leased or for services rendered, whether or not earned
by performance.
"Account Debtor" shall mean, with respect to any Account, the obligor
--------------
with respect to such Account.
2
<PAGE>
"Additional Interim Credit" shall have the meaning given such term in
-------------------------
Section 4.02(d) hereof.
"Adjusted Eligible Accounts Receivable" shall mean Eligible Accounts
-------------------------------------
Receivable minus the Dilution Reserve.
-----
"Affiliate" shall mean, as to any Person, any other Person which,
---------
directly or indirectly, is in control of, is controlled by, or is under common
control with, such Person. For purposes of this definition, a Person (a
"Controlled Person") shall be deemed to be "controlled by" another Person (a
-----------------
"Controlling Person") if the Controlling Person possesses, directly or
------------------
indirectly, power to direct or cause the direction of the management and
policies of the Controlled Person whether by contract or otherwise.
"Agent" shall have the meaning set forth in the Introduction.
-----
"Agreement" shall mean this Revolving Credit and Guaranty Agreement,
---------
as the same may from time to time be further amended, modified or supplemented.
"Alternate Base Rate" shall mean, for any day, a rate per annum
-------------------
(rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of
(a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such
day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus
1/2 of 1%. For purposes hereof, "Prime Rate" shall mean the rate of interest
----------
per annum publicly announced from time to time by the Agent as its prime rate in
effect at its principal office in New York City; each change in the Prime Rate
shall be effective on the date such change is publicly announced. "Base CD
-------
Rate" shall mean the sum of (a) the quotient of (i) the Three-Month Secondary CD
- ----
Rate divided by (ii) a percentage expressed as a decimal equal to 100% minus
Statutory Reserves and (b) the Assessment Rate. "Three-Month Secondary CD Rate"
-----------------------------
shall mean, for any day, the secondary market rate for three-month certificates
of deposit reported as being in effect on such day (or, if such day shall not be
a Business Day, the next preceding Business Day) by the Board through the public
information telephone line of the Federal Reserve Bank of New York (which rate
will, under the current practices of the Board, be published in Federal Reserve
Statistical Release H.15(519) during the week following such day), or, if such
rate shall not be so reported on such day or such next preceding Business Day,
the average of the secondary market quotations for three-month certificates of
deposit of major money center banks in New York City received at approximately
10:00 a.m., New York City time, on such day (or, if such day shall not be a
Business Day, on the next preceding Business Day) by the Agent from three New
York City negotiable certificate of deposit dealers of recognized standing
selected by it. "Federal Funds Effective Rate" shall mean, for any day, the
----------------------------
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as
published on the next succeeding Business Day by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day which is a Business Day,
the average of the quotations for the day of such transactions received by the
Agent from three Federal funds brokers of recognized standing selected by it.
If for any reason the Agent shall have determined (which determination shall be
conclusive absent manifest error) that it is unable to ascertain the Base CD
Rate or the Federal Funds Effective
3
<PAGE>
Rate or both for any reason, including the inability or failure of the Agent to
obtain sufficient quotations in accordance with the terms hereof, the Alternate
Base Rate shall be determined without regard to clause (b) or (c), or both, of
the first sentence of this definition, as appropriate, until the circumstances
giving rise to such inability no longer exist. Any change in the Alternate Base
Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the
Federal Funds Effective Rate shall be effective on the effective date of such
change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds
Effective Rate, respectively. "Assessment Rate" shall mean for any date the
---------------
annual rate (rounded upwards, if necessary, to the next 1/100 of 1%) most
recently estimated by the Agent as the then current net annual assessment rate
that will be employed in determining amounts payable by the Agent to the Federal
Deposit Insurance Corporation (or any successor) for insurance by such
Corporation (or any successor) of time deposits made in dollars at the Agent's
domestic offices.
"Assignment and Acceptance" shall mean an assignment and acceptance
-------------------------
entered into by a Bank and an Eligible Assignee, and accepted by the Agent,
substantially in the form of Exhibit D.
"Bankruptcy Code" shall mean The Bankruptcy Reform Act of 1978, as
---------------
heretofore and hereafter amended, and codified as 11 U.S.C. Section 101 et seq.
-- ---
"Bankruptcy Court" shall mean the United States Bankruptcy Court for
----------------
the District of Delaware or any other court having jurisdiction over the Cases
from time to time.
"Banks" shall have the meaning set forth in the Introduction.
-----
"Board" shall mean the Board of Governors of the Federal Reserve
-----
System of the United States.
"Borrower" shall have the meaning set forth in the Introduction.
--------
"Borrowing" shall mean the incurrence of Loans made from all the Banks
---------
on a single date.
"Borrowing Base" means, an amount equal to the sum, without
--------------
duplication of (i) 80% of "Inpatient" Eligible Accounts Receivable minus (a) the
Reserve for Cost Report Liabilities in Excess of the Medicaid Contra and (b) the
Reserve for Cost Report Liabilities in Excess of the Medicare Contra, (ii) 80%
of "LTAC" Eligible Accounts Receivable minus (a) the Reserve for Cost Report
Liabilities in Excess of the Medicaid Contra and (b) the Reserve for Cost Report
Liabilities in Excess of the Medicare Contra, (iii) 75% of APS "Part B" Adjusted
Eligible Accounts Receivable, (iv) 75% of APS "Private" Adjusted Eligible
Accounts Receivable, (v) 75 % of APS "Medicaid" Adjusted Eligible Accounts
Receivable, provided that (x) in no event shall the contribution to the
Borrowing Base for any Division be less than zero; and (y) the sum contribution
of "Part B", "Private" and "Medicaid" shall not be greater than 25% of the sum
contribution of "Inpatient" and "LTAC". The Borrowing Base shall be computed as
of the end of each fiscal month; provided that the Borrowing Base in effect at
any time shall be determined by reference to the most recent
4
<PAGE>
Borrowing Base Certificate delivered to the Agent, absent any error in such
Borrowing Base Certificate. Borrowing Base component definitions may be fixed
and revised from time to time solely by the Agent in the exercise of its
reasonable judgment, with any changes in such definitions to be effective 10
days after delivery of notice thereof to the Borrower.
"Borrowing Base Certificate" shall have the meaning set forth in
--------------------------
Section 5.06.
"Budget" shall have the meaning set forth in Section 4.01(i).
------
"Business Day" shall mean any day except a Saturday, Sunday or other
------------
day on which either (i) in the case of any action to be taken by the Bankruptcy
Court or any filing with the Bankruptcy Court, the Court is "inaccessible" or is
observing a "legal holiday" as provided in Rule 9006(a) of the Federal Rules of
Bankruptcy Procedure, or (ii) in all other cases, any day on which banks in the
State of New York are required or permitted to close (and, for a Letter of
Credit, other than a day on which the Fronting Bank issuing such Letter of
Credit is closed).
"Capital Expenditures" shall mean, for any period, the aggregate of
--------------------
all expenditures (whether (1) paid in cash and not theretofore accrued
subsequent to the date of this Agreement or (2) not previously paid in cash but
accrued as liabilities during such period and including that portion of
Capitalized Leases which is capitalized on the consolidated balance sheet of the
Borrower and the Guarantors) net of cash amounts received by the Borrower and
the Guarantors from other Persons during such period in reimbursement of Capital
Expenditures made by the Borrower and the Guarantors, excluding interest
capitalized during construction, by the Borrower and the Guarantors during such
period that, in conformity with GAAP, are required to be included in or
reflected by the property, plant, equipment or intangibles or similar fixed
asset accounts reflected in the consolidated balance sheet of the Borrower and
the Guarantors (including equipment which is purchased simultaneously with the
trade-in of existing equipment owned by the Borrower or any of the Guarantors to
the extent of the gross amount of such purchase price less the book value of the
equipment being traded in at such time), but excluding expenditures made in
connection with the replacement or restoration of assets, to the extent
reimbursed or financed from insurance proceeds paid on account of the loss of or
the damage to the assets being replaced or restored, or from awards of
compensation arising from the taking by condemnation or eminent domain of such
assets being replaced.
"Capital Stock" shall mean any and all shares, interests,
-------------
participations or other equivalents (however designated) of capital stock of a
corporation, any and all equivalent ownership interests in a Person (other than
a corporation) and any and all warrants, rights or options to purchase any of
the foregoing.
"Capitalized Lease" shall mean, as applied to any Person, any lease of
-----------------
property by such Person as lessee which would be capitalized on a balance sheet
of such Person prepared in accordance with GAAP.
"Carve-Out" shall have the meaning set forth in Section 2.20.
---------
5
<PAGE>
"Cases" shall mean the Chapter 11 Cases of the Borrower and each of
-----
the Guarantors pending in the Bankruptcy Court.
"Change of Control" shall mean (i) the acquisition of ownership,
-----------------
directly or indirectly, beneficially or of record, by any Person or group
(within the meaning of the Securities Exchange Act of 1934 and the rules of the
Securities and Exchange Commission thereunder as in effect on the date hereof),
of shares representing more than 30% of the aggregate ordinary voting power
represented by the issued and outstanding capital stock of the Borrower; or (ii)
the occupation of a majority of the seats (other than vacant seats) on the Board
of Directors of the Borrower, after the Filing Date, by Persons who were neither
(A) nominated by the Board of Directors of the Borrower nor (B) appointed by
directors so nominated.
"Chase" shall have the meaning set forth in the Introduction.
-----
"Closing Date" shall mean the date on which this Agreement has been
------------
executed and the conditions precedent to the making of the initial Loans set
forth in Section 4.01 have been satisfied or waived, which date shall occur
promptly upon entry of the First Day Order, but not later than 15 days following
the Filing Date.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
----
"Collateral" shall mean the Collateral under the Security and Pledge
----------
Agreement.
"Commitment" shall mean, with respect to each Bank, the commitment of
----------
each Bank hereunder in the amount set forth opposite its name on Annex A hereto
or as may subsequently be set forth in the Register from time to time, as the
same may be reduced from time to time pursuant to this Agreement.
"Commitment Fee" shall have the meaning set forth in Section 2.17.
--------------
"Commitment Letter" shall mean that certain Commitment Letter dated
-----------------
December 22, 1999 among the Agent, Chase Securities Inc. and the Borrower.
"Commitment Percentage" shall mean at any time, with respect to each
---------------------
Bank, the percentage obtained by dividing its Commitment at such time by the
Total Commitment at such time.
"Consummation Date" shall mean the date of the substantial
-----------------
consummation (as defined in Section 1101 of the Bankruptcy Code and which for
purposes of this Agreement shall be no later than the effective date) of a
Reorganization Plan of the Borrower or any of the Guarantors that is confirmed
pursuant to an order of the Bankruptcy Court.
"Contractual Obligation" shall mean, as to any Person, any provision
----------------------
of any security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
Property is bound.
6
<PAGE>
"Deficiency Note" shall mean that certain Deficiency Note, made by the
---------------
Borrower, dated August 16, 1999 in the principal amount of $26,485,562.79 held
by Bank of America, N.A.
"Dilution Factor" shall mean with respect to any period, (a) the
---------------
aggregate amount of all deductions, contractual adjustments, other negative
adjustments, credit memos and write-offs with respect to Accounts during such
period, divided by (b) the aggregate gross charges attributable to Accounts
during such period.
"Dilution Reserve" shall mean, as of any date, (a) the Dilution Factor
----------------
for the immediately preceding twelve-month period (ending as of the date of the
calculation of the Borrowing Base then in effect, which such date is set forth
on the applicable Borrowing Base Certificate) multiplied by the (b) Eligible
Accounts Receivable on such date.
"Division" shall mean, as of any date, a functional entity of the
--------
Borrower such as "Inpatient", "LTAC", or "APS".
"Dollars" and "$" shall mean lawful money of the United States of
---------------
America.
"EBITDA" shall mean, for any period, all as determined in accordance
------
with GAAP, the consolidated net income (or net loss) of the Borrower and the
Guarantors for such period, plus (a) the sum of (i) depreciation expense, (ii)
amortization expense, (iii) other non-cash expenses, (iv) provision for LIFO
adjustment for inventory valuation, (v) net total Federal, state and local
income tax expense, (vi) gross interest expense for such period less gross
interest income for such period, (vii) extraordinary losses, (viii) any non-
recurring charge or restructuring charge, (ix) the cumulative effect of any
change in accounting principles and (x) "Chapter 11 expenses" (or
"administrative costs reflecting Chapter 11 expenses") as shown on the
Borrower's consolidated statement of income for such period less (b)
----
extraordinary gains plus or minus (c) the amount of cash received or expended,
---- -----
as the case may be, in such period in respect of any amount which, under clauses
(iii) and (viii) above, was taken into account in determining EBITDA for such or
any prior period.
"Eligible Accounts Receivable" means, at the time of any determination
----------------------------
thereof, each Account that satisfies the following criteria at the time of
creation and continues to meet the same at the time of such determination: such
Account (i) arose from a completed, outright and lawful sale of goods or from
the completed performance of patient-related services by the Borrower, any
Guarantor or any Division in the ordinary course of business of the Borrower,
any Guarantor or Division and in a manner consistent with current and historical
business practices and (ii) is not ineligible for inclusion in the calculation
of the Eligible Accounts Receivable pursuant to any of clauses (a) through (o)
below or otherwise reasonably deemed by the Agent in good faith to be ineligible
for inclusion in the calculation of Eligible Accounts Receivable as described
below.
Without limiting the foregoing, to qualify as an Eligible Accounts
Receivable, an Account shall indicate as sole payee and as sole remittance party
the Borrower, any Guarantor or any Division. In determining the amount to be so
included, the face amount of an Account or Accounts shall be reduced by, without
duplication, to the extent not reflected in such face amount, (a) the amount of
all accrued and actual returns, contractual adjustments, discounts, claims,
credits or credits
7
<PAGE>
pending, charges, price adjustments, freight or other allowances (including any
amount that the Borrower or a Division, as applicable, may be obligated to
rebate to a customer pursuant to the terms of any agreement or understanding
(written or oral)), (b) the aggregate amount of all limits and deductions
provided for in this definition and elsewhere in this Agreement, (c) the
aggregate amount of all cash received in respect of such Account but not yet
applied by the Borrower or the applicable Division to reduce the amount of such
Account; and (d) the aggregate amount, without duplication, of reconciling items
which reduce otherwise Eligible Accounts Receivable to the amounts shown on the
Borrower's consolidating financial statements. Unless otherwise approved from
time to time in writing by the Agent, no Account shall be an Eligible Accounts
Receivable if, without duplication:
(1) such Account represents charges for which a bill, claim, or other
similar form used for billing purposes has not been generated; or
(2) such Account arises out of a cost report settlement or other
similar transaction; or
(3) such Account arises out of a sale made by the Borrower or a
Division to an Affiliate of the Borrower or a Division or an Affiliate of any
subsidiary of the Borrower or Division; or
(4) such Account (i) is unpaid more than 120 days with respect to an
invoice date aging; (ii) is unpaid more than 90 days with respect to a due date
aging; (iii) is unpaid more than 60 days with respect to a balance forward
aging; or (iv) has been written off the accounting records of the Borrower or a
Division or has been otherwise designated on such accounting records as
uncollectible; or
(5) the Account Debtor with respect to such Account (i) is a creditor
of the Borrower, Guarantor or the respective Division, (ii) has or has asserted
a right of set off against the Borrower, Guarantor or its respective Division
and (iii) has disputed its liability (whether by chargeback or otherwise) or
made any claim with respect to the Account which has not been resolved, in each
case, without duplication, only to the extent of the amount owed to each Account
Debtor by the Borrower, Guarantor or respective Division, provided that the
--------
total amount deducted from Eligible Accounts Receivable with respect to such
Account Debtor shall not exceed the aggregate amount of all Accounts owed by
such Account Debtor to the Borrower, Guarantor or respective Division (for
calculation of this ineligible, for Medicare and Medicaid purposes, refer to
Schedule 1, page 2 of the Borrowing Base Certificate); or
(6) the Account Debtor is insolvent or the subject of any bankruptcy
case or insolvency proceeding of any kind; or
(7) the Account is not payable in Dollars or the Account Debtor is
either not incorporated under the laws of the United States of America, any
state thereof or the District of Columbia or is located outside or has its
principal place of business or substantially all of its assets outside the
United States; or
8
<PAGE>
(8) the sale to the Account Debtor is on a bill-and-hold, guaranteed
sale, extended terms or consignment or other similar basis; or
(9) such Account does not comply in all material respects with the
requirements of any applicable laws and regulations, whether federal, state or
local (including Health Care Laws such as the rules and regulations of
Governmental Authorities, JCAHO and other organizations exercising similar
quasi-governmental or accreditation authority over hospitals or other
facilities, the federal Consumer Credit Protection Act, the federal Truth in
Lending Act and Regulation Z of the Board); or,
(10) such Account represents an amount due directly from a patient (a
natural person) and not a third party reimbursement agency, provided that in the
case of the "Inpatient" Division no Account shall be excluded as a result of
this clause (j) unless it is unpaid more than 30 days after the date of invoice;
or
(11) such Account represents an amount for which the third-party
reimbursement agency is not obligated to pay because it has not yet been
determined whether the patient meets all eligibility requirements, provided that
in the case of the "Inpatient" Division no Account shall be excluded as a result
of this clause (k) unless it is unpaid more than 60 days after the service date
and the anticipated reimbursement agency is Medicaid from any state; or
(12) such Account (i) is not solely and lawfully owned by the
Borrower, Guarantor or a Division or the Borrower, Guarantor or Division does
not have absolute title to such Account, (ii) is not subject to a valid and
perfected first priority Lien in favor of the Agent for the benefit of the
Banks, or (iii) does not otherwise conform in all material respects to the
representations and warranties contained in the Loan Documents relating to
Accounts; or
(13) as to all or any part of such Account, a check, promissory note,
draft, trade acceptance or other instrument for the payment of money has been
received, presented for payment and returned uncollected for any reason; or
(14) all Accounts of any single Account Debtor other than a Medicaid
or Medicare Account Debtor which, in the aggregate, exceed 15% of the total
amount of all gross Accounts for the applicable Division to the extent of such
excess; or
(15) such Medicaid Account with respect to the APS Division is billed
utilizing a system other than the Borrower's QS1 system or other system so
approved by the Agent.
Notwithstanding the foregoing, "Eligible Accounts Receivable" shall
not include: (a) a "credit reclass reserve" equal to the greater of 1% of
"Inpatient's" gross Accounts aging balance or $2,000,000 and (b) any individual
Account that (i) arises from discontinued operations of the Borrower, Guarantor
or any Division or (ii) was generated through the provision of goods or services
at any hospital that (x) has lost its accreditation from JCAHO, (y) has lost its
ability to provide reimbursed services for federally or state funded programs or
(z) is closed, abandoned or no longer
9
<PAGE>
operating (other than pursuant to a sale of such Health Care Facility in an
arms-length transaction permitted under this Agreement.)
"Eligible Assignee" shall mean (i) a commercial bank having total
-----------------
assets in excess of $1,000,000,000; (ii) a finance company, insurance company or
other financial institution or fund, in each case acceptable to the Agent, which
in the ordinary course of business extends credit of the type contemplated
herein and has total assets in excess of $200,000,000 and whose becoming an
assignee would not constitute a prohibited transaction under Section 4975 of
ERISA; and (iii) any other financial institution satisfactory to the Borrower
and the Agent.
"Environmental Lien" shall mean a Lien in favor of any Governmental
------------------
Authority for (i) any liability under federal or state environmental laws or
regulations, or (ii) damages arising from or costs incurred by such Governmental
Authority in response to a release or threatened release of a hazardous or toxic
waste, substance or constituent, or other substance into the environment.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended from time to time, and the regulations promulgated and rulings
issued thereunder.
"ERISA Affiliate" shall mean any trade or business (whether or not
---------------
incorporated) which is a member of a group of which the Borrower is a member and
which is under common control within the meaning of Section 414(b) or (c) of the
Code and the regulations promulgated and rulings issued thereunder.
"Event of Default" shall have the meaning given such term in Section
----------------
7.
"Existing Agreements" shall mean the Existing Credit Agreement, the
-------------------
Synthetic Guarantee, the Deficiency Note, and all of the other agreements
granting security interests and Liens in property and assets of the Borrower and
the Guarantors to the Existing Lenders, including without limitation, the
security agreements, mortgages and leasehold mortgages listed on Schedule 1.01
hereto, each of which documents was executed and delivered (to the extent party
thereto) by the Borrower and the Guarantors prior to the Filing Date, as each
may have been amended or modified from time to time.
"Existing Credit Agreement" shall mean that certain Credit Agreement
-------------------------
dated as of November 4, 1997 among the Borrower (formerly known as Paragon
Health Network, Inc.), the several lenders from time to time party thereto,
Chase, as administrative agent, and Bank of America, N.A. (formerly known as
Nationsbank, N.A.), as documentation agent, as heretofore amended.
"Existing Lenders" shall mean, collectively, those certain lenders to
----------------
the Borrower and the Guarantors (to the extent party thereto) under any of the
Existing Agreements, together with any successors or assigns thereof.
"Fees" shall collectively mean the Commitment Fees, Letter of Credit
----
Fees and other fees referred to in Sections 2.16, 2.17 and 2.18.
10
<PAGE>
"Filing Date" shall mean January 18, 2000.
-----------
"Final Order" shall have the meaning given such term in Section
-----------
4.02(d).
"Financial Officer" shall mean the Chief Financial Officer, Treasurer
-----------------
or Assistant Treasurer of the Borrower (or, in the case of a Guarantor, any Vice
President in charge of financial matters).
"First Day Order" shall have the meaning given such term in Section
---------------
4.01(b).
"Fronting Bank" shall mean Chase or such other Bank (which other Bank
-------------
shall be reasonably satisfactory to the Borrower) as may agree with Chase to act
in such capacity.
"Further Additional Credit" shall have the meaning given such term in
-------------------------
Section 4.02(d).
"GAAP" shall mean generally accepted accounting principles applied in
----
accordance with Section 1.02.
"Governmental Authority" shall mean any federal, state, municipal or
----------------------
other governmental department, commission, board, bureau, agency or
instrumentality or any court, in each case whether of the United States or
foreign.
"Guarantor" shall have the meaning set forth in the Introduction.
---------
"Health Care Facility" shall mean any ownership or leasehold interest
--------------------
in a facility which provides any level of geriatric care, home care, medical
care (including, without limitation, sub-acute care), assisted living or
rehabilitative services, whether licensed as a skilled nursing facility,
intermediate care facility, personal care facility, out-patient clinic or
hospital (including, without limitation, any long-term acute care hospital) or
any products or services reasonably related thereto.
"Health Care Law" shall mean any and all applicable current and future
---------------
laws, rules, regulations, codes, ordinances, orders, decrees, judgments,
injunctions or binding agreements issued, promulgated or entered into by the
Food and Drug Administration, the Health Care Financing Administration, the
Department of Health and Human Services ("HHS"), the Office of Inspector General
---
of HHS, the Drug Enforcement Administration or any other Governmental Authority,
including any state and/or local professional licensing laws, certificate of
need laws and state reimbursement laws, in each case relating in any way to the
conduct of the business of the Borrower or any Subsidiary and the provision of
health care services generally.
"Health Care Permit" shall mean every accreditation, authorization,
------------------
certificate of need, license or permit that is required by any applicable
Governmental Authority to own, lease, operate or manage a Health Care Facility
of the Borrower or any of its Subsidiaries.
11
<PAGE>
"HRPT" shall mean SPTMNR Properties Trust, a Maryland real estate
----
investment trust, as successor in interest to Health and Retirement Properties
Trust, a real estate investment trust organized under the laws of the State of
Maryland.
"Indebtedness" shall mean, at any time and with respect to any Person,
------------
and without duplication (i) all indebtedness of such Person for borrowed money,
(ii) all indebtedness of such Person for the deferred purchase price of property
or services (other than property, including inventory, and services purchased,
and expense accruals and deferred compensation items arising, in the ordinary
course of business), (iii) all obligations of such Person evidenced by notes,
bonds, debentures or other similar instruments (other than performance, surety
and appeal bonds arising in the ordinary course of business), (iv) all
indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), (v) all obligations of such Person under leases which have been or
should be, in accordance with GAAP, recorded as capital leases, to the extent
required to be so recorded, (vi) all reimbursement, payment or similar
obligations of such Person, contingent or otherwise, under acceptance, letter of
credit or similar facilities and all obligations of such Person in respect of
(x) currency swap agreements, currency future or option contracts and other
similar agreements designed to hedge against fluctuations in foreign interest
rates and (y) interest rate swap, cap or collar agreements and interest rate
future or option contracts; (vii) all Indebtedness referred to in clauses (i)
through (vi) above guaranteed directly or indirectly by such Person, or in
effect guaranteed directly or indirectly by such Person through an agreement (A)
to pay or purchase such Indebtedness or to advance or supply funds for the
payment or purchase of such Indebtedness, (B) to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the debtor to make payment of such Indebtedness or to assure
the holder of such Indebtedness against loss in respect of such Indebtedness,
(C) to supply funds to or in any other manner invest in the debtor (including
any agreement to pay for property or services irrespective of whether such
property is received or such services are rendered) or (D) otherwise to assure a
creditor against loss in respect of such Indebtedness, and (viii) all
Indebtedness referred to in clauses (i) through (vii) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon or in property (including, without
limitation, accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such Indebtedness.
"Insufficiency" shall mean, with respect to any Plan, the amount, if
-------------
any, of its unfunded benefit liabilities within the meaning of Section
4001(a)(18) of ERISA.
"Interim Order" shall have the meaning given such term in Section
-------------
4.02(d).
"Investments" shall have the meaning given such term in Section 6.10.
-----------
"JCAHO" shall mean the Joint Commission on Accreditation of Healthcare
-----
Organizations, or any similar successor organization thereto.
12
<PAGE>
"Letter of Credit" shall mean any irrevocable letter of credit issued
----------------
pursuant to Section 2.03, which letter of credit shall be (i) a standby letter
of credit, (ii) issued for purposes that are consistent with the ordinary course
of business of the Borrower or any Guarantor, or for such other purposes as are
reasonably acceptable to the Agent (including, without limitation, the
replacement at the request of the Borrower of any expiring standby letter of
credit issued under the Existing Credit Agreement), (iii) denominated in Dollars
and (iv) otherwise in such form as may be reasonably approved from time to time
by the Agent and the applicable Fronting Bank.
"Letter of Credit Account" shall mean the account established by the
------------------------
Borrower under the sole and exclusive control of the Agent maintained at the
office of the Agent at 270 Park Avenue, New York, New York 10017 designated as
the "Mariner Post-Acute Network, Inc. Letter of Credit Account" that shall be
used solely for the purposes set forth in Sections 2.03(b) and 2.11.
"Letter of Credit Fees" shall mean the fees payable in respect of
---------------------
Letters of Credit pursuant to Section 2.18.
"Letter of Credit Outstandings" shall mean, at any time, the sum of
-----------------------------
(i) the aggregate undrawn stated amount of all Letters of Credit then
outstanding plus (ii) all amounts theretofore drawn under Letters of Credit and
----
not then reimbursed.
"Lien" shall mean any mortgage, pledge, security interest,
----
encumbrance, lien or charge of any kind whatsoever (including any conditional
sale or other title retention agreement or any lease in the nature thereof).
"Loan" shall have the meaning given such term in Section 2.01.
----
"Loan Documents" shall mean this Agreement, the Letters of Credit, the
--------------
Security and Pledge Agreement and any other instrument or agreement executed and
delivered in connection herewith.
"Material Adverse Effect" shall mean a material adverse effect on (a)
-----------------------
the business, assets, property, condition (financial or otherwise) or prospects
of the Borrower and the Guarantors taken as a whole or (b) the validity or
enforceability of this Agreement or any of the other Loan Documents or the
rights or remedies of the Agent or the Banks hereunder or thereunder; provided,
--------
that a Material Adverse Effect shall not be deemed to have occurred solely on
account of the commencement of the Cases or on account of facts and
circumstances disclosed in writing to the Banks prior to the Filing Date.
"Maturity Date" shall mean January 19, 2001.
-------------
"MHG" shall mean Mariner Health Group, Inc., a Delaware corporation.
---
"Medicaid or Medicare Account Debtor" shall mean any Account Debtor
-----------------------------------
which is (i) the United States of America acting under the Medicaid/Medicare
program established pursuant to the Social Security Act, (ii) any state or the
District of Columbia acting pursuant to a health plan
13
<PAGE>
adopted pursuant to Title XIX of the Social Security Act or (iii) any agent,
carrier, administrator or intermediary for any of the foregoing.
"Multiemployer Plan" shall mean a "multiemployer plan" as defined in
------------------
Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is
making or accruing an obligation to make contributions, or has within any of the
preceding five plan years made or accrued an obligation to make contributions.
"Multiple Employer Plan" shall mean a Single Employer Plan, which (i)
----------------------
is maintained for employees of the Borrower or an ERISA Affiliate and at least
one Person other than the Borrower and its ERISA Affiliates or (ii) was so
maintained and in respect of which the Borrower or an ERISA Affiliate could have
liability under Section 4064 or 4069 of ERISA in the event such Plan has been or
were to be terminated.
"Net Proceeds" shall mean, in respect of any sale of assets, the
------------
proceeds of such sale after the payment of or reservation for (i) expenses that
are directly related to (or the need for which arises as a result of) the
transaction of sale, including, but not limited to, related severance costs,
taxes payable, brokerage commissions, professional expenses, escrow fees, title
insurance fees, and other similar costs that are directly related to the sale
and (ii) the amount secured by valid and perfected Liens, if any, that are
senior to the Liens on such assets held by the Agent on behalf of the Banks.
"NHP" shall mean Nationwide Health Properties, Inc., a Maryland
---
corporation.
"Obligations" shall mean (a) the due and punctual payment of principal
-----------
of and interest on the Loans and the reimbursement of all amounts drawn under
Letters of Credit, and (b) the due and punctual payment of the Fees and all
other present and future, fixed or contingent, monetary obligations of the
Borrower and the Guarantors to the Banks and the Agent under the Loan Documents.
"Omega" shall mean Omega Healthcare Investors, Inc., a Maryland
-----
corporation.
"Orders" shall mean the First Day Order, the Interim Order and the
------
Final Order of the Bankruptcy Court referred to in Sections 4.01(b) and 4.02(d).
"Original Required Banks" shall mean the Banks party to this Agreement
-----------------------
on the date hereof having Commitments representing in excess of 50% of the Total
Commitment, provided that, for the purposes of this definition, Highland Capital
--------
Management, L.P. (or any of its Affiliates) shall be included as a Bank in
determining the Original Required Banks, from and after the time at which it
shall have received an assignment of a portion of Chase's Commitment hereunder,
but only if such assignment shall have occurred within 30 days of the Filing
Date.
"Other Taxes" shall have the meaning given such term in Section 2.15.
-----------
14
<PAGE>
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or any
----
successor agency or entity performing substantially the same functions.
"Pension Plan" shall mean a defined benefit pension or retirement plan
------------
which meets and is subject to the requirements of Section 401(a) of the Code.
"Permitted Adequate Protection Lien" shall mean (i) a Lien in favor of
----------------------------------
any of the Real Estate Financiers in the postpetition inventory, Accounts or
other rights to payment relating to a particular Health Care Facility, Borrower,
or Guarantor, as approved by the Bankruptcy Court after notice to the Agent, for
the sole purpose of providing such holder of Indebtedness with "adequate
protection" (as that term is used in Bankruptcy Code sections 361 through 364)
to the extent (x) such holder as of the Filing Date held valid, enforceable and
non-avoidable Liens in the prepetition inventory, Accounts or other rights to
payment relating to such Health Care Facility, Borrower or Guarantor (as
applicable), and (y) such holder's interests in such prepetition inventory,
Accounts or other rights to payment are impaired or diminished as a result of
the use, sale or lease of such inventory, Accounts or other rights to payment by
the Borrower or Guarantors during the Cases; or (ii) other Liens for adequate
protection approved by Required Lenders and by the Bankruptcy Court.
"Permitted Investments" shall mean:
---------------------
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States of
America (or by any agency thereof to the extent such obligations are backed by
the full faith and credit of the United States of America), in each case
maturing within twelve months from the date of acquisition thereof;
(b) without limiting the provisions of paragraph (d) below,
investments in commercial paper maturing within six months from the date of
acquisition thereof and having, at such date of acquisition, a rating of at
least "A-2" or the equivalent thereof from Standard & Poor's Corporation or of
at least "P-2" or the equivalent thereof from Moody's Investors Service, Inc.;
(c) investments in certificates of deposit, banker's acceptances and
time deposits (including Eurodollar time deposits) maturing within six months
from the date of acquisition thereof issued or guaranteed by or placed with (i)
any domestic office of the Agent or the bank with whom the Borrower and the
Guarantors maintain their cash management system, provided, that if such bank is
not a Bank hereunder, such bank shall have entered into an agreement with the
Agent pursuant to which such bank shall have waived all rights of setoff and
confirmed that such bank does not have, nor shall it claim, a security interest
therein, except to the extent of chargebacks for returned items and for fees
charged for maintaining such cash management system, or (ii) any domestic office
of any other commercial bank of recognized standing organized under the laws of
the United States of America or any State thereof that has a combined capital
and surplus and undivided profits of not less than $250,000,000 and is the
principal banking Subsidiary of a bank holding company having a long-term
unsecured debt rating of at least "A-2" or the equivalent thereof from Standard
& Poor's Corporation or at least "P-2" or the equivalent thereof from Moody's
Investors Service, Inc.;
15
<PAGE>
(d) investments in commercial paper maturing within six months from
the date of acquisition thereof and issued by (i) the holding company of the
Agent or (ii) the holding company of any other commercial bank of recognized
standing organized under the laws of the United States of America or any State
thereof that has (A) a combined capital and surplus in excess of $250,000,000
and (B) commercial paper rated at least "A-2" or the equivalent thereof from
Standard & Poor's Corporation or of at least "P-2" or the equivalent thereof
from Moody's Investors Service, Inc.;
(e) investments in repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clause (a)
above entered into with any office of a bank or trust company meeting the
qualifications specified in clause (c) above;
(f) investments in money market funds substantially all the assets of
which are comprised of securities of the types described in clauses (a) through
(e) above; and
(g) to the extent owned on the Filing Date, investments in the
capital stock of any direct or indirect Subsidiary of the Borrower.
"Permitted Liens" shall mean (i) Liens imposed by law (other than
---------------
Environmental Liens and any Lien imposed under ERISA) for taxes, assessments or
charges of any Governmental Authority for claims not yet due or which are being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves or other appropriate provisions are being maintained in
accordance with GAAP; (ii) Liens of landlords and Liens of carriers,
warehousemen, mechanics, materialmen and other Liens (other than Environmental
Liens and any Lien imposed under ERISA) in existence on the Filing Date or
thereafter imposed by law and created in the ordinary course of business; (iii)
Liens (other than any Lien imposed under ERISA) incurred or deposits made in the
ordinary course of business (including, without limitation, surety bonds and
appeal bonds) in connection with workers' compensation, unemployment insurance
and other types of social security benefits or to secure the performance of
tenders, bids, leases, contracts (other than for the repayment of Indebtedness),
statutory obligations and other similar obligations or arising as a result of
progress payments under government contracts; (iv) easements (including, without
limitation, reciprocal easement agreements and utility agreements), rights-of-
way, covenants, consents, reservations, encroachments, variations and zoning and
other restrictions, charges or encumbrances (whether or not recorded) and
interest of ground lessors, which do not interfere materially with the ordinary
conduct of the business of the Borrower or any Guarantor, as the case may be,
and which do not materially detract from the value of the property to which they
attach or materially impair the use thereof to the Borrower or any Guarantor, as
the case may be; (v) purchase money Liens (including Capitalized Leases) upon or
in any property acquired or held in the ordinary course of business to secure
the purchase price of such property or to secure Indebtedness permitted by
Section 6.03(iii) solely for the purpose of financing the acquisition of such
property; (vi) Liens consisting of rights of patients in respect of patient
trust accounts held pursuant to the Omnibus Budget and Reconciliation Act of
1987, 28 U.S.C., (S)483.10(C) and the regulations of the Health Care Financing
Administration; (vii) Liens on unearned premium refunds and policy proceeds
incurred in the ordinary course of business in connection with the purchase of
casualty, health, and
16
<PAGE>
other types of insurance; (viii) Permitted Adequate Protection Liens; (ix) other
Liens securing other obligations of the Borrower and the Guarantors in an amount
not to exceed $500,000 in the aggregate and (x) extensions, renewals or
replacements of any Lien referred to in paragraphs (i) through (ix) above,
provided that the principal amount of the obligation secured thereby is not
- --------
increased and that any such extension, renewal or replacement is limited to the
property originally encumbered thereby.
"Person" shall mean any natural person, corporation, division of a
------
corporation, partnership, trust, joint venture, association, company, estate,
unincorporated organization or government or any agency or political subdivision
thereof.
"Plan" shall mean a Single Employer Plan or a Multiemployer Plan.
----
"Prepayment Date" shall mean the first Business Day that is at least
---------------
thirty (30) days after the entry of the First Day Order (or if no First Day
Order is entered, the Interim Order) or such later date as is satisfactory to
the Original Required Banks by the Bankruptcy Court if the Final Order has not
been entered by the Bankruptcy Court prior to the expiration of such thirty (30)
day period.
"Pre-Petition Agent" shall mean The Chase Manhattan Bank, as
------------------
administrative agent under the Existing Credit Agreement.
"Pre-Petition Payment" shall mean a payment (by way of adequate
--------------------
protection or otherwise) of principal or interest or otherwise on account of any
pre-petition Indebtedness or trade payables or other pre-petition claims against
the Borrower or any Guarantor.
"Property" shall mean any right or interest in or to property of any
--------
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible, including, without limitation, Capital Stock.
"Real Estate Financiers" shall mean, collectively, HRPT, Omega,
----------------------
SouthTrust, NHP (insofar as inventory, but not Accounts or other rights to
payment, are concerned) and holders of other Indebtedness in an aggregate amount
for all such other Indebtedness not in excess of $1,000,000, as to which such
holders as of the Filing Date hold valid, enforceable and non-avoidable Liens in
the prepetition inventory, Accounts or other rights to payment relating to a
Health Care Facility, the Borrower or a Guarantor (as applicable).
"Register" shall have the meaning set forth in Section 10.03(d).
--------
"Reorganization Plan" shall mean a plan of reorganization in any of
-------------------
the Cases.
"Required Banks" shall mean, at any time, Banks holding Loans
--------------
representing in excess of 50% of the aggregate principal amount of such Loans
outstanding or, if no such Loans are outstanding, Banks having Commitments
representing in excess of 50% of the Total Commitment.
17
<PAGE>
"Requirement of Law" shall mean, as to any Person, the Certificate or
------------------
Articles of Incorporation and By-Laws or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental Authority, in
each case applicable to or binding upon such Person or any of its Property or to
which such Person or any of its Property is subject.
"Reserve for Cost Report Liabilities in Excess of the Medicaid Contra"
--------------------------------------------------------------------
shall mean all net cost report liabilities remaining after excluding net cost
report liabilities equal to or lesser than the Eligible Account Receivable for
Medicaid (for calculation of this amount, see Schedule 1, page 2 of the
Borrowing Base Certificate).
"Reserve for Cost Report Liabilities in Excess of the Medicare Contra"
--------------------------------------------------------------------
shall mean all net cost report liabilities remaining after excluding net cost
report liabilities equal to or lesser than the Eligible Account Receivable for
Medicare (for calculation of this amount, see Schedule 1, page 2 of the
Borrowing Base Certificate).
"Responsible Officer" shall mean, with respect to the Borrower or any
-------------------
Guarantor, the chief executive officer, president, chief financial officer,
treasurer or vice president in charge of financial matters thereof, but in any
event, with respect to financial matters, the treasurer or vice president in
charge of financial matters thereof.
"Security and Pledge Agreement" shall have the meaning set forth in
-----------------------------
Section 4.01(c).
"Single Employer Plan" shall mean a single employer plan, as defined
--------------------
in Section 4001(a)(15) of ERISA, that (i) is maintained for employees of the
Borrower or an ERISA Affiliate or (ii) was so maintained and in respect of which
the Borrower could have liability under Section 4069 of ERISA in the event such
Plan has been or were to be terminated.
"Social Security Act" shall mean the Social Security Act as codified
-------------------
at 42 U.S.C. (S)1395 et. seq.
"SouthTrust" shall mean SouthTrust Bank of Alabama, National
----------
Association, a national banking association, and its successors and assigns
(including LaSalle National Bank, as trustee).
"Statutory Reserves" shall mean on any date the percentage (expressed
------------------
as a decimal) established by the Board and any other banking authority which is
for purposes of the definition of Base CD Rate, the then stated maximum rate of
all reserves (including, but not limited to, any emergency, supplemental or
other marginal reserve requirement) for a member bank of the Federal Reserve
System in New York City, for new three month negotiable nonpersonal time
deposits in dollars of $100,000 or more. Such reserve percentages shall
include, without limitation, those imposed pursuant to said Regulation. The
Statutory Reserves shall be adjusted automatically on and as of the effective
date of any change in such percentage.
18
<PAGE>
"Subsidiary" shall mean, with respect to any Person (herein referred
----------
to as the "parent"), any corporation, association or other business entity
------
(whether now existing or hereafter organized) of which at least a majority of
the securities or other ownership interests having ordinary voting power for the
election of directors is, at the time as of which any determination is being
made, owned or controlled by the parent or one or more subsidiaries of the
parent or by the parent and one or more subsidiaries of the parent.
"Super-majority Banks" shall have the meaning given such term in
--------------------
Section 10.10(b).
"Superpriority Claim" shall mean a claim against the Borrower and any
-------------------
Guarantor in any of the Cases which is an administrative expense claim having
priority over any or all administrative expenses of the kind specified in
Sections 503(b) or 507(b) of the Bankruptcy Code.
"Synthetic Guarantee" shall mean that certain Amended and Restated
-------------------
Guarantee dated as of November 4, 1997, as heretofore amended, made by the
Borrower and the Guarantors signatory thereto in favor of Chase, as
administrative agent for the lenders under that certain Amended and Restated
Credit Agreement dated as of November 4, 1997, as heretofore amended, to which
FBTC Leasing Corp., among others, is a party, and the instruments and agreements
executed in connection therewith (it being understood that the obligations of
the Borrower and such Guarantors signatory thereto under or in connection with
the Synthetic Guarantee and the instruments and agreements executed in
connection therewith shall include, without limitation, such direct obligations
as the Borrower and such Guarantors may have to FBTC Leasing Corp. and the other
lenders party to such Amended and Restated Credit Agreement upon and after the
entry of an order approving that certain Stipulation Acknowledging Ownership of
Properties Subject to "Synthetic Lease Transactions" among certain parties
including FBTC Leasing Corp., Chase as administrative agent, the Borrower and
the Guarantors (including Living Centers Holding Corp.), as described in Section
4.02(e)).
"Taxes" shall have the meaning given such term in Section 2.15.
-----
"Termination Date" shall mean the earliest to occur of (i) the
----------------
Prepayment Date, (ii) the Maturity Date, (iii) the Consummation Date and (iv)
the acceleration of the Loans and the termination of the Total Commitment in
accordance with the terms hereof.
"Termination Event" shall mean (i) a "reportable event", as such term
-----------------
is described in Section 4043 of ERISA and the regulations issued thereunder
(other than a "reportable event" not subject to the provision for 30-day notice
to the PBGC under Section 4043 of ERISA or such regulations) or an event
described in Section 4068 of ERISA excluding events described in Section
4043(c)(9) of ERISA or 29 CFR (S)(S)2615.21 or 2615.23 and excluding events
which would not be reasonably likely (as reasonably determined by the Agent) to
have a material adverse effect on the financial condition, operations, business,
properties or assets of the Borrower and the Guarantors taken as a whole, or
(ii) the withdrawal of the Borrower or any ERISA Affiliate from a Multiple
Employer Plan during a plan year in which it was a "substantial employer", as
such term is defined in Section 4001(c) of ERISA, or the incurrence of liability
by the Borrower or any ERISA Affiliate under Section 4064 of ERISA upon the
termination of a Multiple Employer Plan, or (iii) providing
19
<PAGE>
notice of intent to terminate a Plan pursuant to Section 4041(c) of ERISA or the
treatment of a Plan amendment as a termination under Section 4041 of ERISA, or
(iv) the institution of proceedings to terminate a Plan by the PBGC under
Section 4042 of ERISA, or (v) any other event or condition (other than the
commencement of the Cases and the failure to have made any contribution accrued
as of the Filing Date but not paid) which would reasonably be expected to
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan, or the imposition of any
liability under Title IV of ERISA (other than for the payment of premiums to the
PBGC).
"Total Commitment" shall mean, at any time, the sum of the Commitments
----------------
at such time.
"Transferee" shall have the meaning given such term in Section 2.18.
----------
"Unused Total Commitment" shall mean, at any time, (i) the Total
-----------------------
Commitment less (ii) the sum of (x) the aggregate outstanding principal amount
of all Loans and (y) the aggregate Letter of Credit Outstandings.
"Withdrawal Liability" shall have the meaning given such term under
--------------------
Part I of Subtitle E of Title IV of ERISA.
SECTION 2.2 Terms Generally. The definitions in Section 1.01 shall apply
---------------
equally to both the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. All references herein to Sections, Exhibits and
Schedules shall be deemed references to Sections of, and Exhibits and Schedules
to, this Agreement unless the context shall otherwise require. Except as
otherwise expressly provided herein, all terms of an accounting or financial
nature shall be construed in accordance with GAAP, as in effect from time to
time; provided, however, that for purposes of determining compliance with any
-------- -------
covenant set forth in Section 6, such terms shall be construed in accordance
with GAAP as in effect on the date of this Agreement applied on a basis
consistent with the application used in the Borrower's audited financial
statements referred to in Section 3.04.
SECTION 3. AMOUNT AND TERMS OF CREDIT.
SECTION 3.1 Commitment of the Banks.
-----------------------
20
<PAGE>
(1) Each Bank severally and not jointly with the other Banks agrees,
upon the terms and subject to the conditions herein set forth (including,
without limitation, the provisions of Section 2.25), to make revolving credit
loans (each a "Loan" and collectively, the "Loans") to the Borrower at any time
---- -----
and from time to time during the period commencing on the date hereof and ending
on the Termination Date (or the earlier date of termination of the Total
Commitment) in an aggregate principal amount not to exceed, when added to such
Bank's Commitment Percentage of the then aggregate Letter of Credit Outstandings
(in excess of the ratable portion of the amount of cash then held in the Letter
of Credit Account pursuant to Section 2.03(b) and allocable to such Bank), the
Commitment of such Bank, which Loans may be repaid and reborrowed in accordance
with the provisions of this Agreement. At no time shall the sum of the then
outstanding aggregate principal amount of the Loans plus the then aggregate
----
Letter of Credit Outstandings exceed the lesser of (i) the Total Commitment of
$100,000,000, as the same may be reduced from time to time pursuant to Section
2.10, and (ii) the Borrowing Base.
(2) Each Borrowing shall be made by the Banks pro rata in accordance
--- ----
with their respective Commitments; provided, however, that the failure of any
-------- -------
Bank to make any Loan shall not in itself relieve the other Banks of their
obligations to lend.
SECTION 3.2 Borrowing Base. Notwithstanding any other provision of this
--------------
Agreement to the contrary, the aggregate principal amount of all outstanding
Loans plus the then aggregate Letter of Credit Outstandings shall not at any
----
time exceed the Borrowing Base and no Loan shall be made or Letter of Credit
issued in violation of the foregoing.
SECTION 3.3 Letters of Credit.
-----------------
(1) Upon the terms and subject to the conditions herein set forth,
the Borrower may request a Fronting Bank, at any time and from time to time
after the date hereof and prior to the Termination Date, to issue, and, subject
to the terms and conditions contained herein, such Fronting Bank shall issue,
for the account of the Borrower or a Guarantor one or more Letters of Credit,
provided that no Letter of Credit shall be issued if after giving effect to such
- --------
issuance (i) the aggregate Letter of Credit Outstandings shall exceed
$10,000,000 or (ii) the aggregate Letter of Credit Outstandings, when added to
the aggregate outstanding principal amount of the Loans, would exceed the Total
Commitment and, provided further that no Letter of Credit shall be issued if the
-------- -------
Fronting Bank shall have received notice from the Agent or the Required Banks
that the conditions to such issuance have not been met.
(2) No Letter of Credit shall expire later than 60 days after the
Maturity Date, provided that if any Letter of Credit shall be outstanding on the
--------
Termination Date, the Borrower shall, at or prior to the Termination Date,
except as the Agent may otherwise agree in writing, (i) cause all Letters of
Credit which expire after the Termination Date to be returned to the Fronting
Bank undrawn and marked "canceled" or (ii) if the Borrower is unable to do so in
whole or in part, either (x) provide a "back-to-back" letter of credit to one or
more Fronting Banks in a form satisfactory to such Fronting Bank and the Agent
(in their sole discretion), issued by a bank satisfactory to such Fronting Bank
and the Agent (in their sole discretion), is in an amount equal to
21
<PAGE>
105% of the then undrawn stated amount of all outstanding Letters of Credit
issued by such Fronting Banks and/or (y) deposit cash in the Letter of Credit
Account in an amount equal to 105% of the then undrawn stated amount of all
outstanding Letters of Credit as collateral security for the Borrower's
reimbursement obligations in connection therewith, such cash to be remitted to
the Borrower upon the expiration, cancellation or other termination or
satisfaction of such reimbursement obligations.
(3) The Borrower shall pay to each Fronting Bank, in addition to such
other fees and charges as are specifically provided for in Section 2.18 hereof,
such fees and charges in connection with the issuance and processing of the
Letters of Credit issued by such Fronting Bank as are customarily imposed by
such Fronting Bank from time to time in connection with letter of credit
transactions.
(4) Drafts drawn under each Letter of Credit shall be reimbursed by
the Borrower in Dollars not later than the first Business Day following the date
such draw is honored and shall bear interest from the date such draw is honored
until the first Business Day following the date such draw is honored at a rate
per annum equal to the Alternate Base Rate plus 3% and thereafter until
----
reimbursed in full at a rate per annum equal to the Alternate Base Rate plus 5%
----
(computed on the basis of the actual number of days elapsed over a year of 360
days). The Borrower shall effect such reimbursement (x) if such draw occurs
prior to the Termination Date (or the earlier date of termination of the Total
Commitment), in cash or through a Borrowing initiated by the Agent without the
satisfaction of the conditions precedent set forth in Section 4.02 or (y) if
such draw occurs on or after the Termination Date (or the earlier date of
termination of the Total Commitment), in cash. Each Bank agrees to make the
Loans described in clause (x) of the preceding sentence notwithstanding a
failure to satisfy the applicable lending conditions thereto or the provisions
of Sections 2.02 or 2.25. If such draw occurs on or after the Termination Date,
the Borrower shall reimburse the Fronting Bank first from any cash deposit or
cash proceeds of a back-to-back letter of credit in accordance with Section
2.03(b), and then from the Borrower's other assets.
(5) Immediately upon the issuance of any Letter of Credit by any
Fronting Bank, such Fronting Bank shall be deemed to have sold to each Bank
other than such Fronting Bank and each such other Bank shall be deemed
unconditionally and irrevocably to have purchased from such Fronting Bank,
without recourse or warranty, an undivided interest and participation, to the
extent of such Bank's Commitment Percentage, in such Letter of Credit, each
drawing thereunder and the obligations of the Borrower and the Guarantors under
this Agreement with respect thereto. Upon any change in the Commitments
pursuant to Section 10.03, it is hereby agreed that with respect to all Letter
of Credit Outstandings, there shall be an automatic adjustment to the
participations hereby created to reflect the new Commitment Percentages of the
assigning and assignee Banks. Any action taken or omitted by a Fronting Bank
under or in connection with a Letter of Credit, if taken or omitted in the
absence of gross negligence or willful misconduct, shall not create for such
Fronting Bank any resulting liability to any other Bank.
(6) In the event that a Fronting Bank makes any payment under any
Letter of Credit and the Borrower shall not have reimbursed such amount in full
to such Fronting Bank pursuant to this Section, the Fronting Bank shall promptly
notify the Agent, which shall promptly
22
<PAGE>
notify each Bank of such failure, and each Bank shall promptly and
unconditionally pay to the Agent for the account of the Fronting Bank the amount
of such Bank's Commitment Percentage of such unreimbursed payment in Dollars and
in same day funds. If the Fronting Bank so notifies the Agent, and the Agent so
notifies the Banks prior to 11:00 a.m. (New York City time) on any Business Day,
such Banks shall make available to the Fronting Bank such Bank's Commitment
Percentage of the amount of such payment on such Business Day in same day funds.
If and to the extent such Bank shall not have so made its Commitment Percentage
of the amount of such payment available to the Fronting Bank, such Bank agrees
to pay to such Fronting Bank, forthwith on demand such amount, together with
interest thereon, for each day from such date until the date such amount is paid
to the Agent for the account of such Fronting Bank at the Federal Funds
Effective Rate. The failure of any Bank to make available to the Fronting Bank
its Commitment Percentage of any payment under any Letter of Credit shall not
relieve any other Bank of its obligation hereunder to make available to the
Fronting Bank its Commitment Percentage of any payment under any Letter of
Credit on the date required, as specified above, but no Bank shall be
responsible for the failure of any other Bank to make available to such Fronting
Bank such other Bank's Commitment Percentage of any such payment. Whenever a
Fronting Bank receives a payment of a reimbursement obligation as to which it
has received any payments from the Banks pursuant to this paragraph, such
Fronting Bank shall pay to each Bank which has paid its Commitment Percentage
thereof, in Dollars and in same day funds, an amount equal to such Bank's
Commitment Percentage thereof.
SECTION 3.4 Issuance. Whenever the Borrower desires a Fronting Bank to
--------
issue a Letter of Credit, it shall give to such Fronting Bank and the Agent at
least two Business Days' prior written (including telegraphic, telex, facsimile
or cable communication) notice (or such shorter period as may be agreed upon by
the Agent, the Borrower and the Fronting Bank) specifying the date on which the
proposed Letter of Credit is to be issued (which shall be a Business Day), the
stated amount of the Letter of Credit so requested, the expiration date of such
Letter of Credit and the name and address of the beneficiary thereof.
SECTION 3.5 Nature of Letter of Credit Obligations Absolute. The
-----------------------------------------------
obligations of the Borrower to reimburse the Banks for drawings made under any
Letter of Credit shall be unconditional and irrevocable and shall be paid
strictly in accordance with the terms of this Agreement under all circumstances,
including, without limitation (it being understood that any such payment by the
Borrower shall be without prejudice to, and shall not constitute a waiver of,
any rights the Borrower might have or might acquire as a result of the payment
by the Fronting Bank of any draft or the reimbursement by the Borrower thereof):
(i) any lack of validity or enforceability of any Letter of Credit; (ii) the
existence of any claim, setoff, defense or other right which the Borrower or any
Guarantor may have at any time against a beneficiary of any Letter of Credit or
against any of the Banks, whether in connection with this Agreement, the
transactions contemplated herein or any unrelated transaction; (iii) any draft,
demand, certificate or other document presented under any Letter of Credit
proving to be forged, fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect; (iv) payment by a
Fronting Bank of any Letter of Credit against presentation of a demand, draft or
certificate or other document which does not comply with the terms of such
Letter of Credit; (v) any other circumstance or happening
23
<PAGE>
whatsoever, which is similar to any of the foregoing; or (vi) the fact that any
Event of Default shall have occurred and be continuing.
SECTION 3.6 Making of Loans.
----------------
(1) Each Bank may fulfill its Commitment with respect to any Loan by
causing any lending office of such Bank to make such Loan; provided that any
--------
such use of a lending office shall not affect the obligation of the Borrower to
repay such Loan in accordance with the terms of this Agreement. Each Bank
shall, subject to its overall policy considerations, use reasonable efforts (but
shall not be obligated) to select a lending office which will not result in the
payment of increased costs by the Borrower pursuant to Section 2.13.
(2) The Borrower shall give the Agent prior notice of each Borrowing
hereunder of at least one Business Day (except as provided in the last sentence
of this Section 2.06(b)), such notice shall be irrevocable and shall specify the
amount of the proposed Borrowing (which shall not be less than $1,000,000) and
the date thereof (which shall be a Business Day) and shall contain disbursement
instructions. Such notice, to be effective, must be received by the Agent not
later than 1:00 p.m., New York City time, on the first Business Day preceding
the date on which such Borrowing is to be made except as provided in the last
sentence of this Section 2.06(b). The Agent shall promptly notify each Bank of
its proportionate share of such Borrowing and the date of such Borrowing. On
the borrowing date specified in such notice, each Bank shall make its share of
the Borrowing available at the office of the Agent at 270 Park Avenue, New York,
New York 10017, no later than 12:00 noon, New York City time, in immediately
available funds. Upon receipt of the funds made available by the Banks to fund
any Borrowing hereunder, the Agent shall disburse such funds in the manner
specified in the notice of borrowing delivered by the Borrower and shall use
reasonable efforts to make the funds so received from the Banks available to the
Borrower no later than 2:00 p.m. New York City time (other than as provided in
the following sentence). With respect to Loans of $5,000,000 or less, the Banks
shall make such Borrowings available to the Borrower by 4:00 p.m., New York City
time, on the same Business Day that the Borrower gives notice to the Agent of
such Borrowing by 12:00 noon, New York City time, provided that the Agent has
--------
notified the Banks thereof by 2:00 p.m., New York City time, on such day.
SECTION 3.7 Repayment of Loans; Evidence of Debt.
------------------------------------
(1) The Borrower hereby unconditionally promises to pay to the Agent
for the account of each Bank the then unpaid principal amount of each Loan on
the Termination Date.
(2) Each Bank shall maintain in accordance with its usual practice an
account or accounts evidencing the indebtedness of the Borrower to such Bank
resulting from each Loan made by such Bank, including the amounts of principal
and interest payable and paid to such Bank from time to time hereunder.
(3) The Agent shall maintain accounts in which it shall record (i)
the amount of each Loan made hereunder, (ii) the amount of any principal or
interest due and payable or to become
24
<PAGE>
due and payable from the Borrower to each Bank hereunder and (iii) the amount of
any sum received by the Agent hereunder for the account of the Banks and each
Bank's share thereof.
(4) The entries made in the accounts maintained pursuant to paragraph
(b) or (c) of this Section shall be prima facie evidence of the existence and
----- -----
amounts of the obligations recorded therein; provided that the failure of any
--------
Bank or the Agent to maintain such accounts or any error therein shall not in
any manner affect the obligation of the Borrower to repay the Loans in
accordance with the terms of this Agreement.
(5) Any Bank may request that Loans made by it be evidenced by a
promissory note. In such event, the Borrower shall execute and deliver to such
Bank a promissory note payable to the order of such Bank (or, if requested by
such Bank, to such Bank and its registered assigns) in a form furnished by the
Agent and reasonably acceptable to the Borrower. Thereafter, the Loans
evidenced by such promissory note and interest thereon shall at all times
(including after assignment pursuant to Section 10.03) be represented by one or
more promissory notes in such form payable to the order of the payee named
therein (or, if such promissory note is a registered note, to such payee and its
registered assigns).
SECTION 3.8 Interest on Loans.
-----------------
(1) Subject to the provisions of Section 2.09, each Loan shall bear
interest (computed on the basis of the actual number of days elapsed over a year
of 360 days) at a rate per annum equal to the Alternate Base Rate plus 3%.
----
(2) Accrued interest on all Loans shall be payable in arrears on the
last calendar day of each month, at maturity (whether by acceleration or
otherwise), after such maturity on demand and upon any repayment or prepayment
thereof (on the amount prepaid).
SECTION 3.9 Default Interest. If the Borrower or any Guarantor, as the
----------------
case may be, shall default in the payment of the principal of or interest on any
Loan or in the payment of any other amount becoming due hereunder (including,
without limitation, the reimbursement pursuant to Section 2.03(d) of any draft
drawn under a Letter of Credit), whether at stated maturity, by acceleration or
otherwise, the Borrower or such Guarantor, as the case may be, shall on demand
from time to time pay interest, to the extent permitted by law, on such
defaulted amount up to (but not including) the date of actual payment (after as
well as before judgment) at a rate per annum (computed on the basis of the
actual number of days elapsed over a year of 360 days) equal to the Alternate
Base Rate plus 5%.
----
SECTION 3.10 Optional Termination or Reduction of Commitment. Upon at
-----------------------------------------------
least two Business Days' prior written notice to the Agent, the Borrower may at
any time in whole permanently terminate, or from time to time in part
permanently reduce, the Unused Total Commitment. Each such reduction of the
Unused Total Commitment shall be in the principal amount of $5,000,000 or any
integral multiple thereof. Simultaneously with each reduction or termination of
the Total Commitment, the Borrower shall pay to the Agent for the account of
each Bank the Commitment Fee accrued on the amount of the Commitment of such
Bank so terminated
25
<PAGE>
or reduced through the date thereof. Any reduction of the Total Commitment
pursuant to this Section shall be applied pro rata to reduce the Commitment of
--- ----
each Bank.
SECTION 3.11 Mandatory Prepayment; Commitment Termination; Cash
--------------------------------------------------
Collateral.
- ----------
(1) If at any time the aggregate principal amount of the outstanding
Loans plus the aggregate Letter of Credit Outstandings exceeds the lesser of (x)
the Total Commitment and (y) the Borrowing Base, the Borrower will within three
Business Days (i) prepay the Loans in an amount necessary to cause the aggregate
principal amount of the outstanding Loans plus the aggregate Letter of Credit
----
Outstandings to be equal to or less than the Total Commitment and/or the
Borrowing Base, as the case may be, and (ii) if, after giving effect to the
prepayment in full of the Loans, the aggregate Letter of Credit Outstandings in
excess of the amount of cash held in the Letter of Credit Account exceeds the
Total Commitment and/or the Borrowing Base, as the case may be, deposit into the
Letter of Credit Account an amount equal to 105% of the amount by which the
aggregate Letter of Credit Outstandings in excess of the amount of cash held in
the Letter of Credit Account so exceeds the Total Commitment or Borrowing Base,
as the case may be.
(2) Upon the sale or other disposition of any of the properties the
completion of which was financed with the proceeds of Loans as permitted by
Section 3.10, the Borrower shall first apply that portion of the Net Proceeds
thereof that is equal to the principal amount of Loans so utilized for such
completion to the prepayment of the Loans.
(3) Upon the Termination Date, the Total Commitment shall be
terminated in full and the Borrower shall pay the Loans in full and, except as
the Agent may otherwise agree in writing, if any Letter of Credit remains
outstanding, deposit into the Letter of Credit Account an amount equal to 105%
of the amount by which the sum of the aggregate Letter of Credit Outstandings
exceeds the amount of cash held in the Letter of Credit Account, such cash to be
remitted to the Borrower upon the expiration, cancellation, satisfaction or
other termination of such reimbursement obligations, or otherwise comply with
Section 2.03(b).
SECTION 3.12 Optional Prepayment of Loans. The Borrower shall have the
----------------------------
right at any time and from time to time to prepay any Loans, in whole or in
part, on the same Business Day if written, telex or facsimile notice is received
by the Agent prior to 1:00 p.m., New York City time, and thereafter upon at
least one Business Day's prior written, telex or facsimile notice to the Agent;
provided, however, that each such partial prepayment shall be in multiples of
- -------- -------
$1,000,000. Each notice of prepayment shall specify the prepayment date and the
principal amount of the Loans to be prepaid, shall be irrevocable and shall
commit the Borrower to prepay such Loan in the amount and on the date stated
therein. The Agent shall, promptly after receiving notice from the Borrower
hereunder, notify each Bank of the principal amount of the Loans held by such
Bank which are to be prepaid, the prepayment date and the manner of application
of the prepayment.
SECTION 3.13 Reserve Requirements; Change in Circumstances.
---------------------------------------------
26
<PAGE>
(1) If any Bank shall have determined that the adoption or
effectiveness after the date hereof of any law, rule, regulation or guideline
regarding capital adequacy, or any change in any of the foregoing or in the
interpretation or administration of any of the foregoing by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank (or any lending office of such
Bank) or any Bank's holding company with any request or directive regarding
capital adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing the
rate of return on such Bank's capital or on the capital of such Bank's holding
company, if any, as a consequence of this Agreement, the Loans made by such Bank
pursuant hereto, such Bank's Commitment hereunder or the issuance of, or
participation in, any Letter of Credit by such Bank to a level below that which
such Bank or such Bank's holding company could have achieved but for such
adoption, change or compliance (taking into account Bank's policies and the
policies of such Bank's holding company with respect to capital adequacy) by an
amount deemed by such Bank to be material, then from time to time the Borrower
shall pay to such Bank such additional amount or amounts as will compensate such
Bank or such Bank's holding company for any such reduction suffered.
(2) A certificate of each Bank setting forth such amount or amounts
as shall be necessary to compensate such Bank or its holding company as
specified in paragraph (a) above, shall be delivered to the Borrower and shall
be conclusive absent manifest error. The Borrower shall pay each Bank the amount
shown as due on any such certificate delivered to it within 10 days after its
receipt of the same. Any Bank receiving any such payment shall promptly make a
refund thereof to the Borrower if the law, regulation, guideline or change in
circumstances giving rise to such payment is subsequently deemed or held to be
invalid or inapplicable.
(3) Failure on the part of any Bank to demand compensation for any
increased costs or reduction in amounts received or receivable or reduction in
return on capital with respect to any period shall not constitute a waiver of
such Bank's right to demand compensation with respect to such period or any
other period. The protection of this Section shall be available to each Bank
regardless of any possible contention of the invalidity or inapplicability of
the law, rule, regulation, guideline or other change or condition which shall
have occurred or been imposed.
SECTION 3.14 Pro Rata Treatment, etc. All payments and repayments of
-----------------------
principal and interest in respect of the Loans (except as provided in Sections
2.13) shall be made pro rata among the Banks in accordance with the then
outstanding principal amount of the Loans and/or participations in Letter of
Credit Outstandings and all outstanding undrawn Letters of Credit (and the
unreimbursed amount of drawn Letters of Credit) hereunder and all payments of
Commitment Fees and Letter of Credit Fees (other than those payable to a
Fronting Bank) shall be made pro rata among the Banks in accordance with their
Commitments. All payments by the Borrower hereunder shall be (i) net of any tax
applicable to the Borrower or Guarantor and (ii) made in Dollars in immediately
available funds at the office of the Agent by 12:00 noon, New York City time, on
the date on which such payment shall be due. Interest in respect of any Loan
hereunder shall accrue from and including the date of such Loan to but excluding
the date on which such Loan is paid in full.
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SECTION 3.15 Taxes.
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(1) Any and all payments by the Borrower or any Guarantor hereunder
shall be made free and clear of and without deduction for any and all current or
future taxes, levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, excluding (i) taxes imposed on or measured by
---------
the net income or overall gross receipts of the Agent or any Bank (or any
transferee or assignee thereof, including a participation holder (any such
entity being called a "Transferee")) and franchise taxes imposed on the Agent or
----------
any Bank (or Transferee) by the United States or any jurisdiction under the laws
of which the Agent or any such Bank (or Transferee) is organized or in which the
applicable lending office of any such Bank (or Transferee) is located or any
political subdivision thereof or by any other jurisdiction or by any political
subdivision or taxing authority therein other than a jurisdiction in which the
Agent or such Bank (or Transferee) would not be subject to tax but for the
execution and performance of this Agreement and (ii) taxes, levies, imposts,
deductions, charges or withholdings ("Amounts") with respect to payments
-------
hereunder to a Bank (or Transferee) in accordance with laws in effect on the
later of the date of this Agreement and the date such Bank (or Transferee)
becomes a Bank (or Transferee, as the case may be), but not excluding, with
respect to such Bank (or Transferee), any increase in such Amounts solely as a
result of any change in such laws occurring after such later date or any Amounts
that would not have been imposed but for actions (other than actions
contemplated by this Agreement) taken by the Borrower after such later date (all
such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If the Borrower or any
-----
Guarantor shall be required by law to deduct any Taxes from or in respect of any
sum payable hereunder to the Banks (or any Transferee) or the Agent, (i) the sum
payable shall be increased by the amount necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section) such Bank (or Transferee) or the Agent (as the case may be)
shall receive an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions and (iii) the
Borrower shall pay the full amount deducted to the relevant taxing authority or
other Governmental Authority in accordance with applicable law.
(2) In addition, the Borrower agrees to pay any current or future
stamp or documentary taxes or any other excise or property taxes, charges,
assessments or similar levies that arise from any payment made hereunder or from
the execution, delivery or registration of, or otherwise with respect to, this
Agreement or any other Loan Document (hereinafter referred to as "Other Taxes").
-----------
(3) The Borrower will indemnify each Bank (or Transferee) and the
Agent for the full amount of Taxes and Other Taxes paid by such Bank (or
Transferee) or the Agent, as the case may be, and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto,
whether or not such Taxes or Other Taxes were correctly or legally asserted by
the relevant taxing authority or other Governmental Authority. Such
indemnification shall be made within 30 days after the date any Bank (or
Transferee) or the Agent, as the case may be, makes written demand therefor. If
a Bank (or Transferee) or the Agent shall become aware that it is entitled to
receive a refund in respect of Taxes or Other Taxes as to which it has been
indemnified by the Borrower pursuant to this Section, it shall promptly notify
the Borrower of the availability of such
28
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refund and shall, within 30 days after receipt of a request by the Borrower,
apply for such refund at the Borrower's expense. If any Bank (or Transferee) or
the Agent receives a refund in respect of any Taxes or Other Taxes as to which
it has been indemnified by the Borrower pursuant to this Section, it shall
promptly notify the Borrower of such refund and shall, within 30 days after
receipt of a request by the Borrower (or promptly upon receipt, if the Borrower
has requested application for such refund pursuant hereto), repay such refund to
the Borrower (to the extent of amounts that have been paid by the Borrower under
this Section with respect to such refund plus interest that is received by the
Bank (or Transferee) or the Agent as part of the refund), net of all out-of-
pocket expenses of such Bank (or Transferee) or the Agent and without additional
interest thereon; provided that the Borrower, upon the request of such Bank (or
--------
Transferee) or the Agent, agrees to return such refund (plus penalties, interest
or other charges) to such Bank (or Transferee) or the Agent in the event such
Bank (or Transferee) or the Agent is required to repay such refund. Nothing
contained in this subsection (c) shall require any Bank (or Transferee) or the
Agent to make available any of its tax returns (or any other information
relating to its taxes that it deems to be confidential).
(4) Within 30 days after the date of any payment of Taxes or Other
Taxes withheld by the Borrower in respect of any payment to any Bank (or
Transferee) or the Agent, the Borrower will furnish to the Agent, at its address
referred to on the signature pages hereof, the original or a certified copy of a
receipt evidencing payment thereof.
(5) Without prejudice to the survival of any other agreement
contained herein, the agreements and obligations contained in this Section shall
survive the payment in full of the principal of and interest on all Loans made
hereunder.
(6) Each Bank (or Transferee) that is organized under the laws of a
jurisdiction outside the United States shall, if legally able to do so, prior to
the immediately following due date of any payment by the Borrower hereunder,
deliver to the Borrower such certificates, documents or other evidence, as
required by the Code or Treasury Regulations issued pursuant thereto, including
(A) Internal Revenue Service Form W-8 or W-9 and (B) Internal Revenue Service
Form 1001 or Form 4224 and any other certificate or statement of exemption
required by Treasury Regulation Section 1.1441-1, 1.1441-4 or 1.1441-6(c) or any
subsequent version thereof or successors thereto, properly completed and duly
executed by such Bank (or Transferee) establishing that such payment is (i) not
subject to United States federal withholding tax under the Code because such
payment is effectively connected with the conduct by such Bank (or Transferee)
of a trade or business in the United States or (ii) totally exempt from United
States federal withholding tax or subject to a reduced rate of such tax under a
provision of an applicable tax treaty. Unless the Borrower and the Agent have
received forms or other documents satisfactory to them indicating that such
payments hereunder or are not subject to United States federal withholding tax
or are subject to such tax at a rate reduced by an applicable tax treaty, the
Borrower or the Agent shall withhold taxes from such payments at the applicable
statutory rate.
(7) The Borrower shall not be required to pay any additional amounts
to any Bank (or Transferee) in respect of United States federal withholding tax
pursuant to subsection (a)
29
<PAGE>
above if the obligation to pay such additional amounts would not have arisen but
for a failure by such Bank (or Transferee) to comply with the provisions of
subsection (f) above.
(8) Any Bank (or Transferee) claiming any additional amounts payable
pursuant to this Section 2.15 shall use reasonable efforts (consistent with
legal and regulatory restrictions) to file any certificate or document requested
by the Borrower or to change the jurisdiction of its applicable lending office
if the making of such a filing or change would avoid the need for or reduce the
amount of any such additional amounts that may thereafter accrue and would not,
in the sole reasonable determination of such Bank (or Transferee), be otherwise
materially disadvantageous to such Bank (or Transferee).
SECTION 3.16 Certain Fees. The Borrower shall pay to the Agent, for the
------------
respective accounts of the Agent and the Banks, the fees set forth in that
certain letter dated December 22, 1999 among the Agent, Chase Securities Inc.
and the Borrower at the times set forth therein.
SECTION 3.17 Commitment Fee. The Borrower shall pay to the Banks a
--------------
commitment fee (the "Commitment Fee") for the period commencing on the date the
--------------
Commitment Letter is executed to the Termination Date or the earlier date of
termination of the Commitment, computed (on the basis of the actual number of
days elapsed over a year of 360 days) at the rate of one percent (1%) per annum
on the average daily Unused Total Commitment. Such Commitment Fee, to the extent
then accrued, shall be payable (x) monthly, in arrears, on the last calendar day
of each month, (y) on the Termination Date and (z) as provided in Section 2.10
hereof, upon any reduction or termination in whole or in part of the Total
Commitment.
SECTION 3.18 Letter of Credit Fees. The Borrower shall pay with respect to
---------------------
each Letter of Credit (i) to the Agent on behalf of the Banks a fee calculated
(on the basis of the actual number of days elapsed over a year of 360 days) at
the rate of three percent (3%) per annum on the daily average Letter of Credit
Outstandings and (ii) to the Fronting Bank such Fronting Bank's customary fees
for issuance, amendments and processing referred to in Section 2.03. In
addition, the Borrower agrees to pay each Fronting Bank for its account a
fronting fee in respect of each Letter of Credit issued by such Fronting Bank,
for the period from and including the date of issuance of such Letter of Credit
to and including the date of expiry or draw of such Letter of Credit, computed
at a rate, and payable at times, to be determined by such Fronting Bank, the
Borrower and the Agent. Accrued fees described in clause (i) of the first
sentence of this paragraph in respect of each Letter of Credit shall be due and
payable monthly in arrears on the last calendar day of each month and on the
Termination Date, or such earlier date as the Total Commitment is terminated.
Accrued fees described in clause (ii) of the first sentence of this paragraph in
respect of each Letter of Credit shall be payable at times to be determined by
the Fronting Bank, the Borrower and the Agent.
SECTION 3.19 Nature of Fees. All Fees shall be paid on the dates due, in
--------------
immediately available funds, to the Agent for the respective accounts of the
Agent and the Banks, as provided herein and in the letter described in Section
2.16. Once paid, none of the Fees shall be refundable under any circumstances.
SECTION 3.20 Priority and Liens.
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<PAGE>
(1) The Borrower and each of the Guarantors hereby covenants,
represents and warrants that, upon entry of the First Day Order, the
Obligations of the Borrower and the Guarantors hereunder and under the Loan
Documents and in respect of Indebtedness permitted by Section 6.03 (vi): (i)
pursuant to Section 364(c)(1) of the Bankruptcy Code, shall at all times
constitute allowed administrative expense claims in the Cases having priority
over all administrative expenses of the kind specified in Sections 503(b) or
507(b) of the Bankruptcy Code; (ii) pursuant to Section 364(c)(2) of the
Bankruptcy Code, shall at all times be secured by perfected first priority Liens
on all unencumbered pre-petition and post-petition property of the Borrower and
the Guarantors (including, without limitation, all Accounts arising after the
Filing Date, except as otherwise provided in subparagraph (iii) below or in the
Orders, with any such Account on which the Agent and the Banks do not have a
first priority perfected Lien being excluded from the Borrowing Base, but
excluding bankruptcy causes of action, it being understood that, notwithstanding
such exclusion, the proceeds of such causes of action shall be available for the
repayment of the Obligations) and on all cash maintained in the Letter of Credit
Account and any direct investments of the funds contained therein; (iii)
pursuant to Section 364(c)(3) of the Bankruptcy Code, shall be secured by
perfected Liens upon all pre-petition and post-petition property of the Borrower
and the Guarantors (including, without limitation, Accounts in existence as of
the Filing Date that are subject to valid and perfected Liens in favor of the
Real Estate Financiers and the proceeds thereof, but not including property that
is subject to existing Liens that presently secure the obligations of the
Borrower and the Guarantors under the Existing Agreements as to which the Liens
in favor of the Agent and the Banks will be as described in clause (iv) of this
sentence) that is subject to valid and perfected Liens in existence on the
Filing Date or to Permitted Liens, junior to such valid and perfected Liens; and
(iv) pursuant to Section 364(d)(1) of the Bankruptcy Code, shall be secured by
perfected first priority, senior priming Liens on all pre-petition and post-
petition property of the Borrower and the Guarantors that is subject to (A) the
existing Liens that secure the obligations of the Borrower and the Guarantors
under and in connection with the Existing Agreements (subject to any Liens in
existence on the Filing Date to which the Liens being primed hereby are subject
or become subject) but excluding from such priming Liens (but not from the Liens
described in clause (iii) of this sentence) the Liens of the Synthetic Agent to
the extent of the Tranche B Loans and of FBTC Leasing Corp. to the extent of the
Lessor Contributions and related obligations (under and as each such term is
described in the Amended and Restated Credit Agreement that is referred to in
the definition of the term "Synthetic Guarantee" herein) and (B) any Liens
granted after the Filing Date to provide adequate protection in respect of the
Existing Agreements; subject only to (x) in the event of the occurrence and
during the continuance of an Event of Default or an event that would constitute
an Event of Default with the giving of notice or lapse of time or both, the
payment of (1) accrued and unpaid professional fees and disbursements
theretofore incurred or incurred after the cure or waiver of such Event of
Default or event, and (2) professional fees and disbursements incurred during
the time of such continuance in an aggregate amount not in excess of $2,500,000,
in each case by the Borrower, the Guarantors and any statutory committee
appointed in the Cases and allowed by an order of the Bankruptcy Court and (y)
the payment of unpaid fees pursuant to 28 U.S.C. (S) 1930 and to the Clerk of
the Bankruptcy Court (collectively, the "Carve-Out"), provided that following
--------- --------
the Termination Date amounts in the Letter of Credit Account shall not
be subject to the Carve-Out, and provided, further, that, except as otherwise
-------- -------
provided in the Orders, no portion of the Carve-Out shall be utilized for the
payment of professional fees and disbursements incurred in connection with
31
<PAGE>
any challenge to the amount, extent, priority, validity, perfection or
enforcement of the indebtedness of the Borrower and the Guarantors owing to the
Existing Lenders or to the collateral securing such indebtedness. The Banks
agree that so long as no Event of Default or event which with the giving of
notice or lapse of time or both would constitute an Event of Default shall have
occurred, the Borrower and the Guarantors shall be permitted to pay compensation
and reimbursement of expenses allowed and payable under 11 U.S.C. (S) 330 and 11
U.S.C. (S) 331, as the same may be due and payable, and the same shall not
reduce the Carve-Out.
(2) Subject to the Carve-Out and Permitted Liens, as to all real
property the title to which is held by the Borrower or any of the Guarantors, or
the possession of which is held by the Borrower or any of the Guarantors
pursuant to a leasehold interest, the Borrower and each Guarantor hereby assigns
and conveys as security, grants a security interest in, and (as applicable under
relevant state law) conveys security title to, hypothecates, mortgages, pledges
and sets over unto the Agent on behalf of the Banks (with the priorities
described above) all of the right, title and interest of the Borrower and such
Guarantor in all of such owned real property and in all such leasehold
interests, together in each case with all of the right, title and interest of
the Borrower and such Guarantor in and to all buildings, improvements, and
fixtures related thereto, any lease or sublease thereof, all general intangibles
relating thereto and all proceeds thereof. The Borrower and each Guarantor
acknowledges that, pursuant to the Orders, the Liens in favor of the Agent on
behalf of the Banks in all of such real property and leasehold instruments shall
be perfected without the recordation of any mortgages, deeds of trust, deeds to
secure debt or assignments. The Borrower and each Guarantor further agrees
that, upon the request of the Agent, the Borrower and such Guarantor shall enter
into separate fee and leasehold mortgages, deeds of trust, deeds to secure debt,
collateral assignments or similar instruments in recordable form with respect to
such properties on terms reasonably satisfactory to the Agent.
SECTION 3.21 Right of Set-Off. Subject to the provisions of Section 7.01,
----------------
upon the occurrence and during the continuance of any Event of Default and the
Carve-Out the Agent and each Bank is hereby authorized at any time and from time
to time, to the fullest extent permitted by law and without further order of or
application to the Bankruptcy Court, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by the Agent and each such Bank to or for
the credit or the account of the Borrower or any Guarantor against any and all
of the obligations of such Borrower or Guarantor now or hereafter existing under
the Loan Documents, irrespective of whether or not such Bank shall have made any
demand under any Loan Document and although such obligations may not have been
accelerated. Each Bank and the Agent agrees promptly to notify the Borrower and
Guarantors after any such set-off and application made by such Bank or by the
Agent, as the case may be, provided that the failure to give such notice shall
--------
not affect the validity of such set-off and application. The rights of each
Bank and the Agent under this Section are in addition to other rights and
remedies which such Bank and the Agent may have upon the occurrence and during
the continuance of any Event of Default.
SECTION 3.22 Security Interest in Letter of Credit Account. Pursuant to
---------------------------------------------
Section 364(c)(2) of the Bankruptcy Code, the Borrower and the Guarantors hereby
assign and pledge to the
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<PAGE>
Agent, for its benefit and for the ratable benefit of the Banks, and hereby
grant to the Agent, for its benefit and for the ratable benefit of the Banks, a
first priority security interest, senior to all other Liens, if any, in all of
the Borrower's and the Guarantors' right, title and interest in and to the
Letter of Credit Account and any direct investment of the funds contained
therein. Cash held in the Letter of Credit Account shall not be available for
use by the Borrower, whether pursuant to Section 363 of the Bankruptcy Code or
otherwise.
SECTION 3.23 Payment of Obligations. Subject to the provisions of Section
----------------------
7.01, upon the maturity (whether by acceleration or otherwise) of any of the
Obligations under this Agreement or any of the other Loan Documents of the
Borrower and the Guarantors, the Banks shall be entitled to immediate payment of
such Obligations without further application to or order of the Bankruptcy
Court.
SECTION 3.24 No Discharge; Survival of Claims. Each of the Borrower and
--------------------------------
the Guarantors agrees that (i) its Obligations hereunder shall not be discharged
by the entry of an order confirming a Plan of Reorganization (and each of the
Borrower and the Guarantors, pursuant to Section 1141(d)(4) of the Bankruptcy
Code, hereby waives any such discharge) and (ii) the Superpriority Claim granted
to the Agent and the Banks pursuant to the Orders and described in Section 2.20
and the Liens granted to the Agent pursuant to the Orders and described in
Sections 2.20 and 2.22 shall not be affected in any manner by the entry of an
order confirming a Plan of Reorganization.
SECTION 3.25 Use of Cash Collateral. Notwithstanding anything to the
----------------------
contrary contained herein, the Borrower shall not be permitted (i) to request a
Borrowing under Section 2.06 or request the issuance of a Letter of Credit under
Section 2.04 unless the Bankruptcy Court shall have entered the First Day Order
or (ii) to request a Borrowing under Section 2.06 unless the Borrower and the
Guarantors shall at that time have the use of all cash collateral subject to the
Orders for the purposes described in Section 3.10.
SECTION 4. REPRESENTATIONS AND WARRANTIES
In order to induce the Banks to make Loans and issue and/or
participate in Letters of Credit hereunder, the Borrower and each of the
Guarantors jointly and severally represent and warrant as follows:
SECTION 4.1 Organization and Authority. Each of the Borrower and the
--------------------------
Guarantors (i) is a corporation duly organized and validly existing under the
laws of the State of its incorporation and is duly qualified as a foreign
corporation and is in good standing in each jurisdiction in which the failure to
so qualify would have a Material Adverse Effect; (ii) subject to the entry by
the Bankruptcy Court of the First Day Order (or the Interim Order or the Final
Order, when applicable) has the requisite corporate power and authority to
effect the transactions contemplated hereby, and by the other Loan Documents to
which it is a party, and (iii) subject to the entry by the Bankruptcy Court of
the First Day Order (or the Interim Order or the Final Order, when applicable)
has all requisite corporate power and authority and the legal right to own,
pledge, mortgage and operate its properties, and to conduct its business as now
or currently proposed to be conducted.
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<PAGE>
SECTION 4.2 Due Execution. Upon the entry by the Bankruptcy Court of the
-------------
First Day Order (or the Interim Order or the Final Order, when applicable), the
execution, delivery and performance by each of the Borrower and the Guarantors
of each of the Loan Documents to which it is a party (i) are within the
respective corporate powers of each of the Borrower and the Guarantors, have
been duly authorized by all necessary corporate action including the consent of
shareholders where required, and do not (A) contravene the charter or by-laws of
any of the Borrower or the Guarantors, (B) violate any law (including, without
limitation, the Securities Exchange Act of 1934) or regulation (including,
without limitation, Regulations T, U or X of the Board of Governors of the
Federal Reserve System), or any order or decree of any court or governmental
instrumentality, the violation of which could reasonably be expected to have a
Material Adverse Effect, (C) conflict with or result in a breach of, or
constitute a default under, any indenture, mortgage or deed of trust entered
into after the Filing Date or any lease, agreement or other instrument entered
into after the Filing Date binding on the Borrower or the Guarantors or any of
their properties, in each case which conflict, breach or default could
reasonably be expected to have a Material Adverse Effect, or (D) result in or
require the creation or imposition of any Lien upon any of the property of any
of the Borrower or the Guarantors other than the Liens granted pursuant to this
Agreement, the other Loan Documents or the Orders; and do not require the
consent, authorization by or approval of or notice to or filing or registration
with any Governmental Authority other than the entry of the Orders. Upon the
entry by the Bankruptcy Court of the First Day Order (or the Interim Order or
the Final Order, when applicable), this Agreement has been duly executed and
delivered by each of the Borrower and the Guarantors. This Agreement is, and
each of the other Loan Documents to which the Borrower and each of the
Guarantors is or will be a party, when delivered hereunder or thereunder, will
be, a legal, valid and binding obligation of the Borrower and each Guarantor, as
the case may be, enforceable against the Borrower and the Guarantors, as the
case may be, in accordance with its terms and the Orders.
SECTION 4.3 Statements Made. The information that has been delivered in
---------------
writing by the Borrower or any of the Guarantors to the Agent or to the
Bankruptcy Court in connection with any Loan Document, and any financial
statement delivered pursuant hereto or thereto (other than to the extent that
any such statements constitute projections), taken as a whole and in light of
the circumstances in which made, as of the date so delivered, contained no
untrue statement of a material fact and did not omit to state a material fact
necessary to make such statements not misleading; and, to the extent that any
such information constitutes projections, such projections were prepared in good
faith on the basis of assumptions, methods, data, tests and information believed
by the Borrower or such Guarantor to be reasonable at the time such projections
were furnished.
SECTION 4.4 Financial Statements. The Borrower has furnished the Banks
--------------------
with copies of (i) the audited consolidated financial statement and schedules of
the Borrower for the fiscal year ended September 30, 1998 and (ii) the unaudited
consolidated financial statement and schedules of the Borrower for the fiscal
quarter ended June 30, 1999. Such financial statements present fairly the
financial condition and results of operations of the Borrower and its
consolidated Subsidiaries on a consolidated basis as of such dates and for such
periods; such balance sheets and the notes thereto disclose all liabilities,
direct or contingent, of the Borrower and its consolidated Subsidiaries as of
the dates thereof required to be disclosed by GAAP and such financial statements
were prepared in
34
<PAGE>
a manner consistent with GAAP, subject (in the case of such fiscal quarter
statement) to normal year end adjustments. No material adverse change in the
operations, business, properties, assets, prospects or condition (financial or
otherwise) of the Borrower and its consolidated Subsidiaries, taken as a whole,
has occurred from that set forth in the Borrower's consolidated financial
statements for the fiscal year ended September 30, 1998 or the fiscal quarter
ended June 30, 1999 other than those which have been disclosed to the Banks in
writing and those which customarily occur as a result of events leading up to
and following the commencement of a proceeding under Chapter 11 of the
Bankruptcy Code and the commencement of the Cases (including, without
limitation, those reflected in the financial projections heretofore made
available to the Agent).
SECTION 4.5 Ownership. Except as set forth on Schedule 3.05, (a) each of
---------
the Persons listed on Schedule 3.05 is a wholly-owned, direct or indirect
Subsidiary of the Borrower and (b) the Borrower owns no other Subsidiaries,
whether directly or indirectly, other than MHG and the direct and indirect
subsidiaries of MHG.
SECTION 4.6 Liens. Except for Liens existing on the Filing Date as
-----
reflected on Schedule 3.06 (which Schedules shall be deemed to include any Liens
disclosed by the Lien search reports delivered to the Agent pursuant to Section
4.02(h) hereof, which reports are required to be satisfactory to the Agent and
the Original Required Banks), there are no Liens of any nature whatsoever on any
assets of the Borrower or any of the Guarantors other than Liens permitted
pursuant to Section 6.01. Neither the Borrower nor the Guarantors are parties to
any contract, agreement, lease or instrument the performance of which, either
unconditionally or upon the happening of an event, will result in or require the
creation of a Lien on any assets of the Borrower or any Guarantor or otherwise
result in a violation of this Agreement other than the Liens granted to the
Agent and the Banks as provided for in this Agreement and Permitted Adequate
Protection Liens.
SECTION 4.7 Compliance with Law. Except as set forth in a letter dated
-------------------
the Closing Date heretofore delivered to the Agent and the Banks (which letter
need not duplicate disclosures referred to in Section 3.13) and except for
matters which, singly or in the aggregate could not reasonably expected to have
a Material Adverse Effect:
(1) (i) To the knowledge of the Borrower or the Guarantors, the
operations of the Borrower and the Guarantors comply in all material respects
with all applicable environmental, health and safety statutes and regulations,
including, without limitation, regulations promulgated under the Resource
Conservation and Recovery Act (42 U.S.C. (S)(S) 6901 et seq.); (ii) to the
-- ---
Borrower's and each of the Guarantor's knowledge, none of the operations of the
Borrower or the Guarantors is the subject of any federal or state investigation
evaluating whether any remedial action involving a material expenditure by the
Borrower or any Guarantor is needed to respond to a release of any Hazardous
Waste or Hazardous Substance (as such terms are defined in any applicable state
or federal environmental law or regulations) into the environment; and (iii) to
the Borrower's and each of the Guarantor's knowledge, the Borrower and the
Guarantors do not have any material contingent liability in connection with any
release of any Hazardous Waste or Hazardous Substance into the environment.
35
<PAGE>
(2) Neither the Borrower nor any Guarantor is, to the best of its
knowledge, in violation of any law, rule or regulation, or in default with
respect to any judgment, writ, injunction or decree of any Governmental
Authority.
SECTION 4.8 Insurance. All policies of insurance of any kind or nature
---------
owned by or issued to the Borrower and the Guarantors, including, without
limitation, policies of life, fire, theft, product liability, public liability,
property damage, other casualty, employee fidelity, workers' compensation,
employee health and welfare, title, property and liability insurance, are in
full force and effect and are of a nature and provide such coverage (including
self insurance) as is customarily carried by companies of the size and character
of the Borrower and the Guarantors.
SECTION 4.9 The Orders. On the date of the making of the initial Loans or
----------
the issuance of the initial Letters of Credit hereunder, whichever first occurs,
the First Day Order will have been entered and will not have been stayed,
amended, vacated, reversed or rescinded (without the prior written consent of
the Agent). On the date of the making of any Loan or the issuance of any Letter
of Credit, the First Day Order, the Interim Order or the Final Order, as the
case may be, shall have been entered and shall not have been amended, stayed,
vacated or rescinded (without the prior written consent of the Agent). Upon the
maturity (whether by the acceleration or otherwise) of any of the Obligations of
the Borrower and the Guarantors hereunder and under the other Loan Documents,
the Banks shall, subject to the provisions of Section 7.01 and the Carve-Out, be
entitled to immediate payment of such Obligations, and to enforce the remedies
provided for hereunder, without further application to or order by the
Bankruptcy Court.
SECTION 4.10 Use of Proceeds. The proceeds of the Loans shall be used for
---------------
working capital and other general corporate purposes of the Borrower and the
Guarantors consistent with the Budget (including periodic updates thereof),
which shall include the completion, for not more than $8,800,000, of certain
properties that, on the Filing Date, shall have been partially constructed with
the proceeds of certain of the loans involving, among others, FBTC Leasing Corp.
relating to the Synthetic Guarantee.
SECTION 4.11 Litigation. Other than as set forth in a letter dated the
----------
Closing Date heretofore delivered to the Agent and the Banks or as disclosed
pursuant to Section 5.05(b), there are no unstayed actions, suits or proceedings
pending or, to the knowledge of the Borrower or the Guarantors, threatened
against or affecting the Borrower or the Guarantors or any of their respective
properties, before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which if determined
adversely to the Borrower or the Guarantors would have a Material Adverse
Effect.
SECTION 4.12 Year 2000 Matters. Any reprogramming required to permit the
-----------------
proper functioning (but only to the extent that such proper functioning would
otherwise be impaired by the occurrence of the year 2000) in and following the
year 2000 of computer systems and other equipment containing embedded
microchips, in either case owned or operated by the Borrower or any of its
Subsidiaries or used or relied upon in the conduct of their business (including
any such systems and other equipment supplied by others or with which the
computer systems of the Borrower
36
<PAGE>
or any of its Subsidiaries interface), and the testing of all such systems and
other equipment as so reprogrammed, has been completed in all material respects.
The costs to the Borrower and its Subsidiaries that have not been incurred as of
the date hereof for such reprogramming and testing for the other reasonably
foreseeable consequences to them of any improper functioning of other computer
systems and equipment containing embedded microchips due to the occurrence of
the year 2000 could not reasonably be expected to result in a Default or Event
of Default or to have a Material Adverse Effect. Except for any reprogramming
referred to above, the computer systems of the Borrower and its Subsidiaries are
and, with the ordinary course upgrading and maintenance, will continue for the
term of this Agreement to be, sufficient for the conduct of their business as
currently conducted.
SECTION 4.13 Health Care Permits. Other than as set forth in a letter
-------------------
dated the Closing Date heretofore delivered to the Agent of the Banks:
(1) Except as, in the aggregate, could not reasonably be expected to
have a Material Adverse Effect: (i) each of the Borrower and the Guarantors now
has, and has no reason to believe it will not be able to maintain in effect, all
Health Care Permits necessary for the lawful conduct of its business or
operations wherever now conducted and as planned to be conducted, without
limitation, the ownership and operation of its Health Care Facilities pursuant
to all Requirements of Law, (ii) all such Health Care Permits are in full force
and effect and have not been amended or otherwise modified, rescinded, revoked
or assigned, (iii) the Borrower and each of the Guarantors is substantially
complying with the requirements of each such Health Care Permit, and no event
has occurred, and no condition exists, which, with the giving of notice, the
passage of time, or both, would constitute a violation thereof, (iv) neither the
Borrower nor any of the Guarantors has received any written notice of any
violation of any Requirement of Law, (v) to the knowledge of the Borrower, no
condition exists or event has occurred which in itself or with the giving of
notice or the lapse of time, or both, would result in the suspension,
revocation, impairment, forfeiture or non-renewal of any such Health Care
Permit, (vi) there is no claim filed with any Governmental Authority of which
the Borrower or any of the Guarantors has been notified in writing challenging
the validity of any such Health Care Permit and (vii) the continuation, validity
and effectiveness of all such Health Care Permits will not be adversely affected
by the execution and performance of this Agreement or any of the other Loan
Documents.
(2) All Health Care Facilities owned, leased, managed or operated by
the Borrower or any of the Guarantors are entitled to participate in, and
receive payment under, the appropriate Medicare, Medicaid and related
reimbursement programs, and any similar state or local government-sponsored
program, to the extent that the Borrower or any of the Guarantors has decided to
participate in any such program, and to receive reimbursement from private and
commercial payers and health maintenance organizations to the extent applicable
thereto. There are no proceedings pending or, to the knowledge of the Borrower,
any proceedings threatened or investigations pending or threatened, by any
Governmental Authority with respect to the Borrower's or any of its
Subsidiaries' participation in the Medicare, Medicaid or related reimbursement
programs and which could reasonably be expected to have a Material Adverse
Effect.
37
<PAGE>
SECTION 5. CONDITIONS OF LENDING
SECTION 5.1 Conditions Precedent to Initial Loans and Initial Letters of
------------------------------------------------------------
Credit. The obligation of the Banks to make the initial Loans or the Fronting
- ------
Bank to issue the initial Letter of Credit, whichever may occur first, is
subject to the following conditions precedent:
(1) Supporting Documents. The Agent shall have received for each of
--------------------
the Borrower and the Guarantors:
(1) a copy of such entity's certificate of incorporation, as
amended, certified as of a recent date by the Secretary of State of
the state of its incorporation;
(2) a certificate of such Secretary of State, dated as of a
recent date, as to the good standing of and payment of taxes by that
entity and as to the charter documents on file in the office of such
Secretary of State; and
(3) a certificate of the Secretary or an Assistant Secretary of
that entity dated the date of the initial Loans or the initial Letter
of Credit hereunder, whichever first occurs, and certifying (A) that
attached thereto is a true and complete copy of the by-laws of that
entity as in effect on the date of such certification, (B) that
attached thereto is a true and complete copy of resolutions adopted by
the Board of Directors of that entity authorizing the Borrowings and
Letter of Credit extensions hereunder, the execution, delivery and
performance in accordance with their respective terms of this
Agreement, the Loan Documents and any other documents required or
contemplated hereunder or thereunder and the granting of the security
interest in the Letter of Credit Account and other Liens contemplated
hereby, (C) that the certificate of incorporation of that entity has
not been amended since the date of the last amendment thereto
indicated on the certificate of the Secretary of State furnished
pursuant to clause (i) above and (D) as to the incumbency and specimen
signature of each officer of that entity executing this Agreement and
the Loan Documents or any other document delivered by it in connection
herewith or therewith (such certificate to contain a certification by
another officer of that entity as to the incumbency and signature of
the officer signing the certificate referred to in this clause (iii)).
(2) First Day Order.
---------------
(1) At the time of the making of the initial Loans or at the
time of the issuance of the initial Letters of Credit, whichever first
occurs, the Agent and the Banks shall have received a certified copy
of an order of the Bankruptcy Court in substantially the form of
Exhibit A-1 (the "First Day Order") approving the Loan Documents and
---------------
granting the Superpriority Claim status and senior priming and other
Liens described in Section 2.20 which First Day Order: (i) shall have
been entered, with the consent or non-objection of a preponderance, as
determined by the Agent in its sole judgment, of the Existing Lenders,
upon an application or motion of the Borrower reasonably satisfactory
in form and substance to the Agent, on such prior
38
<PAGE>
notice to such parties (including the Existing Lenders) as may in each
case be reasonably satisfactory to the Agent; (ii) shall authorize
extensions of credit in an amount not in excess of $25,000,000; (iii)
shall approve the payment by the Borrower of all of the Fees set forth
in Section 2.16; (iv) shall be in full force and effect; and (v) shall
not have been stayed, reversed, modified or amended in any respect
without the prior written consent of the Agent (on behalf of the
Original Required Banks), and, if the First Day Order is the subject
of a pending appeal in any respect, neither the making of such Loans
nor the issuance of such Letter of Credit nor the performance by the
Borrower or any of the Guarantors of any of their respective
obligations hereunder or under the Loan Documents or under any other
instrument or agreement referred to herein shall be the subject of a
presently effective stay pending appeal.
(2) In addition, the First Day Order shall authorize the use by
the Borrower and the Guarantors of any cash collateral in which any
Existing Lender under the Existing Agreements may have an interest and
shall provide, as adequate protection for the use of such cash
collateral and the priming of the Liens granted pursuant to the
Existing Agreements contemplated hereby and subject to the Carve-Out,
for (A) a superpriority claim as contemplated by Section 507(b) of the
Bankruptcy Code immediately junior to the claims under Section
364(c)(1) of the Bankruptcy Code held by the Agent and the Banks, (B)
a replacement Lien on substantially all of the assets of the Borrower
and the Guarantors having a priority immediately junior to, and
subject to the same limitations as are applicable to, the priming and
other Liens granted in favor of the Agent and the Banks hereunder and
under the other Loan Documents (and, in the case of Accounts arising
on or after the Filing Date out of the use of the properties that are
subject as of the Filing Date to valid and perfected Liens in favor of
the Real Estate Financiers, also junior to adequate protection Liens
on such Accounts that may be granted in favor of the Real Estate
Financiers), (C) the payment on a current basis of the reasonable fees
and disbursements of respective professionals (including, but not
limited to, the reasonable fees and disbursements of counsel and
internal and third-party consultants, including financial consultants,
and auditors) for the Pre-Petition Agent (including the payment on the
Closing Date or as soon thereafter as is practicable of any unpaid
pre-petition fees and expenses), the payment of counsel fees and
disbursements of members of the Steering Committee acting under the
Existing Credit Agreement and the continuation of the payment to the
Pre-Petition Agent on a current basis of the administration fees that
are provided for under the Existing Credit Agreement and (D) the
payment to the Existing Lenders, so long as no Event of Default or
event, which upon notice or lapse of time or both, would constitute an
Event of Default shall have occurred and be continuing, of (x) any
cash proceeds received by the Borrower pursuant to any settlement of
the "prudent buyer" dispute with the Health Care Financing
Administration and (y) 75% of the Net Proceeds of asset sales or
dispositions permitted hereunder, the proceeds of which are not
required to be applied to the Loans pursuant to Section 2.11(b).
39
<PAGE>
(3) Insofar as the Department of Health and Human Services
("HHS") and the Healthcare Finance Administration ("HCFA") are
--- ----
concerned, the condition in this Section shall be deemed to have been
satisfied if either (x) the First Day Order shall contain a paragraph
limiting the recoupment rights of HHS and HCFA as set forth in Exhibit
A-1 or (y) HHS and the Borrower shall have entered into a stipulation
with respect to Accounts that are included in the Borrowing Base on
terms substantially similar to the terms of the stipulation entered
into on November 4, 1999 between HHS and Sun Healthcare Group, Inc.,
et al., and otherwise satisfactory to the Agent and the Banks.
-----
(3) Security and Pledge Agreement. The Borrower and each of the
-----------------------------
Guarantors shall have duly executed and delivered to the Agent a Security and
Pledge Agreement in substantially the form of Exhibit B (the "Security and
------------
Pledge Agreement").
- ----------------
(4) First Day Orders. All of the "first day orders" entered by the
----------------
Bankruptcy Court at the time of the commencement of the Cases shall be
reasonably satisfactory in form and substance to the Agent and the Original
Required Banks.
(5) Opinion of Counsel. Unless the Agent shall have agreed that the
------------------
condition set forth in this Section may be satisfied at the time of the entry of
the Interim Order, the Agent and the Banks shall have received the favorable
written opinion of counsel to the Borrower and the Guarantors reasonably
acceptable to the Agent and the Original Required Banks, dated the date of the
initial Loans or the issuance of the initial Letter of Credit, whichever first
occurs, substantially in the form of Exhibit C.
(6) Payment of Fees. The Borrower shall have paid to the Agent the
---------------
then unpaid balance of all accrued and unpaid Fees then due and payable under
and pursuant to this Agreement and the letter referred to in Section 2.16.
(7) Corporate and Judicial Proceedings. All corporate and judicial
----------------------------------
proceedings and all instruments and agreements in connection with the
transactions among the Borrower, the Guarantors, the Agent and the Banks
contemplated by this Agreement shall be reasonably satisfactory in form and
substance to the Agent and the Original Required Banks, and the Agent shall have
received all information and copies of all documents and papers, including
records of corporate and judicial proceedings, which the Agent may have
reasonably requested in connection therewith, such documents and papers where
appropriate to be certified by proper corporate, governmental or judicial
authorities.
(8) Information. The Agent shall have received such information
-----------
(financial or otherwise) as may be reasonably requested by the Agent and shall
have discussed the Borrower's business plan heretofore delivered to the Agent
with the Borrower's management and shall be reasonably satisfied with the nature
and substance of such discussions.
(9) Budget. The Agent shall have received from the Borrower a budget
------
detailing the Borrower's anticipated cash receipts and disbursements for the
period through the Maturity Date
40
<PAGE>
and setting forth the anticipated uses of the Commitment that is reasonably
satisfactory in form and substance to the Agent and the Original Required Banks
(the "Budget").
------
(j) Compliance with Laws. The Borrower and the Guarantors shall have
--------------------
granted the Agent access to and the right to inspect all reports, audits and
other internal information of the Borrower and the Guarantors relating to
environmental matters, and any third party verification of certain matters
relating to compliance with environmental laws and regulations reasonably
requested by the Agent, and the Agent shall be reasonably satisfied that the
Borrower and the Guarantors are in compliance in all material respects with all
applicable environmental laws and regulations and be reasonably satisfied that
the costs of maintaining such compliance will not have a Material Adverse
Effect.
(k) Closing Documents. The Agent shall have received all documents
-----------------
required by this Agreement reasonably satisfactory in form and substance to the
Agent.
SECTION 5.2 Conditions Precedent to Each Loan and Each Letter of Credit.
-----------------------------------------------------------
The obligation of the Banks to make each Loan and of the Fronting Bank to issue
each Letter of Credit, including the initial Loan and the initial Letter of
Credit, is subject to the following conditions precedent:
(1) Notice. The Agent shall have received a notice with respect to
------
such borrowing or issuance, as the case may be, as required by Section 2.
(2) Representations and Warranties. All representations and
------------------------------
warranties contained in this Agreement and the other Loan Documents shall be
true and correct in all material respects on and as of the date of each
Borrowing or the issuance of each Letter of Credit hereunder with the same
effect as if made on and as of such date except to the extent such
representations and warranties expressly relate to an earlier date.
(3) No Default. On the date of each Borrowing hereunder or the
----------
issuance of each Letter of Credit, no Event of Default or event which upon
notice or lapse of time or both would constitute an Event of Default shall have
occurred and be continuing.
(4) Orders. The First Day Order shall be in full force and effect
------
and shall not have been stayed, reversed, modified or amended in any respect
without the prior written consent of the Agent (on behalf of the Original
Required Banks), provided, that (i) at the time of the making of any Loan or the
--------
issuance of any Letter of Credit the aggregate amount of either of which, when
added to the sum of the principal amount of all Loans then outstanding and the
Letter of Credit Outstandings, would exceed the amount authorized by the First
Day Order (collectively, the "Additional Interim Credit"), the Agent and each of
-------------------------
the Banks shall have received a certified copy of an order of the Bankruptcy
Court in substantially the form of Exhibit A-2 (the "Interim Order"), which, in
-------------
any event, shall have been entered by the Bankruptcy Court no later than 10 days
after the entry of the First Day Order and shall authorize extensions of credit
in an amount not in excess of $50,000,000, taken together with the extensions of
credit that were authorized by the First Day Order, and at the time of the
extension of any Additional Interim Credit the Interim Order shall be
41
<PAGE>
in full force and effect, and shall not have been stayed, reversed, modified or
amended in any respect without the prior written consent of the Agent (on behalf
of the Original Required Banks); and if either the First Day Order or the
Interim Order is the subject of a pending appeal in any respect, neither the
making of the Loans nor the issuance of any Letter of Credit nor the performance
by the Borrower or any Guarantor of any of their respective obligations under
any of the Loan Documents shall be the subject of a presently effective stay
pending appeal and (ii) at the time of the making of any Loan or the issuance of
any Letter of Credit the aggregate amount of either of which, when added to the
sum of the principal amount of all Loans then outstanding and the Letter of
Credit Outstandings, would exceed the amount authorized by the Interim Order
(collectively, the "Further Additional Credit"), the Agent and each of the Banks
-------------------------
shall have received a certified copy of an order of the Bankruptcy Court in
substantially the form of Exhibit A-3 (the "Final Order"), which, in any event,
-----------
shall have been entered by the Bankruptcy Court no later than 30 days after the
entry of the First Day Order, and at the time of the extension of any Further
Additional Credit the Final Order shall be in full force and effect, and shall
not have been stayed, reversed, modified or amended in any respect without the
prior written consent of the Agent (on behalf of the Original Required Banks);
and if any of the First Day Order, the Interim Order or the Final Order is the
subject of a pending appeal in any respect, neither the making of the Loans nor
the issuance of any Letter of Credit nor the performance by the Borrower or any
Guarantor of any of their respective obligations under any of the Loan Documents
shall be the subject of a presently effective stay pending appeal.
(5) Synthetic Leases. At the time of the extension of any Additional
----------------
Interim Credit, the Bankruptcy Court shall have "so ordered" a stipulation
executed by, among others, the Borrower and FBTC Leasing Corp., in form and
substance satisfactory to the Agent and the Original Required Banks, regarding
the treatment of the "synthetic lease" transactions with FBTC Leasing Corp.
(6) Payment of Fees. The Borrower shall have paid to the Agent the
---------------
then unpaid balance of all accrued and unpaid Fees then due and payable under
and pursuant to this Agreement and the letter referred to in Section 2.16.
(7) Borrowing Base Certificate. The Agent shall have received the
--------------------------
timely delivery of the most recent Borrowing Base Certificate required pursuant
to Section 5.06.
(8) UCC Searches. At the time of the making of the first Loan or
------------
the issuance of the first Letter of Credit following the entry of the Final
Order, the Agent shall have received UCC searches conducted in the jurisdictions
in which the Borrower and the Guarantors conduct business (dated as of a date
reasonably satisfactory to the Agent), reflecting the absence of Liens and
encumbrances on the assets of the Borrower and the Guarantors other than Liens
granted (or otherwise permitted) under the Existing Agreements or Permitted
Liens and such other Liens as may be satisfactory to the Agent and the Original
Required Banks.
(9) Usage. The use of such extension of credit shall be consistent
-----
with the Budget, as updated from time to time.
42
<PAGE>
(10) Overhead. No later than the date of the entry of the Interim
--------
Order, the Bankruptcy Court shall have entered orders (in the cases of each of
the Borrower and MHG), which orders may be included in the Orders and any
corresponding orders in the MHG bankruptcy cases, in form and substance
satisfactory to the Agent and the Original Required Banks, regarding the payment
by MHG and its Subsidiaries that are debtors in cases under Chapter 11 of the
Bankruptcy Code of a weekly overhead fee to the Borrower in an amount
satisfactory to the Agent and the Original Required Banks that shall in no event
be less than 5% of MHG's and such debtor Subsidiaries' net revenues for prior
periods, excluding any management fees received from third parties and paid
directly to the Borrower during such periods, and at the time of each extension
of credit thereafter such orders shall be in full force and effect.
The request by the Borrower for, and the acceptance by the Borrower of, each
extension of credit hereunder shall be deemed to be a representation and
warranty by the Borrower that the conditions specified in this Section have been
satisfied or waived at that time.
SECTION 6. AFFIRMATIVE COVENANTS
From the date hereof and for so long as any Commitment shall be in
effect or any Letter of Credit shall remain outstanding (in a face amount in
excess of the amount of cash then held in the Letter of Credit Account, or in
excess of the face amount of back-to-back letters of credit delivered, in each
case pursuant to Section 2.03(b)), or any amount shall remain outstanding or
unpaid under this Agreement, the Borrower and each of the Guarantors agree that,
unless the Required Banks shall otherwise consent in writing, the Borrower and
each of the Guarantors will:
SECTION 6.1 Financial Statements, Reports, etc. In the case of the
----------------------------------
Borrower and the Guarantors, deliver to the Agent and each of the Banks:
(1) On or before January 25, 2000, the Borrower's consolidated
balance sheet and related consolidated statements of income, consolidated cash
flows, and consolidated statement of changes in shareholders' equity, showing
the consolidated financial condition and the consolidated results of operations
of the Borrower and its Subsidiaries (excluding MHG and its Subsidiaries) as of
and for the fiscal year ended September 30, 1999, such financial statements to
be audited by Ernst & Young LLP or other independent public accountants of
recognized national standing reasonably acceptable to the Original Required
Banks and accompanied by an opinion of such accountants which (1) shall not be
qualified in any material respect other than with respect to the Cases, (2) may
contain an explanatory paragraph expressing doubt about the Borrower's ability
to continue as a going concern, and (3) shall refer to the notes to the
financial statements (which notes may state that the financial statements are
not prepared in accordance with GAAP since GAAP would require that the accounts
of MHG and its Subsidiaries be included in the Borrower's consolidated financial
statements). Such consolidated financial statements shall include in the notes
to the financial statements disclosure of segment information as required by
Financial Accounting Standards Board Statement No. 131 "Disclosures and Segments
of an Enterprise and Related Information" except that MHG and its Subsidiaries
may be excluded. Such consolidated financial statements shall be accompanied by
a certification by a Financial Officer of the Borrower certifying that such
43
<PAGE>
consolidated financial statements fairly present the financial condition and
results of operations of the Borrower and its Subsidiaries (excluding MHG and
its Subsidiaries) on a consolidated basis in accordance with GAAP and that the
segment disclosure (excluding MHG and its Subsidiaries) included in the notes to
the consolidated financial statements have been prepared in accordance with GAAP
(but for the exclusion of MHG and its Subsidiaries);
(2) as soon as available, but no more than (i) 45 days after the end
of each of November 1999, December 1999, January 2000 and February 2000 and
(ii) 30 days after the end of each month thereafter, the unaudited consolidated
and consolidating balance sheets, and related statements of income and cash
flows of the Borrower and the Guarantors on a consolidated and consolidating
basis and as of the close of such fiscal month and the then elapsed portion of
the fiscal year together with (x) an update for the successive 13-week period of
the Borrower's 13-week cash flow forecast previously delivered to the Agent and
(y) a report of the EBITDA performance during the immediately preceding month of
the real estate portfolios financed by the Real Estate Financiers;
(3) concurrently with any delivery of financial statements under (a)
or (b) above as applicable, (i) a certificate of a Financial Officer certifying
such statements (A) certifying to the best of such Financial Officer's knowledge
that no Event of Default or event which upon notice or lapse of time or both
would constitute an Event of Default has occurred, or, if such an Event of
Default or event has occurred, specifying the nature and extent thereof and any
corrective action taken or proposed to be taken with respect thereto and (B)
setting forth computations in reasonable detail satisfactory to the Agent
demonstrating compliance with the provisions of Sections 6.03, 6.04, 6.05 and
6.14 and (ii) a certificate (which certificate may be limited to accounting
matters and disclaim responsibility for legal interpretations) of such
accountants accompanying the audited consolidated financial statements delivered
under (a) above certifying that, in the course of the regular audit of the
business of the Borrower and its Subsidiaries, such accountants have obtained no
knowledge that an Event of Default has occurred and is continuing, or if, in the
opinion of such accountants, an Event of Default has occurred and is continuing,
specifying the nature thereof and all relevant facts with respect thereto;
(4) as soon as possible, and in any event within 45 days of the
Closing Date, a consolidated pro forma balance sheet of the Borrower's and the
--- -----
Guarantors' financial condition as of the Filing Date;
(5) within 30 days from the end of each fiscal quarter of the
Borrower, an update of the Budget for the succeeding six-month period
satisfactory in form and substance to the Agent and the Original Required Banks
together with an analysis of budgeted to actual performance for the immediately
preceding month (or a certificate from a Financial Officer of the Borrower that
the Budget need not be updated);
(6) promptly after the same become publicly available, copies of all
periodic and other reports, proxy statements and other materials filed by it
with the Securities and Exchange Commission, or any governmental authority
succeeding to any of or all the functions of said commission, or with any
national securities exchange, as the case may be;
44
<PAGE>
(7) as soon as available and in any event (A) within 30 days after
the Borrower or any of its ERISA Affiliates knows or has reason to know that any
Termination Event described in clause (i) of the definition of Termination Event
with respect to any Single Employer Plan of the Borrower or such ERISA Affiliate
has occurred and (B) within 10 days after the Borrower or any of its ERISA
Affiliates knows or has reason to know that any other Termination Event with
respect to any such Plan has occurred, a statement of a Financial Officer of the
Borrower describing such Termination Event and the action, if any, which the
Borrower or such ERISA Affiliate proposes to take with respect thereto;
(8) promptly and in any event within 10 days after receipt thereof by
the Borrower or any of its ERISA Affiliates from the PBGC copies of each notice
received by the Borrower or any such ERISA Affiliate of the PBGC's intention to
terminate any Single Employer Plan of the Borrower or such ERISA Affiliate or to
have a trustee appointed to administer any such Plan;
(9) if requested by the Agent, promptly and in any event within 30
days after the filing thereof with the Internal Revenue Service, copies of each
Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with
respect to each Single Employer Plan of the Borrower or any of its ERISA
Affiliates;
(10) within 10 days after notice is given or required to be given to
the PBGC under Section 302(f)(4)(A) of ERISA of the failure of the Borrower or
any of its ERISA Affiliates to make timely payments to a Plan, a copy of any
such notice filed and a statement of a Financial Officer of the Borrower setting
forth (A) sufficient information necessary to determine the amount of the lien
under Section 302(f)(3), (B) the reason for the failure to make the required
payments and (C) the action, if any, which the Borrower or any of its ERISA
Affiliates proposed to take with respect thereto;
(11) promptly and in any event within 10 days after receipt thereof by
the Borrower or any ERISA Affiliate from a Multiemployer Plan sponsor, a copy of
each notice received by the Borrower or any ERISA Affiliate concerning (A) the
imposition of Withdrawal Liability by a Multiemployer Plan, (B) the
determination that a Multiemployer Plan is, or is expected to be, in
reorganization within the meaning of Title IV of ERISA, (C) the termination of a
Multiemployer Plan within the meaning of Title IV of ERISA, or (D) the amount of
liability incurred, or which may be incurred, by the Borrower or any ERISA
Affiliate in connection with any event described in clause (A), (B) or (C)
above;
(12) promptly, from time to time, such other information regarding the
operations, business affairs and financial condition of the Borrower or any
Guarantor, or compliance with the terms of any material loan or financing
agreements as the Agent, at the request of any Bank, may reasonably request; and
(13) furnish to the Agent and its counsel promptly after the same is
available, copies of all pleadings, motions, applications, judicial information,
financial information and other documents filed by or on behalf of the Borrower
or any of the Guarantors with the Bankruptcy Court
45
<PAGE>
in the Cases, or distributed by or on behalf of the Borrower or any of the
Guarantors to any official committee appointed in the Cases.
SECTION 6.2 Corporate Existence. Preserve and maintain in full force and
-------------------
effect all governmental rights, privileges, qualifications, permits, licenses
and franchises necessary or desirable in the normal conduct of its business
except (i)(A) if in the reasonable business judgment of the Borrower or such
Guarantor, as the case may be, it is in its best economic interest not to
preserve and maintain such rights, privileges, qualifications, permits, licenses
and franchises, and (B) such failure to preserve the same could not, in the
aggregate, reasonably be expected to have a Material Adverse Effect and (ii) as
otherwise permitted in connection with sales of assets permitted by Section
6.11.
SECTION 6.3 Insurance. (a) Keep its insurable properties insured at all
---------
times, against such risks, including fire and other risks insured against by
extended coverage, as is customary with companies of the same or similar size in
the same or similar businesses; and maintain in full force and effect public
liability insurance against claims for personal injury or death or property
damage occurring upon, in, about or in connection with the use of any properties
owned, occupied or controlled by the Borrower or any Guarantor, as the case may
be, in such amounts and with such deductibles as are customary with companies of
the same or similar size in the same or similar businesses and in the same
geographic area; and (b) maintain such other insurance or self insurance as may
be required by law.
SECTION 6.4 Obligations and Taxes. With respect to the Borrower and each
---------------------
Guarantor, pay all its material obligations arising after the Filing Date
promptly and in accordance with their terms and pay and discharge promptly all
material taxes, assessments and governmental charges or levies imposed upon it
or upon its income or profits or in respect of its property arising after the
Filing Date, before the same shall become in default, as well as all material
lawful claims for labor, materials and supplies or otherwise arising after the
Filing Date which, if unpaid, would become a Lien or charge upon such properties
or any part thereof; provided, however, that the Borrower and each Guarantor
shall not be required to pay and discharge or to cause to be paid and discharged
any such tax, assessment, charge, levy or claim so long as the validity or
amount thereof shall be contested in good faith by appropriate proceedings (if
the Borrower and the Guarantors shall have set aside on their books adequate
reserves therefor).
SECTION 6.5 Notice of Event of Default, Investigations, Violations, etc.
-----------------------------------------------------------
Promptly give to the Agent notice in writing of:
(1) any Event of Default or the occurrence of any event or
circumstance which with the passage of time or giving of notice or both would
constitute an Event of Default;
(2) any litigation, investigations or proceeding which may exist at
any time between the Borrower or any of the Guarantors and any Governmental
Authority, which in either case could reasonably be expected to have a Material
Adverse Effect; and
46
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(3) the following events, as soon as possible and in any event within
five Business Days (i) after obtaining knowledge thereof, the occurrence of any
event that would (with the giving of notice, the passage of time, or both) be a
violation of any Health Care Permit necessary for the lawful conduct of the
business or operations of the Borrower or any of the Guarantors (other than
those Health Care Permits the violation of which could not reasonably be
expected to have a Material Adverse Effect), including, without limitation, the
ownership and operation of its Health Care Facilities, (ii) after receipt
thereof, any notice of any violation of any Requirements of Law which would
(with the giving of notice, the passage of time, or both) cause any of the
Health Care Permits referred to in clause (i) to be modified, rescinded or
revoked and which the Borrower does not reasonably expect to be able to cure
within a reasonable period of time, (iii) after receipt thereof, any notice,
summons, citation, or other proceeding seeking to adversely modify in any
material respect, revoke, or suspend any Medicare provider agreement, Medicaid
provider agreement, Medicare certification or Medicaid certification applicable
to any of the Health Care Facilities of the Borrower or any of the Guarantors in
any manner which could reasonably be expected to have a Material Adverse Effect,
or (iv) after obtaining knowledge thereof, any revocation or involuntary
termination of any Medicare provider agreement, Medicaid provider agreement,
Medicare certification or Medicaid certification applicable to any of the Health
Care Facilities of the Borrower or any of the Guarantors that could reasonably
be expected to have a Material Adverse Effect.
SECTION 6.6 Borrowing Base Certificate. Promptly deliver to the Agent, but
--------------------------
in no event later than (i) the Closing Date for the month ended October 31,
1999, (ii) 60 days after the month ended November 30, 1999, (iii) 45 days after
each of the months ended December 31, 1999 and January 31, 2000, and (iv) 30
days after the end of each calendar month thereafter (and, if requested by the
Agent at any other time when the Agent reasonably believes that the
then-existing Borrowing Base is materially inaccurate, as soon as reasonably
available but no later than 10 days after the request), a completed Borrowing
Base Certificate in substantially the form of Exhibit E hereto (the "Borrowing
---------
Base Certificate") calculating and certifying the Borrowing Base as of the last
- ----------------
day of such calendar month (or as of such other requested date, as the case may
be), with supporting documentation (including, without limitation, the
documentation described in Schedule 1 to Exhibit E), in each case signed on
behalf of the Borrower by a Financial Officer thereof and certified as being
complete and correct based on the Borrower's and applicable Division's
accounting records.
SECTION 6.7 Maintenance of Concentration Accounts. Continue to maintain
-------------------------------------
with the Agent an account or accounts to be used by the Borrower and the
Guarantors as their principal concentration accounts for day-to-day operations
conducted by the Borrower and the Guarantors.
SECTION 6.8 Books and Records, Inspection and Collateral Review Rights.
----------------------------------------------------------
(1) The Borrower will, and will cause each of the Guarantors to, keep
proper books of record and account in which full, true and correct entries in
conformity with GAAP in all material respects and all material Requirements of
Law are made of all dealings and transactions in relation to its business and
activities. The Borrower will, and will cause each of the Guarantors to, permit
any representatives designated by the Agent, upon reasonable prior notice, to
visit and inspect its financial records and properties, to examine and make
extracts from its books and records, and
47
<PAGE>
to discuss its affairs, finances and condition with its officers and independent
accountants, all at such reasonable times and as often as reasonably requested.
(2) The Borrower will, and will cause each of the Guarantors to,
permit any representatives designated by the Agent (including any consultants,
accountants, lawyers and appraisers retained by the Agent) to conduct
evaluations and appraisals of the Borrower's computation of the Borrowing Base
and the assets included in the Borrowing Base, all at such reasonable times and
as often as reasonably requested. The Borrower shall pay the reasonable fees
(including reasonable and customary internally allocated fees of employees of
the Agent as to which invoices have been furnished) and expenses of any such
representatives retained by the Agent as to which invoices have been furnished
to conduct any such evaluation or appraisal, including the reasonable fees and
expenses associated with collateral monitoring services performed by the
Collateral Agent Services Group of the Agent. To the extent required by the
Agent as a result of any such evaluation, appraisal or monitoring, the Borrower
also agrees to modify or adjust the computation of the Borrowing Base (which may
include maintaining additional reserves, modifying the advance rates or
modifying the eligibility criteria for the components of the Borrowing Base).
(3) In the event that historical accounting practices, systems or
reserves relating to the components of the Borrowing Base are modified in a
manner that is adverse to the Banks in any material respect, the Borrower will
agree to maintain such additional reserves (for purposes of computing the
Borrowing Base) in respect to the components of the Borrowing Base and make such
other adjustments to its parameters for including the components of the
Borrowing Base as the Agent shall reasonably require based upon such
modifications.
SECTION 6.10 Conduct of Business and Maintenance of Existence, etc. (a) (i)
------------------------------------------------------
Continue to engage in the business of owning, operating, managing and/or
financing Health Care Facilities and providing other services or amenities
customarily provided by, or other activities customarily undertaken by, Persons
owning, operating, managing and/or financing Health Care Facilities, (ii)
preserve, renew and keep in full force and effect its corporate existence
(except as otherwise permitted by Section 6.11) and (iii) take all reasonable
action to maintain all rights, privileges and franchises necessary or desirable
in the normal conduct of its business, except, in each case, as otherwise
permitted by Section 6.11 and except, in the case of clause (iii) above, to the
extent that failure to do so could not reasonably be expected to have a Material
Adverse Effect; and (b) comply with all Contractual Obligations and Requirements
of Law except to the extent that failure to comply therewith could not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
SECTION 6.10 Health Care Permits and Approvals. Take all action reasonably
---------------------------------
necessary to (a) maintain in full force and effect all Health Care Permits
reasonably necessary for the lawful conduct of its business or operations where
now conducted and as planned to be conducted, including the ownership and
operation of its Health Care Facilities, pursuant to all Requirements of Law and
(b) to ensure that all Health Care Facilities owned, leased, managed or operated
by the Borrower or any of the Guarantors are entitled to participate in, and
receive payment under, the appropriate Medicare, Medicaid and related
reimbursement programs, and any similar state or local government-sponsored
program, to the extent the Borrower or any of the Guarantors
48
<PAGE>
has decided to participate in any such program, and to receive reimbursement
from private and commercial payers and health maintenance organizations to the
extent applicable thereto, except, in each case, where a failure to do so could
not reasonably be expected to have a Material Adverse Effect or would not be
inconsistent with the Borrower's three-year business plan heretofore delivered
to the Agent and the Banks.
SECTION 6.11 Financial Advisor. Not later than 30 days following the Filing
-----------------
Date, retain, pursuant to an order entered by the Bankruptcy Court, and
thereafter continue the retention at all times of, a financial advisor
acceptable to the Agent (it being understood that Conway Del Genio Gries & Co.,
LLC is acceptable to the Agent and the Original Required Banks), to assist the
Borrower with its operational and financial restructuring, to monitor the
Borrower's cash flows and financial position (and to report same to the Agent)
and to make such financial advisor available to the Agent to discuss the
Borrower's operations, financial performance and cash flow reports upon the
Agent's reasonable request.
SECTION 7. NEGATIVE COVENANTS
From the date hereof and for so long as any Commitment shall be in
effect or any Letter of Credit shall remain outstanding (in a face amount in
excess of the amount of cash then held in the Letter of Credit Account, or in
excess of the face amount of back-to-back letters of credit delivered, in each
case pursuant to Section 2.03(b)) or any amount shall remain outstanding or
unpaid under this Agreement, unless the Required Banks shall otherwise consent
in writing, the Borrower and each of the Guarantors will not (and will not apply
to the Bankruptcy Court for authority to):
SECTION 7.1 Liens. Incur, create, assume or suffer to exist any Lien on any
-----
asset of the Borrower or the Guarantors, now owned or hereafter acquired by the
Borrower or any of such Guarantors, other than (i) Liens which were existing on
the Filing Date as reflected on Schedule 3.06 hereto and Liens granted pursuant
to the Existing Agreement; (ii) Liens in favor of the Existing Lenders as
adequate protection granted pursuant to the Orders, which Liens are junior to
the Liens contemplated hereby in favor of the Agent and the Banks, provided that
--------
the First Day Order, the Interim Order and the Final Order provide that the
holder of such junior Liens shall not be permitted to take any action to
foreclose with respect to such junior Liens so long as any amounts shall remain
outstanding hereunder or any Commitment shall be in effect; (iii) Permitted
Liens; (iv) Liens in favor of the Agent and the Banks; and (v) Liens securing
purchase money Indebtedness or Capitalized Leases permitted by Section
6.03(iii).
SECTION 7.2 Merger, etc. Consolidate or merge with or into another Person.
-----------
SECTIOn 7.3 Indebtedness. Contract, create, incur, assume or suffer to
------------
exist any Indebtedness, except for (i) Indebtedness under this Agreement; (ii)
Indebtedness incurred prior to the Filing Date (including existing Capitalized
Leases); (iii) Indebtedness incurred subsequent to the Filing Date secured by
purchase money Liens or Capitalized Leases in an aggregate amount not to exceed
$7,500,000 to the extent permitted by Section 6.04; (iv) Indebtedness arising
from Investments among the Borrower and the Guarantors that are permitted
hereunder; (v) Indebtedness
49
<PAGE>
which is secured by a Lien permitted by Section 6.01; and (vi) Indebtedness owed
to Chase or any of its banking Affiliates in respect of any overdrafts and
related liabilities arising from treasury, depository and cash management
services or in connection with any automated clearing house transfers of funds.
SECTION 7.4 Capital Expenditures. (a) Make Capital Expenditures during each
--------------------
month listed below in excess of the amount opposite such month, provided that if
--------
the amount of the actual Capital Expenditures that are made during any month is
less than the amount thereof that is permitted to be made during such month, the
unused portion thereof may be carried forward to and made during the immediately
following three months:
Month Ending Capital Expenditures
------------ --------------------
January 31, 2000 $8,000,000
February 29, 2000 $3,000,000
March 31, 2000 $1,400,000
April 30, 2000 $1,400,000
May 31, 2000 $1,400,000
June 30, 2000 $1,400,000
July 31, 2000 $1,400,000
August 31, 2000 $1,400,000
September 30, 2000 $1,400,000
October 31, 2000 $1,400,000
November 30, 2000 $1,400,000
December 31, 2000 $1,400,000
(b) Make Capital Expenditures other than for normal routine
maintenance or required to maintain applicable Health Care Permits in the case
of any Health Care Facility that is leased from, or subject to a Lien in favor
of, a Real Estate Financier.
SECTION 7.5 EBITDA. Permit EBITDA during each month listed below to be
------
less than the amount specified opposite such month:
Month Ending EBITDA
------------ ------
January 31, 2000 ($600,000)
February 29, 2000 $1,650,000
March 31, 2000 $3,500,000
April 30, 2000 $3,400,000
May 31, 2000 $3,000,000
June 30, 2000 $1,800,000
July 31, 2000 $3,700,000
August 31, 2000 $2,600,000
September 30, 2000 $ 600,000
50
<PAGE>
October 31, 2000 $4,300,000
November 30, 2000 $2,300,000
December 31, 2000 $2,500,000
SECTION 7.6 Guarantees and Other Liabilities. Purchase or repurchase (or
--------------------------------
agree, contingently or otherwise, so to do) the Indebtedness of, or assume,
guarantee (directly or indirectly or by an instrument having the effect of
assuring another's payment or performance of any obligation or capability of so
doing, or otherwise), endorse or otherwise become liable, directly or
indirectly, in connection with the obligations, stock or dividends of any
Person, except (i) for any guaranty of Indebtedness or other obligations of any
Borrower or Guarantor if the Guarantor could have incurred such Indebtedness or
obligations under this Agreement and (ii) by endorsement of negotiable
instruments for deposit or collection in the ordinary course of business.
SECTION 7.7 Chapter 11 Claims. Incur, create, assume, suffer to exist or
-----------------
permit any other Super-Priority Claim which is pari passu with or senior to the
---- -----
claims of the Agent and the Banks against the Borrower and the Guarantors
hereunder, except for the Carve-Out.
SECTION 7.8 Dividends; Capital Stock. Declare or pay, directly or
------------------------
indirectly, any dividends or make any other distribution or payment, whether in
cash, property, securities or a combination thereof, with respect to (whether by
reduction of capital or otherwise) any shares of capital stock (or any options,
warrants, rights or other equity securities or agreements relating to any
capital stock), or set apart any sum for the aforesaid purposes, provided that
--------
any Guarantor may pay dividends or make distributions or other payments to its
direct parent or to the Borrower.
SECTION 7.9 Transactions with Affiliates. Except as set forth on
----------------------------
Schedule 6.09, sell or transfer any property or assets to, or otherwise engage
in any other material transactions with, any of its Affiliates (other than the
Borrower and the Guarantors), other than in the ordinary course of business at
prices and on terms and conditions not less favorable to the Borrower or such
Guarantor than could be obtained on an arm's-length basis from unrelated third
parties, and other than the overhead payment arrangements described in Section
4.02(j).
SECTION 7.10 Investments, Loans and Advances. Purchase, hold or acquire
-------------------------------
any capital stock, evidences of indebtedness or other securities of, make or
permit to exist any loans or advances to, or make or permit to exist any
investment in, any other Person (including, without limitations, to MHG or any
of its Subsidiaries or any Subsidiary of the Borrower that is not a Guarantor or
that has not commenced a Case) (all of the foregoing, "Investments"), except for
-----------
(i) ownership by the Borrower or the Guarantors of the capital stock of each of
the Subsidiaries listed on Schedule 3.05, (ii) Permitted Investments and (iii)
advances and loans among the Borrower and the Guarantors in the ordinary course
of business.
SECTION 7.11 Disposition of Assets. Sell or otherwise dispose of any
---------------------
assets (including, without limitation, the capital stock of any Subsidiary)
except for (i) sales of inventory, fixtures and equipment in the ordinary course
of business, (ii) sales of surplus equipment no longer used or useful in its
business, (iii) sales of assets described in a letter dated the Closing Date,
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<PAGE>
heretofore delivered to the Agent and the Banks upon terms reasonably acceptable
to the Agent and the Required Banks and (iv) sales or other dispositions of
other assets having a fair market value not exceeding $500,000 in the aggregate.
SECTION 7.12 Nature of Business. Modify or alter in any material manner
------------------
the nature and type of its business as conducted at or prior to the Filing Date
or the manner in which such business is conducted (except as required by the
Bankruptcy Code), it being understood that asset sales permitted by Section 6.11
shall not constitute such a material modification or alteration.
SECTION 7.13 Health Care Permits and Approvals. Engage in any activity that
---------------------------------
(a) constitutes or, with the giving of notice, the passage of time, or both,
would result in a material violation of, any Health Care Permit necessary for
the lawful conduct of its business or operations or (b) constitutes or, with the
giving of notice, the passage of time, or both, would result in the loss by any
Health Care Facility owned or leased by the Borrower or any of the Guarantors of
the right to participate in, and receive payment under, the appropriate
Medicare, Medicaid and related reimbursement programs, and any similar state or
local government-sponsored program, to the extent that the Borrower or such
Guarantor has decided to participate in any such program, and to receive
reimbursement from private and commercial payers and health maintenance
organizations to the extent applicable thereto, in each case, except where the
loss of such Health Care Permit or rights to participate in or receive payments
under such programs could not reasonably be expected to have a Material Adverse
Effect or would not be inconsistent with the Borrower's three-year business plan
heretofore delivered to the Agent and the Banks.
SECTION 7.14 Census. Allow the patient census of the Borrower's and the
------
Guarantors' Health Care Facilities when taken as a whole, during each month
listed below, to fall below the percentage of the number of licensed available
beds in such Health Care Facilities, taken as a whole (computed in a manner
consistent with reporting practices existing on the Filing Date) set forth
opposite such month:
Month Ending Percentage
------------ ----------
January 31, 2000 83.0%
February 29, 2000 83.0%
March 31, 2000 83.8%
April 30, 2000 84.0%
May 31, 2000 84.0%
June 30, 2000 84.0%
July 31, 2000 84.0%
August 31, 2000 83.5%
September 30, 2000 84.5%
October 31, 2000 84.5%
November 30, 2000 84.5%
December 31, 2000 84.5%
52
<PAGE>
SECTION 7.15 Assumption of Provider Agreements. Assume, without the
---------------------------------
prior written consent of the Agent, any provider agreement between the Borrower,
any Guarantor and any Governmental Authority.
SECTION 7.16 Overhead. Permit any modification, amendment or alteration
--------
in any material respect of the orders (or of the applicable paragraphs of the
Orders and any corresponding orders in the MHG bankruptcy cases) referred to in
Section 4.02(j) or render any management services to MHG or any of its
Subsidiaries so long as any failure by MHG or its Subsidiaries to pay the fees
that are provided for thereunder, or to perform any of its other obligations
thereunder, shall have occurred and be continuing for more than 7 days.
SECTION 8. EVENTS OF DEFAULT
SECTION 8.1 Events of Default. In the case of the happening of any of
-----------------
the following events and the continuance thereof beyond the applicable period of
grace if any (each, an "Event of Default"):
----------------
(1) any material representation or warranty made by the Borrower or
any Guarantor in this Agreement or in any Loan Document or in connection with
this Agreement or the credit extensions hereunder or any material statement or
representation made in any report, financial statement, certificate or other
document furnished by the Borrower or any Guarantors to the Banks under or in
connection with this Agreement, shall prove to have been false or misleading in
any material respect when made or delivered; or
(2) default shall be made in the payment of any (i) Fees or interest
on the Loans or reimbursable costs and expenses when due, and such default shall
continue unremedied for more than two (2) Business Days or (ii) principal of the
Loans or other amounts payable by the Borrower hereunder (including, without
limitation, reimbursement obligations or cash collateralization in respect of
Letters of Credit but excluding those provided for in clause (i) above), when
and as the same shall become due and payable, whether at the due date thereof
(including the Prepayment Date) or at a date fixed for prepayment thereof or by
acceleration thereof or otherwise; or
(3) default shall be made by the Borrower or any Guarantor in the due
observance or performance of any covenant, condition or agreement contained in
Section 6 hereof; or
(4) default shall be made by the Borrower or any Guarantor in the due
observance or performance of any other covenant, condition or agreement to be
observed or performed pursuant to the terms of this Agreement or any of the
other Loan Documents and such default shall continue unremedied for more than
fifteen (15) days (or, in the case of a default under Sections 5.05, 5.09 or
5.10, for more than ten (10) days after a Responsible Officer has knowledge of
such default); or
(5) any of the Cases shall be dismissed or converted to a case under
Chapter 7 of the Bankruptcy Code; a trustee under Chapter 7 or Chapter 11 of the
Bankruptcy Code, a responsible officer or an examiner with enlarged powers
relating to the operation of the business (powers beyond those set forth in
Section 1106(a)(3) and (4) of the Bankruptcy Code) under Section 1106(b) of the
53
<PAGE>
Bankruptcy Code shall be appointed in any of the Cases and the order appointing
such trustee, responsible officer or examiner shall not be reversed or vacated
within 30 days after the entry thereof; or an application shall be filed by the
Borrower or any Guarantor for the approval of any other Super-Priority Claim
(other than the Carve-Out) in any of the Cases which is pari passu with or
---- -----
senior to the claims of the Agent and the Banks against the Borrower or any
Guarantor hereunder, or there shall arise or be granted any such pari passu or
---- -----
senior Super-Priority Claim; or
(6) the Bankruptcy Court shall enter an order or orders granting
relief from the automatic stay applicable under Section 362 of the Bankruptcy
Code to the holder or holders of any security interest to permit foreclosure (or
the granting of a deed in lieu of foreclosure or the like) on any assets of the
Borrower or any of the Guarantors which have a value in excess of $500,000 in
the aggregate; or
(7) a Change of Control shall occur; or
(8) the Borrower shall fail to deliver a certified Borrowing Base
Certificate when due and such default shall continue unremedied for more than
three (3) Business Days; or
(9) any material provision of any Loan Document shall, for any
reason, cease to be valid and binding on the Borrower or any of the Guarantors,
or the Borrower or any of the Guarantors shall so assert in any pleading filed
in any court; or
(10) an order of the Bankruptcy Court shall be entered reversing,
amending, supplementing, staying for a period in excess of 10 days, vacating or
otherwise modifying either of the Orders or terminating the use of cash
collateral by the Borrower or the Guarantors pursuant to the Orders; or
(11) any judgment or order as to a post-petition liability or debt for
the payment of money in excess of $500,000 not covered by insurance shall be
rendered against the Borrower or any of the Guarantors and the enforcement
thereof shall not have been stayed; or
(12) any non-monetary judgment or order with respect to a post-
petition event shall be rendered against the Borrower or any of the Guarantors
which does or would reasonably be expected to (i) cause a material adverse
change in the financial condition, business, prospects, operations or assets of
the Borrower and the Guarantors taken as a whole on a consolidated basis, (ii)
have a material adverse effect on the ability of the Borrower or any of the
Guarantors to perform their respective obligations under any Loan Document, or
(iii) have a material adverse effect on the rights and remedies of the Agent or
any Bank under any Loan Document, and there shall be any period of 10
consecutive days during which a stay of enforcement of such judgment or order,
by reason of a pending appeal or otherwise, shall not be in effect; or
(13) except as permitted by the Orders, the Borrower or the Guarantors
shall make any Pre-Petition Payment other than Pre-Petition Payments authorized
by the Bankruptcy Court (x) not in excess of $20,000,000 in respect of certain
critical vendors and valid reclamation claims, (y) in respect of accrued payroll
and related expenses and employee benefits as of the Filing Date, and
54
<PAGE>
(z) payments in accordance with other "first day" orders approved by the Agent
and the Original Required Banks; or
(14) any Termination Event described in clauses (iii) or (iv) of the
definition of such term shall have occurred and shall continue unremedied for
more than 10 days and the sum (determined as of the date of occurrence of such
Termination Event) of the Insufficiency of the Plan in respect of which such
Termination Event shall have occurred and be continuing and the Insufficiency of
any and all other Plans with respect to which such a Termination Event
(described in such clauses (iii) or (iv)) shall have occurred and then exist is
equal to or greater than $5,000,000; or
(15) (i) the Borrower or any ERISA Affiliate thereof shall have been
notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal
Liability to such Multiemployer Plan, (ii) the Borrower or such ERISA Affiliate
does not have reasonable grounds to contest such Withdrawal Liability and is not
in fact contesting such Withdrawal Liability in a timely and appropriate manner,
and (iii) the amount of such Withdrawal Liability specified in such notice, when
aggregated with all other amounts required to be paid to Multiemployer Plans in
connection with Withdrawal Liabilities (determined as of the date of such
notification), exceeds $5,000,000 allocable to post-petition obligations or
requires payments exceeding $500,000 per annum; or
(16) the Borrower or any ERISA Affiliate thereof shall have been
notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is
in reorganization or is being terminated, within the meaning of Title IV of
ERISA, if as a result of such reorganization or termination the aggregate annual
contributions of the Borrower and its ERISA Affiliates to all Multiemployer
Plans that are then in reorganization or being terminated have been or will be
increased over the amounts contributed to such Multiemployer Plans for the plan
years that include the date hereof by an amount exceeding $5,000,000; or
(17) the Borrower or any ERISA Affiliate shall have committed a
failure described in Section 302(f)(1) of ERISA (other than the failure to make
any contribution accrued and unpaid as of the Filing Date) and the amount
determined under Section 302(f)(3) of ERISA is equal to or greater than
$5,000,000; or
(18) it shall be determined (whether by the Bankruptcy Court or by any
other judicial or administrative forum) that the Borrower or any Guarantor is
liable for the payment of claims arising out of any failure to comply (or to
have complied) with applicable environmental laws or regulations the payment of
which will have a material adverse effect on the financial condition, business,
properties, operations or assets of the Borrower or the Guarantors, taken as a
whole, and the enforcement thereof shall not have been stayed; or
(19) any Medicaid or Medicare Account Debtor or any other Governmental
Authority makes any reduction from or otherwise withholds, through setoff,
recoupment or otherwise, any amounts due to such Account Debtor from any Account
or Accounts arising from healthcare services provided in the then current
cost/rate period, other than (i) any "qualified overpayments" as defined in the
stipulation (related to Medicare overpayments) with HHS referred
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to in Section 4.01(b)(iii), and (ii) other reductions or withholdings through
setoff, recoupment or otherwise, in an aggregate amount that is not in excess of
$1,000,000 (excluding for purposes of this clause (ii), however, reductions,
setoffs or recoupments that arise in the normal course of business and that are
recorded as liabilities or are adequately provided for by retro settlement
reserves on the books of the Borrower and the Guarantors, in each case in
accordance with GAAP, and that represent reductions, setoffs or recoupments in
connection with (x) North Carolina, Colorado or Nebraska Medicaid, (y) nursing
facility Medicare bad debts for deductibles and coinsurance and (z) long-term
acute care hospitals);
then, and in every such event and at any time thereafter during the continuance
of such event, and without further order of or application to the Bankruptcy
Court, the Agent may, and at the request of the Required Banks, shall, by notice
to the Borrower (with a copy to counsel for the Official Creditors' Committee
appointed in the Cases, to counsel for the Pre-Petition Agent and to the United
States Trustee for the District of Delaware), take one or more of the following
actions, at the same or different times (provided, that with respect to clause
--------
(iv) below and the enforcement of Liens or other remedies with respect to the
Collateral under clause (v) below, the Agent shall provide the Borrower (with a
copy to counsel for the Official Creditors' Committee in the Cases, to counsel
for the Pre-Petition Agent and to the United States Trustee for the District of
Delaware) with five (5) Business Days' written notice prior to taking the action
contemplated thereby and provided, further, that upon receipt of notice referred
--------- -------
to in the immediately preceding clause with respect to the accounts referred to
in clause (iv) below, the Borrower may continue to make ordinary course
disbursements from such accounts (other than the Letter of Credit Account) but
may not withdraw or disburse any other amounts from such accounts): (i)
terminate forthwith the Total Commitment; (ii) declare the Loans then
outstanding to be forthwith due and payable, whereupon the principal of the
Loans together with accrued interest thereon and any unpaid accrued Fees and all
other liabilities of the Borrower accrued hereunder and under any other Loan
Document, shall become forthwith due and payable, without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived by the Borrower and the Guarantors, anything contained herein or in any
other Loan Document to the contrary notwithstanding; (iii) require the Borrower
and the Guarantors upon demand to forthwith deposit in the Letter of Credit
Account cash in an amount which, together with any amounts then held in the
Letter of Credit Account, is equal to the sum of 105% of the then outstanding
Letters of Credit (and to the extent the Borrower and the Guarantors shall fail
to furnish such funds as demanded by the Agent, the Agent shall be authorized to
debit the accounts of the Borrower and the Guarantors maintained with the Agent
in such amount five (5) Business Days after the giving of the notice referred to
above); (iv) set-off amounts in the Letter of Credit Account or any other
accounts maintained with the Agent and apply such amounts to the obligations of
the Borrower and the Guarantors hereunder and in the other Loan Documents; and
(v) exercise any and all remedies under the Loan Documents and under applicable
law available to the Agent and the Banks.
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SECTION 9. THE AGENT
SECTION 9.1 Administration by Agent. The general administration of the
-----------------------
Loan Documents shall be by the Agent. Each Bank hereby irrevocably authorizes
the Agent, at its discretion, to take or refrain from taking such actions as
agent on its behalf and to exercise or refrain from exercising such powers under
the Loan Documents as are delegated by the terms hereof or thereof, as
appropriate, together with all powers reasonably incidental thereto (including
the release of Collateral in connection with any transaction that is expressly
permitted by the Loan Documents). The Agent shall have no duties or
responsibilities except as set forth in this Agreement and the remaining Loan
Documents.
SECTION 9.2 Advances and Payments
---------------------
(1) On the date of each Loan, the Agent shall be authorized (but not
obligated) to advance, for the account of each of the Banks, the amount of the
Loan to be made by it in accordance with its Commitment hereunder. Should the
Agent do so, each of the Banks agrees forthwith to reimburse the Agent in
immediately available funds for the amount so advanced on its behalf by the
Agent, together with interest at the Federal Funds Effective Rate if not so
reimbursed on the date due from and including such date but not including the
date of reimbursement.
(2) Any amounts received by the Agent in connection with this
Agreement (other than amounts to which the Agent is entitled pursuant to
Sections 2.16, 8.06, 10.05 and 10.06), the application of which is not otherwise
provided for in this Agreement shall be applied, first, in accordance with each
-----
Bank's Commitment Percentage to pay accrued but unpaid Commitment Fees or Letter
of Credit Fees, and second, in accordance with each Bank's Commitment Percentage
------
to pay accrued but unpaid interest and the principal balance outstanding and all
unreimbursed Letter of Credit drawings. All amounts to be paid to a Bank by the
Agent shall be credited to that Bank, after collection by the Agent, in
immediately available funds either by wire transfer or deposit in that Bank's
correspondent account with the Agent, as such Bank and the Agent shall from time
to time agree.
SECTION 9.3 Sharing of Setoffs. Each Bank agrees that if it shall,
------------------
through the exercise of a right of banker's lien, setoff or counterclaim against
the Borrower, including, but not limited to, a secured claim under Section 506
of the Bankruptcy Code or other security or interest arising from, or in lieu
of, such secured claim and received by such Bank under any applicable
bankruptcy, insolvency or other similar law, or otherwise, obtain payment in
respect of its Loans as a result of which the unpaid portion of its Loans is
proportionately less than the unpaid portion of the Loans of any other Bank (a)
it shall promptly purchase at par (and shall be deemed to have thereupon
purchased) from such other Bank a participation in the Loans of such other Bank,
so that the aggregate unpaid principal amount of each Bank's Loans and its
participation in Loans of the other Banks shall be in the same proportion to the
aggregate unpaid principal amount of all Loans then outstanding as the principal
amount of its Loans prior to the obtaining of such payment was to the principal
amount of all Loans outstanding prior to the obtaining of such payment and (b)
such other adjustments shall be made from time to time as shall be equitable to
ensure that the Banks share such payment pro-rata, provided that if any such
non-pro-rata payment is thereafter recovered or otherwise set aside such
purchase of participations shall be rescinded (without interest). The Borrower
expressly consents to the foregoing arrangements and agrees that any Bank
holding (or deemed to
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be holding) a participation in a Loan may exercise any and all rights of
banker's lien, setoff (in each case, subject to the same notice requirements as
pertain to clause (iv) of the remedial provisions of Section 7.01) or
counterclaim with respect to any and all moneys owing by the Borrower to such
Bank as fully as if such Bank held a Note and was the original obligee thereon,
in the amount of such participation.
SECTION 9.4 Agreement of Required Banks. Upon any occasion requiring or
---------------------------
permitting an approval, consent, waiver, election or other action on the part of
the Required Banks, action shall be taken by the Agent for and on behalf or for
the benefit of all Banks upon the direction of the Required Banks, and any such
action shall be binding on all Banks. No amendment, modification, consent, or
waiver shall be effective except in accordance with the provisions of Section
10.10.
SECTION 9.5 Liability of Agent.
------------------
(1) The Agent when acting on behalf of the Banks, may execute any
of its respective duties under this Agreement by or through any of its
respective officers, agents, and employees, and neither the Agent nor its
directors, officers, agents, employees or Affiliates shall be liable to the
Banks or any of them for any action taken or omitted to be taken in good faith,
or be responsible to the Banks or to any of them for the consequences of any
oversight or error of judgment, or for any loss, unless the same shall happen
through its gross negligence or willful misconduct. The Agent and its respective
directors, officers, agents, employees and Affiliates shall in no event be
liable to the Banks or to any of them for any action taken or omitted to be
taken by them pursuant to instructions received by them from the Required Banks
or in reliance upon the advice of counsel selected by it. Without limiting the
foregoing, neither the Agent, nor any of its respective directors, officers,
employees, agents or Affiliates shall be responsible to any Bank for the due
execution, validity, genuineness, effectiveness, sufficiency, or enforceability
of, or for any statement, warranty, or representation in, this Agreement, any
Loan Document or any related agreement, document or order, or shall be required
to ascertain or to make any inquiry concerning the performance or observance by
the Borrower of any of the terms, conditions, covenants, or agreements of this
Agreement or any of the Loan Documents.
(2) Neither the Agent nor any of its respective directors,
officers, employees, agents or Affiliates shall have any responsibility to the
Borrower or the Guarantors on account of the failure or delay in performance or
breach by any Bank or by the Borrower or the Guarantors of any of their
respective obligations under this Agreement or any of the Loan Documents or in
connection herewith or therewith.
(3) The Agent, in its capacity as Agent hereunder, shall be
entitled to rely on any communication, instrument, or document reasonably
believed by such person to be genuine or correct and to have been signed or sent
by a person or persons believed by such person to be the proper person or
persons, and such person shall be entitled to rely on advice of legal counsel,
independent public accountants, and other professional advisers and experts
selected by such person.
SECTION 9.6 Reimbursement and Indemnification. Each Bank agrees (i) to
---------------------------------
reimburse (x) the Agent for such Bank's Commitment Percentage of any expenses
and fees incurred for the benefit of the Banks under this Agreement and any of
the Loan Documents, including, without limitation, counsel fees and compensation
of agents and employees paid for services rendered on
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behalf of the Banks, and any other expense incurred in connection with the
operations or enforcement thereof not reimbursed by the Borrower or the
Guarantors and (y) the Agent for such Bank's Commitment Percentage of any
expenses of the Agent incurred for the benefit of the Banks that the Borrower
has agreed to reimburse pursuant to Section 10.05 and has failed to so reimburse
and (ii) to indemnify and hold harmless the Agent and any of its directors,
officers, employees, agents or Affiliates, on demand, in the amount of its
proportionate share, from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses, or
disbursements of any kind or nature whatsoever which may be imposed on, incurred
by, or asserted against it or any of them in any way relating to or arising out
of this Agreement or any of the Loan Documents or any action taken or omitted by
it or any of them under this Agreement or any of the Loan Documents to the
extent not reimbursed by the Borrower or the Guarantors (except such as shall
result from their respective gross negligence or willful misconduct).
SECTION 9.7 Rights of Agent. It is understood and agreed that Chase shall
---------------
have the same rights and powers hereunder (including the right to give such
instructions) as the other Banks and may exercise such rights and powers, as
well as its rights and powers under other agreements and instruments to which it
is or may be party, and engage in other transactions with the Borrower or any
Guarantor, as though it were not the Agent of the Banks under this Agreement.
SECTION 9.8 Independent Banks. Each Bank acknowledges that it has decided
-----------------
to enter into this Agreement and to make the Loans hereunder based on its own
analysis of the transactions contemplated hereby and of the creditworthiness of
the Borrower and the Guarantors and agrees that the Agent shall bear no
responsibility therefor.
SECTION 9.9 Notice of Transfer. The Agent may deem and treat a Bank party
------------------
to this Agreement as the owner of such Bank's portion of the Loans for all
purposes, unless and until a written notice of the assignment or transfer
thereof executed by such Bank shall have been received by the Agent.
SECTION 9.10 Successor Agent. The Agent may resign at any time by giving
---------------
written notice thereof to the Banks and the Borrower. Upon any such resignation,
the Required Banks shall have the right to appoint a successor Agent, which
shall be reasonably satisfactory to the Borrower. If no successor Agent shall
have been so appointed by the Required Banks and shall have accepted such
appointment, within 30 days after the retiring Agent's giving of notice of
resignation, the retiring Agent may, on behalf of the Banks, appoint a successor
Agent, which shall be a commercial bank organized under the laws of the United
States of America or of any State thereof and having a combined capital and
surplus of a least $100,000,000, which shall be reasonably satisfactory to the
Borrower. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations under
this Agreement. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Section 8 shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Agent under this Agreement.
SECTION 10. GUARANTY
SECTION 10.1 Guaranty
--------
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(1) Each of the Guarantors unconditionally and irrevocably guarantees
the due and punctual payment and performance by the Borrower of the Obligations.
Each of the Guarantors further agrees that the Obligations may be extended or
renewed, in whole or in part, without notice to or further assent from it, and
it will remain bound upon this guaranty notwithstanding any extension or renewal
of any of the Obligations. The Obligations of the Guarantors shall be joint and
several.
(2) Each of the Guarantors waives presentation to, demand for payment
from and protest to the Borrower or any other Guarantor, and also waives notice
of protest for nonpayment. The Obligations of the Guarantors hereunder shall not
be affected by (i) the failure of the Agent or a Bank to assert any claim or
demand or to enforce any right or remedy against the Borrower or any other
Guarantor under the provisions of this Agreement or any other Loan Document or
otherwise; (ii) any extension or renewal of any provision hereof or thereof;
(iii) any rescission, waiver, compromise, acceleration, amendment or
modification of any of the terms or provisions of any of the Loan Documents;
(iv) the release, exchange, waiver or foreclosure of any security held by the
Agent for the Obligations or any of them; (v) the failure of the Agent or a Bank
to exercise any right or remedy against any other Guarantor; or (vi) the release
or substitution of any Guarantor or any other Guarantor.
(3) Each of the Guarantors further agrees that this guaranty
constitutes a guaranty of performance and of payment when due and not just of
collection, and waives any right to require that any resort be had by the Agent
or a Bank to any security held for payment of the Obligations or to any balance
of any deposit, account or credit on the books of the Agent or a Bank in favor
of the Borrower or any other Guarantor, or to any other Person.
(4) Each of the Guarantors hereby waives any defense that it might
have based on a failure to remain informed of the financial condition of the
Borrower and of any other Guarantor and any circumstances affecting the ability
of the Borrower to perform under this Agreement.
(5) Each Guarantor's guaranty shall not be affected by the
genuineness, validity, regularity or enforceability of the Obligations or any
other instrument evidencing any Obligations, or by the existence, validity,
enforceability, perfection, or extent of any collateral therefor or by any other
circumstance relating to the Obligations which might otherwise constitute a
defense to this Guaranty. Neither of the Agent, nor any of the Banks makes any
representation or warranty in respect to any such circumstances or shall have
any duty or responsibility whatsoever to any Guarantor in respect of the
management and maintenance of the Obligations.
(6) Subject to the provisions of Section 7.01, upon the Obligations
becoming due and payable (by acceleration or otherwise), the Banks shall be
entitled to immediate payment of such Obligations by the Guarantors upon written
demand by the Agent, without further application to or order of the Bankruptcy
Court.
SECTION 10.2 No Impairment of Guaranty. The obligations of the Guarantors
-------------------------
hereundershall not be subject to any reduction, limitation, impairment or
termination for any reason, including, without limitation, any claim of waiver,
release, surrender, alteration or compromise, and shall not be subject to any
defense or set-off, counterclaim, recoupment or termination whatsoever by reason
of the invalidity, illegality or unenforceability of the Obligations. Without
limiting the
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generality of the foregoing, the obligations of the Guarantors hereunder
shall not be discharged or impaired or otherwise affected by the failure of the
Agent or a Bank to assert any claim or demand or to enforce any remedy under
this Agreement or any other agreement, by any waiver or modification of any
provision thereof, by any default, failure or delay, willful or otherwise, in
the performance of the Obligations, or by any other act or thing or omission or
delay to do any other act or thing which may or might in any manner or to any
extent vary the risk of the Guarantors or would otherwise operate as a discharge
of the Guarantors as a matter of law, unless and until the Obligations are paid
in full.
SECTION 10.3 Subrogation. Upon payment by any Guarantor of any sums to
-----------
the Agent or a Bank hereunder, all rights of such Guarantor against the Borrower
arising as a result thereof by way of right of subrogation or otherwise, shall
in all respects be subordinate and junior in right of payment to the prior final
and indefeasible payment in full of all the Obligations. If any amount shall be
paid to such Guarantor for the account of the Borrower, such amount shall be
held in trust for the benefit of the Agent and the Banks and shall forthwith be
paid to the Agent and the Banks to be credited and applied to the Obligations,
whether matured or unmatured.
SECTION 11. MISCELLANEOUS
SECTION 11.1 Notices. Notices and other communications provided for
-------
herein shall be in writing (including telegraphic, telex, facsimile or cable
communication) and shall be mailed, telegraphed, telexed, transmitted, cabled or
delivered to the Borrower, or any Guarantor in care of the Borrower, at One
Ravinia Drive, Suite 1500, Atlanta, Georgia 30346, Attention: Senior Vice
President and Treasurer, with copies to Stutman, Treister & Glatt, P.C., 3699
Wilshire Boulevard, Suite 900, Los Angeles, California 90010, Attn: Jeffrey H.
Davidson, Esq. and K. John Shaffer, Esq., and to Powell, Goldstein, Frazer &
Murphy, LLP, Sixteenth Floor, 191 Peachtree Street, N.E., Atlanta, Georgia
30303, Attn.: Robert C. Lewinson, Esq., and to a Bank or the Agent to it at its
address set forth on Annex A, or such other address as such party may from time
to time designate by giving written notice to the other parties hereunder. All
notices and other communications given to any party hereto in accordance with
the provisions of this Agreement shall be deemed to have been given on the fifth
Business Day after the date when sent by registered or certified mail, postage
prepaid, return receipt requested, if by mail; or when delivered to the
telegraph company, charges prepaid, if by telegram; or when receipt is
acknowledged, if by any telegraphic communications or facsimile equipment of the
sender; or on the first Business Day after delivery to an overnight courier
(charges prepaid); or when received, if by hand delivery; in each case addressed
to such party as provided in this Section 10.01 or in accordance with the latest
unrevoked written direction from such party; provided, however, that in the case
of notices to the Agent notices pursuant to the preceding sentence with respect
to change of address and pursuant to Section 2 shall be effective only when
received by the Agent.
SECTION 11.2 Survival of Agreement, Representations and Warranties, etc.
----------------------------------------------------------
All warranties, representations and covenants made by the Borrower or any
Guarantor herein or in any certificate or other instrument delivered by it or on
its behalf in connection with this Agreement shall be considered to have been
relied upon by the Banks and shall survive the making of the Loans herein
contemplated regardless of any investigation made by any Bank or on its behalf
and shall continue in full force and effect so long as any amount due or to
become due hereunder is outstanding and unpaid and so long as the Commitments
have not been terminated. All statements
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in any such certificate or other instrument shall constitute representations and
warranties by the Borrower and the Guarantors hereunder with respect to the
Borrower.
SECTION 11.3 Successors and Assigns.
----------------------
(1) This Agreement shall be binding upon and inure to the benefit of
the Borrower, the Agent and the Banks and their respective successors and
assigns. Neither the Borrower nor any of the Guarantors may assign or transfer
any of their rights or obligations hereunder without the prior written consent
of all of the Banks. Each Bank may sell participations to any Person in all or
part of any Loan, or all or part of its Commitment, in which event, without
limiting the foregoing, the provisions of Section 2.13 shall inure to the
benefit of each purchaser of a participation (provided that such participant
shall look solely to the seller of such participation for such benefits and the
Borrower's and the Guarantors' liability, if any, under Sections 2.13 and 2.15
shall not be increased as a result of the sale of any such participation) and
the pro rata treatment of payments, as described in Section 2.14, shall be
--- ----
determined as if such Bank had not sold such participation. In the event any
Bank shall sell any participation, such Bank shall retain the sole right and
responsibility to enforce the obligations of the Borrower and each of the
Guarantors relating to the Loans, including, without limitation, the right to
approve any amendment, modification or waiver of any provision of this Agreement
(provided that such Bank may grant its participant the right to consent to such
Bank's execution of amendments, modifications or waivers which (i) reduce any
Fees payable hereunder to the Banks, (ii) reduce the amount of any scheduled
principal payment on any Loan or reduce the principal amount of any Loan or the
rate of interest payable hereunder or (iii) extend the maturity of the
Borrower's obligations hereunder). The sale of any such participation shall not
alter the rights and obligations of the Bank selling such participation
hereunder with respect to the Borrower.
(2) Each Bank may assign to one or more Banks or Eligible Assignees
all or a portion of its interests, rights and obligations under this Agreement
(including, without limitation, all or a portion of its Commitment and the same
portion of the related Loans at the time owing to it), provided, however, that
-------- -------
(i) other than in the case of an assignment to a Person at least 50% owned by
the assignor Bank, or by a common parent of both, or to another Bank, the Agent
and the Fronting Bank must give their respective prior written consent to such
assignment, which consent will not be unreasonably withheld, (ii) the aggregate
amount of the Commitment and/or Loans of the assigning Bank subject to each such
assignment (determined as of the date the Assignment and Acceptance with respect
to such assignment is delivered to the Agent) shall, unless otherwise agreed to
in writing by the Borrower and the Agent, in no event be less than $1,000,000 or
such lesser amount as is equal to the remaining Commitment and/or Loans of the
assignor thereof and (iii) the parties to each such assignment shall execute and
deliver to the Agent, for its acceptance and recording in the Register (as
defined below), an Assignment and Acceptance with blanks appropriately
completed, together with a processing and recordation fee of $3,500 (for which
the Borrower shall have no liability). Upon such execution, delivery,
acceptance and recording, from and after the effective date specified in each
Assignment and Acceptance, which effective date shall be within ten Business
Days after the execution thereof (unless otherwise agreed to in writing by the
Agent), (A) the assignee thereunder shall be a party hereto and, to the extent
provided in such Assignment and Acceptance, have the rights and obligations of a
Bank hereunder and (B) the Bank thereunder shall, to the extent provided in such
Assignment and Acceptance, be released from its obligations under this Agreement
(and, in the case of an Assignment and Acceptance covering all or the remaining
portion of an
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assigning Bank's rights and obligations under this Agreement, such Bank shall
cease to be a party hereto).
(3) By executing and delivering an Assignment and Acceptance, the
Bank assignor thereunder and the assignee thereunder confirm to and agree with
each other and the other parties hereto as follows: (i) other than the
representation and warranty that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim, such Bank
assignor makes no representation or warranty and assumes no responsibility with
respect to any statements, warranties or representations made in or in
connection with this Agreement or any of the other Loan Documents or the
execution, legality, validity, enforceability, genuineness, sufficiency or value
of this Agreement or any of the other Loan Documents; (ii) such Bank assignor
makes no representation or warranty and assumes no responsibility with respect
to the financial condition of the Borrower or any Guarantor or the performance
or observance by the Borrower or any Guarantor of any of its obligations under
this Agreement or any of the other Loan Documents or any other instrument or
document furnished pursuant hereto; (iii) such assignee confirms that it has
received a copy of this Agreement and the other Loan Documents, together with
copies of the financial statements referred to in Section 3.04 and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into such Assignment and Acceptance; (iv) such
assignee will, independently and without reliance upon the Agent, such Bank
assignor or any other Bank and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement; (v) such assignee appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Agent by the terms
thereto, together with such powers as are reasonably incidental hereof; and (vi)
such assignee agrees that it will perform in accordance with their terms all
obligations that by the terms of this Agreement are required to be performed by
it as a Bank.
(4) The Agent shall maintain at its office a copy of each Assignment
and Acceptance delivered to it and a register for the recordation of the names
and addresses of the Banks and the Commitments of, and principal amount of the
Loans owing to, each Bank from time to time (the "Register"). The entries in
--------
the Register shall be conclusive, in the absence of manifest error, and the
Borrower, the Guarantors, the Agent and the Banks shall treat each Person the
name of which is recorded in the Register as a Bank hereunder for all purposes
of this Agreement. The Register shall be available for inspection by the
Borrower or any Bank at any reasonable time and from time to time upon
reasonable prior notice.
(5) Upon its receipt of an Assignment and Acceptance executed by an
assigning Bank and the assignee thereunder together with the fee payable in
respect thereto, the Agent shall, if such Assignment and Acceptance has been
completed with blanks appropriately filled and consented to by the Agent and the
Fronting Bank (to the extent such consent is required hereunder), (i) accept
such Assignment and Acceptance, (ii) record the information contained therein in
the Register and (iii) give prompt written notice thereof to the Borrower
(together with a copy thereof). No assignment shall be effective for purposes of
this Agreement unless it has been recorded in the Register as provided in this
paragraph.
(6) Any Bank may, in connection with any assignment or participation
or proposed assignment or participation pursuant to this Section 10.03, disclose
to the assignee or
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participant or proposed assignee or participant, any information relating to the
Borrower or any of the Guarantors furnished to such Bank by or on behalf of the
Borrower or any of the Guarantors; provided that prior to any such disclosure,
--------
each such assignee or participant or proposed assignee or participant shall
agree in writing to be bound by the provisions of Section 10.04.
(7) The Borrower hereby agrees, to the extent set forth in the
Commitment Letter, to actively assist and cooperate with the Agent in the
Agent's efforts to sell participations herein (as described in Section 10.03(a))
and assign to one or more Banks or Eligible Assignees a portion of its
interests, rights and obligations under this Agreement (as set forth in Section
10.03(b)).
SECTION 11.4 Confidentiality. Each Bank agrees to keep any information
---------------
delivered or made available by the Borrower or any of the Guarantors to it
confidential from anyone other than persons employed or retained by such Bank
who are or are expected to become engaged in evaluating, approving, structuring
or administering the Loans; provided that nothing herein shall prevent any Bank
--------
from disclosing such information (i) to any other Bank, (ii) upon the order of
any court or administrative agency, (iii) upon the request or demand of any
regulatory agency or authority, (iv) which has been publicly disclosed other
than as a result of a disclosure by the Agent or any Bank which is not permitted
by this Agreement, (v) in connection with any litigation to which the Agent, any
Bank, or their respective Affiliates may be a party to the extent reasonably
required, (vi) to the extent reasonably required in connection with the exercise
of any remedy hereunder, (vii) to such Bank's legal counsel and independent
auditors, and (viii) to any actual or proposed participant or assignee of all or
part of its rights hereunder subject to the proviso in Section 10.03(f). Each
Bank shall use reasonable efforts to notify the Borrower of any required
disclosure under clause (ii) of this Section.
SECTION 11.5 Expenses. Whether or not the transactions hereby
--------
contemplated shall be consummated, the Borrower and the Guarantors agree to pay
all reasonable out-of-pocket expenses incurred by the Agent (including but not
limited to the reasonable fees and disbursements of Morgan, Lewis & Bockius LLP,
special counsel for the Agent, any other counsel that the Agent shall retain and
any internal or third-party appraisers, consultants and auditors advising the
Agent and Chase Securities Inc.) as to which invoices have been furnished, in
connection with the preparation, execution, delivery and administration of this
Agreement and the other Loan Documents, the making of the Loans and the issuance
of the Letters of Credit, the perfection of the Liens contemplated hereby, the
syndication of the transactions contemplated hereby, the reasonable and
customary costs, fees and expenses of the Agent in connection with its monthly
and other periodic field audits, monitoring of assets (including reasonable and
customary internally allocated fees related to the initial and ongoing Borrowing
Base examinations), the costs of electronic communications services and
publicity expenses, and, during the continuance of an Event of Default, all
reasonable out-of-pocket expenses incurred by the Banks and the Agent in the
enforcement or protection of the rights of any one or more of the Banks or the
Agent in connection with this Agreement or the other Loan Documents, including
but not limited to the reasonable fees and disbursements of any counsel for the
Banks or the Agent. Such payments shall be made on the date of the First Day
Order and thereafter on demand, promptly upon delivery of a statement setting
forth such costs and expenses. Whether or not the transactions hereby
contemplated shall be consummated, the Borrower and the Guarantors agree to
reimburse the Agent and Chase Securities Inc. for the expenses set forth in the
Commitment Letter and the reimbursement provisions thereof
64
<PAGE>
are hereby incorporated herein by reference. The obligations of the Borrower and
the Guarantors under this Section shall survive the termination of this
Agreement and/or the payment of the Loans.
SECTION 11.6 Indemnity. The Borrower and each of the Guarantors agree
---------
to indemnify and hold harmless the Agent, Chase Securities Inc. and the Banks
and their directors, officers, employees, agents and Affiliates (each an
"Indemnified Party") from and against any and all expenses, losses, claims,
-----------------
damages and liabilities incurred by such Indemnified Party arising out of claims
made by any Person in any way relating to the transactions contemplated hereby,
but excluding therefrom all expenses, losses, claims, damages, and liabilities
to the extent that they are determined by the final judgment of a court of
competent jurisdiction to have resulted from the gross negligence or willful
misconduct of such Indemnified Party. The obligations of the Borrower and the
Guarantors under this Section shall survive the termination of this Agreement
and/or the payment of the Loans.
SECTION 11.7 CHOICE OF LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
-------------
SHALL IN ALL RESPECTS BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS
OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY
WITHIN SUCH STATE, WITHOUT TAKING INTO ACCOUNT ANY CONFLICT OF LAWS PRINCIPLES
THEREOF, AND THE BANKRUPTCY CODE.
SECTION 11.8 No Waiver. No failure on the part of the Agent or any of
---------
the Banks to exercise, and no delay in exercising, any right, power or remedy
hereunder or any of the other Loan Documents shall operate as a waiver thereof,
nor shall any single or partial exercise of any such right, power or remedy
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy. All remedies hereunder are cumulative and are not
exclusive of any other remedies provided by law.
SECTION 11.9 Extension of Maturity. Should any payment of principal of
---------------------
or interest or any other amount due hereunder become due and payable on a day
other than a Business Day, the maturity thereof shall be extended to the next
succeeding Business Day and, in the case of principal, interest shall be payable
thereon at the rate herein specified during such extension.
SECTION 11.10 Amendments, etc.
----------------
(1) No modification, amendment or waiver of any provision of this
Agreement or the other Loan Documents, and no consent to any departure by the
Borrower or any Guarantor therefrom, shall in any event be effective unless the
same shall be in writing and signed by the Required Banks, and then such waiver
or consent shall be effective only in the specific instance and for the purpose
for which given; provided, however, that no such modification or amendment shall
-------- -------
without the written consent of the Bank affected thereby (x) increase the
Commitment of a Bank (it being understood that a waiver of an Event of Default
shall not constitute an increase in the Commitment of a Bank), or (y) reduce the
principal amount of any Loan or the rate of interest payable thereon, or extend
any date for the payment of interest hereunder or reduce any Fees payable
hereunder or extend the final maturity of the Borrower's obligations hereunder;
and, provided, further, that no such modification or amendment shall without the
-------- -------
written consent of (A) all of the Banks (i) amend or modify any provision of
this Agreement which provides for the unanimous
65
<PAGE>
consent or approval of the Banks, (ii) amend this Section 10.10 or the
definition of Required Banks or (iii) amend or modify the Super-Priority Claim
status of the Banks contemplated by Section 2.20; or (iv) release all or any
substantial portion of the Liens granted to the Agent hereunder (other than in
connection with dispositions permitted hereunder), under the Orders or under any
other Loan Document, or release any Guarantor; or (B) Banks holding Loans
representing at least 66-2/3% of the aggregate principal amount of the Loans
outstanding, or if no Loans are outstanding, Banks having Commitments
representing at least 66-2/3% of the Total Commitment to (i) amend any of the
advance rates set forth in the definition of the term "Borrowing Base", (ii)
increase the maximum principal amounts of extensions of credit permitted prior
to the entry of the Final Order by Sections 4.01(b)(i) or 4.02(d), (iii)
decrease the percentage of net revenues required to be paid to the Borrower by
MHG in calculating the weekly overhead payment as described in Section 4.02(j)
or otherwise modify, waive or amend the condition precedent set forth therein or
(iv) modify, waive or amend the provisions of Section 6.16.. No such amendment
or modification may adversely affect the rights and obligations of the Agent or
any Fronting Bank hereunder or any Bank in the capacity referred to in Section
6.03(v) without its prior written consent. No notice to or demand on the
Borrower or any Guarantor shall entitle the Borrower or any Guarantor to any
other or further notice or demand in the same, similar or other circumstances.
Each assignee under Section 10.03(b) shall be bound by any amendment,
modification, waiver, or consent authorized as provided herein, and any consent
by a Bank shall bind any Person subsequently acquiring an interest on the Loans
held by such Bank. No amendment to this Agreement shall be effective against the
Borrower or any Guarantor unless signed by the Borrower or such Guarantor, as
the case may be.
(2) Notwithstanding anything to the contrary contained in Section
10.10(a), in the event that the Borrower requests that this Agreement be
modified or amended in a manner which would require the unanimous consent of all
of the Banks (or the consent described in clause (B) of the first sentence of
Section 10.10(a)) and such modification or amendment is agreed to by the Super-
majority Banks (as hereinafter defined), then with the consent of the Borrower
and the Super-majority Banks, the Borrower and the Super-majority Banks shall be
permitted to amend the Agreement without the consent of the Bank or Banks which
did not agree to the modification or amendment requested by the Borrower (such
Bank or Banks, collectively the "Minority Banks") to provide for (w) the
--------------
termination of the Commitment of each of the Minority Banks, (x) the addition to
this Agreement of one or more other financial institutions (each of which shall
be an Eligible Assignee), or an increase in the Commitment of one or more of the
Super-majority Banks, so that the Total Commitment after giving effect to such
amendment shall be in the same amount as the Total Commitment immediately before
giving effect to such amendment, (y) if any Loans are outstanding at the time of
such amendment, the making of such additional Loans by such new financial
institutions or Super-majority Bank or Banks, as the case may be, as may be
necessary to repay in full the outstanding Loans of the Minority Banks
immediately before giving effect to such amendment and (z) such other
modifications to this Agreement as may be appropriate. As used herein, the term
"Super-majority Banks" shall mean, at any time, Banks holding Loans representing
at least 66-2/3% of the aggregate principal amount of the Loans outstanding, or
if no Loans are outstanding, Banks having Commitments representing at least 66-
2/3% of the Total Commitment.
SECTION 11.11 Severability. Any provision of this Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such
66
<PAGE>
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
SECTION 11.12 Headings. Section headings used herein are for convenience
--------
only and are not to affect the construction of or be taken into consideration in
interpreting this Agreement.
SECTION 11.13 Execution in Counterparts. This Agreement may be executed
--------------------------
in any number of counterparts, each of which shall constitute an original, but
all of which taken together shall constitute one and the same instrument.
SECTION 11.14 Prior Agreements. This Agreement represents the entire
----------------
agreement of the parties with regard to the subject matter hereof and the terms
of any letters and other documentation entered into between the Borrower or a
Guarantor and any Bank or the Agent prior to the execution of this Agreement
which relate to Loans to be made hereunder shall be replaced by the terms of
this Agreement (except as otherwise expressly provided herein with respect to
the Commitment Letter and the fee letter referred to therein, including without
limitation the Borrower's agreement to actively assist the Agent in the
syndication of the transactions contemplated hereby referred to in Section
10.03(g) and including also the provisions of Section 2.16).
SECTION 11.15 Further Assurances. Whenever and so often as reasonably
------------------
requested by the Agent, the Borrower and the Guarantors will promptly execute
and deliver or cause to be executed and delivered all such other and further
instruments, documents or assurances, and promptly do or cause to be done all
such other and further things as may be necessary and reasonably required in
order to further and more fully vest in the Agent all rights, interests, powers,
benefits, privileges and advantages conferred or intended to be conferred by
this Agreement and the other Loan Documents.
SECTION 11.16 WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE GUARANTORS,
--------------------
THE AGENT AND EACH BANK HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY OF THE
LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY.
[SIGNATURE PAGES FOLLOW]
67
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and the year first written.
BORROWER:
MARINER POST-ACUTE NETWORK, INC.
By: _______________________________
Name:
Title:
GUARANTORS:
AMERICAN MEDICAL INSURANCE BILLING
SERVICES, INC.
AMERICAN PHARMACEUTICAL SERVICES, INC.
AMERICAN REHABILITY SERVICES, INC.
AMERICAN-CAL MEDICAL SERVICES, INC.
AMERRA PROPERTIES, INC.
AMS GREEN TREE, INC.
AMS PROPERTIES, INC.
APS HOLDING COMPANY, INC.
APS PHARMACY MANAGEMENT, INC.
BRIAN CENTER HEALTH &
RETIREMENT/ALLEGHANY, INC.
BRIAN CENTER HEALTH &
RETIREMENT/BASTIAN, INC.
BRIAN CENTER HEALTH &
RETIREMENT/TAMPA, INC.
BRIAN CENTER HEALTH &
RETIREMENT/WALLACE, INC.
BRIAN CENTER MANAGEMENT CORPORATION
BRIAN CENTER NURSING CARE/AUSTELL, INC.
BRIAN CENTER NURSING CARE/FINCASTLE,
INC.
BRIAN CENTER NURSING CARE/HICKORY, INC.
BRIAN CENTER NURSING CARE/POWDER
SPRINGS, INC.
BRIAN CENTER OF ASHEBORO, INC.
68
<PAGE>
BRIAN CENTER OF CENTRAL COLUMBIA, INC.
CAMBRIDGE BEDFORD, INC.
CAMBRIDGE EAST, INC.
CAMBRIDGE NORTH, INC.
CAMBRIDGE SOUTH, INC.
CLINTONAIRE NURSING HOME, INC.
CONNERWOOD HEALTHCARE, INC.
CORNERSTONE HEALTH MANAGEMENT COMPANY
CRESTMONT HEALTH CENTER, INC.
DEVCON HOLDING COMPANY
EH ACQUISITION CORP.
EH ACQUISITION CORP. II
EH ACQUISITION CORP. III
EVERGREEN HEALTHCARE LTD., L.P.
EVERGREEN HEALTHCARE, INC.
FRENCHTOWN NURSING HOME, INC.
GC SERVICES, INC.
GCI BELLA VITA, INC.
GCI CAMELLIA CARE CENTER, INC.
GCI COLTER VILLAGE, INC.
GCI EAST VALLEY MEDICAL &
REHABILITATION CENTER, INC.
GCI FAITH NURSING HOME, INC.
GCI HEALTH CARE CENTERS, INC.
GCI JOLLEY ACRES, INC.
GCI PALM COURT, INC.
GCI PRINCE GEORGE, INC.
GCI REHAB, INC.
GCI SPRINGDALE VILLAGE, INC.
GCI THERAPIES, INC.
GCI VILLAGE GREEN, INC.
GCI-CAL THERAPIES COMPANY
GCI-WISCONSIN PROPERTIES, INC.
GRANCARE HOME HEALTH SERVICES, INC.
GRANCARE OF MICHIGAN, INC.
GRANCARE OF NORTH CAROLINA, INC.
GRANCARE OF NORTHERN CALIFORNIA, INC.
GRANCARE SOUTH CAROLINA, INC.
GRANCARE, INC.
HAWK'S-PERIMETER, INC.
HERITAGE NURSING HOME, INC.
69
<PAGE>
HERITAGE OF LOUISIANA, INC.
HMI CONVALESCENT CARE, INC.
HOSPICE ASSOCIATES OF AMERICA, INC.
HOSTMASTERS, INC.
INTERNATIONAL HEALTH CARE MANAGEMENT,
INC.
INTERNATIONAL X-RAY, INC.
LC MANAGEMENT COMPANY
LCA OPERATIONAL HOLDING COMPANY
LCR, INC.
LIVING CENTERS - EAST, INC.
LIVING CENTERS - PHCM, INC.
LIVING CENTERS - ROCKY MOUNTAIN, INC.
LIVING CENTERS - SOUTHEAST
DEVELOPMENT CORPORATION
LIVING CENTERS - SOUTHEAST, INC.
LIVING CENTERS DEVELOPMENT COMPANY
LIVING CENTERS HOLDING COMPANY
LIVING CENTERS LTCP DEVELOPMENT COMPANY
LIVING CENTERS OF TEXAS, INC.
MADONNA NURSING CENTER, INC.
MED-THERAPY REHABILITATION SERVICES,
INC.
MIDDLEBELT NURSING HOME, INC.
MIDDLEBELT-HOPE NURSING HOME, INC.
NAN-DAN CORP.
NATIONAL HERITAGE REALTY, INC.
NIGHTINGALE EAST NURSING CENTER, INC.
OMEGA/INDIANA CARE CORP.
PROFESSIONAL HEALTH CARE MANAGEMENT,
INC.
PROFESSIONAL RX SYSTEMS, INC.
REHABILITY HEALTH SERVICES, INC.
RENAISSANCE MENTAL HEALTH CENTER, INC.
ST. ANTHONY NURSING HOME, INC.
SUMMIT HOSPITAL HOLDINGS, INC.
SUMMIT HOSPITAL OF EAST GEORGIA, INC.
SUMMIT HOSPITAL OF SOUTHEAST ARIZONA,
INC.
70
<PAGE>
SUMMIT HOSPITAL OF SOUTHEAST TEXAS, INC.
SUMMIT HOSPITAL OF SOUTHWEST LOUISIANA, INC.
SUMMIT HOSPITAL OF WEST GEORGIA, INC.
SUMMIT INSTITUTE FOR PULMONARY MEDICINE
AND REHABILITATION, INC.
SUMMIT INSTITUTE OF AUSTIN, INC.
SUMMIT INSTITUTE OF WEST MONROE, INC.
SUMMIT MEDICAL HOLDINGS, LTD.
SUMMIT MEDICAL MANAGEMENT, INC.
By: _______________________________
Name:
Title:
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
71
<PAGE>
THE CHASE MANHATTAN BANK,
Individually and as Agent
By: _______________________________
Name:
Title:
BANK OF AMERICA, N.A.
By: _______________________________
Name:
Title:
GENERAL ELECTRIC CAPITAL CORPORATION
By: _______________________________
Name:
Title:
FOOTHILL CAPITAL CORPORATION
By: _______________________________
Name:
Title:
GOLDMAN SACHS CREDIT PARTNERS L.P.
By: _______________________________
Name:
Title:
VAN KAMPEN PRIME RATE INCOME TRUST
By: Van Kampen Investment Advisory Corp.
By: _______________________________
Name:
Title:
72
<PAGE>
THE BANK OF NOVA SCOTIA
By: _______________________________
Name:
Title:
WACHOVIA BANK, N.A.
By: _______________________________
Name:
Title:
73
<PAGE>
ANNEX A
to
REVOLVING CREDIT AND GUARANTY AGREEMENT
Dated as of January , 1999
----------------------------
<TABLE>
<CAPTION>
Commitment Commitment
Banks Amount Percentage
- ----- ------ ----------
<S> <C> <C>
The Chase Manhattan Bank
380 Madison Avenue $ 26,000,000 26.0000%
New York, NY 10017
Attn: Ms. Agnes Levy
Bank of America, N.A. $ 12,500,000 12.5000%
335 Madison Avenue
New York, NY 10017
Attn: Fred Zagar
General Electric Capital $ 12,500,000 12.5000%
Corporation
60 Long Ridge Road
Stamford, CT 06927
Attn: William Magee
Foothill Capital Corporation $ 12,500,000 12.5000%
11111 Santa Monica Blvd.
#1500
Los Angeles, CA 90025
Attn: Mr. Edward Stearns
Goldman Sachs Credit $ 12,500,000 12.5000%
Partners L.P.
Bank Loan Trading
85 Broad Street, 27th Floor
New York, NY 10004
Attn: Mr. Jody LaNasa
Van Kampen Prime Rate $ 9,500,000 9.5000%
Income Trust
1 Parkview Plaza
Oakbrook Terrace, IL 60181
Attn: Mr. Brian Buscher
The Bank of Nova Scotia $ 9,500,000 9.5000%
</TABLE>
74
<PAGE>
1 Liberty Plaza
New York, NY 10006
Attn: Mr. Alex Clarke
Wachovia Bank, N.A. $ 5,000,000 5.0000%
191 Peachtree Street, N.E.,
GA-212
Atlanta, GA 30303
Attn: Mr. Kevin Harrison
Total $100,000,000 100.0000%
============ ========
75
<PAGE>
Exhibit A-1 to the
Revolving Credit and
Guaranty Agreement
FORM OF FIRST DAY ORDER
76
<PAGE>
Exhibit A-2 to the
Revolving Credit and
Guaranty Agreement
FORM OF INTERIM ORDER
77
<PAGE>
Exhibit A-3 to the
Revolving Credit and
Guaranty Agreement
FORM OF FINAL ORDER
[To be substantially in the form as the Interim Order]
78
<PAGE>
Exhibit B to the
Revolving Credit and
Guaranty Agreement
FORM OF SECURITY AND
PLEDGE AGREEMENT
79
<PAGE>
Exhibit C to the
Revolving Credit and
Guaranty Agreement
FORM OF OPINION OF COUNSEL
80
<PAGE>
Exhibit D to the
Revolving Credit and
Guaranty Agreement
FORM OF ASSIGNMENT AND ACCEPTANCE
81
<PAGE>
Exhibit E to the
Revolving Credit and
Guaranty Agreement
FORM OF BORROWING BASE CERTIFICATE
EXISTING AGREEMENTS
[TO BE SATISFACTORY TO THE BANKS]
82
<PAGE>
SCHEDULE 1.01
EXISTING AGREEMENTS
[TO BE SATISFACTORY TO THE BANKS]
83
<PAGE>
SCHEDULE 3.05
SUBSIDIARIES
[TO BE SATISFACTORY TO THE BANKS]
[Designate Guarantors and Non-Filed Subsidiaries]
84
<PAGE>
SCHEDULE 3.06
LIENS
[TO BE SATISFACTORY TO THE BANKS]
85
<PAGE>
SCHEDULE 6.09
TRANSACTIONS WITH AFFILIATES
[TO BE SATISFACTORY TO THE BANKS]
i
<PAGE>
EXHIBIT 10.97
EXHIBIT B
to
Revolving Credit
and
Guaranty Agreement
SECURITY AND PLEDGE AGREEMENT
SECURITY AND PLEDGE AGREEMENT (the "Agreement"), dated as of January 18,
---------
2000 by and between MARINER POST-ACUTE NETWORK, INC., a Delaware corporation
(the "Borrower"), and each of the direct or indirect subsidiaries of the
--------
Borrower party hereto (together with the Borrower, the "Grantors"), each a
--------
debtor and debtor-in-possession under Chapter 11 of the Bankruptcy Code, and THE
CHASE MANHATTAN BANK, as agent (in such capacity, the "Agent") for the financial
-----
institutions and other lenders (the "Banks") party to the Credit Agreement (as
-----
hereinafter defined).
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the Agent, the Banks and the Grantors are entering into a Revolving
Credit and Guaranty Agreement dated as of the date hereof (as amended, modified
or supplemented from time to time, the "Credit Agreement"); and
----------------
WHEREAS, unless otherwise defined herein, terms defined in the Credit
Agreement are used herein as therein defined; and
WHEREAS, it is a condition precedent to the making of Loans and the
issuance of Letters of Credit that the Grantors shall have granted a security
interest, pledge and lien on (x) all cash maintained in the Letter of Credit
Account pursuant to Section 364(c)(2) of the Bankruptcy Code and (y) certain of
the Grantors' assets and properties and the proceeds thereof pursuant to
Sections 364(c)(2), 364(c)(3) and 364(d)(1) of the Bankruptcy Code; and
WHEREAS, the grant of such security interest, pledge and lien has been
authorized pursuant to Sections 364(c)(2), 364(c)(3) and 364(d)(1) of the
Bankruptcy Code by the First Day Order, and, after the entry thereof, will have
been so authorized by the Interim Order and the Final Order (collectively, the
"Orders"); and
- -------
WHEREAS, to supplement the Orders without in any way diminishing or
limiting the effect of the Orders or the security interest, pledge and lien
granted thereunder, the parties hereto desire to more fully set forth their
respective rights in connection with such security interest, pledge and lien;
and
WHEREAS, this Agreement has been approved by the Orders;
1
<PAGE>
NOW, THEREFORE, in consideration of the premises and in order to induce the
Banks to make Loans and issue Letters of Credit, the Grantors hereby agree with
the Agent as follows:
SECTION 1. Grant of Security and Pledge. Each of the Grantors hereby
-----------------------------
transfers, grants, bargains, sells, conveys, hypothecates, assigns, pledges and
sets over to the Agent for its benefit and the ratable benefit of the Banks and
hereby grants to the Agent for its benefit and the ratable benefit of the Banks,
a perfected pledge and security interest in all of the Grantors' right, title
and interest in and to the following (the "Collateral") which pledge and
----------
security interest shall have the priorities set forth in Orders and shall be
subject to the Carve-Out:
(1) all present and future accounts, accounts receivable and other
rights of each of the Grantors to payment for goods sold or leased or for
services rendered (except those evidenced by instruments or chattel paper),
whether now existing or hereafter arising and wherever arising, and whether or
not they have been earned by performance (collectively, the "Accounts");
--------
(2) all goods and merchandise now owned or hereafter acquired by each
of the Grantors wherever located, whether in the possession of a Grantor or of a
bailee or other person for sale, storage, transit, processing, use or otherwise
consisting of whole goods, components, supplies, materials, or consigned,
returned or repossessed goods) which are held for sale or lease or to be
furnished (or have been furnished) under any contract of service or which are
raw materials, work-in-process, finished goods or materials used or consumed in
such Grantor's business or processed by or on behalf of any Grantor
(collectively, the "Inventory");
---------
(3) all machinery, all manufacturing, distribution, selling, data
processing and office equipment, all furniture, furnishings, appliances,
fixtures and trade fixtures, tools, tooling, molds, dies, vehicles, vessels,
aircraft and all other goods of every type and description (other than
Inventory), in each instance whether now owned or hereafter acquired by each of
the Grantors and wherever located (collectively, the "Equipment");
---------
(4) all works of art now owned or hereafter acquired by each of the
Grantors, including, without limitation, paintings, sketches, drawings, prints,
sculptures, crafts, tapestries, porcelain, carvings, artifacts, renderings and
designs;
(5) all rights, interests, choses in action, causes of action, claims
and all other intangible property of each of the Grantors of every kind and
nature (other than Accounts, Trademarks, Patents and Copyrights), in each
instance whether now owned or hereafter acquired by such Grantor, including,
without limitation, all general intangibles, but excluding causes of action
under the Bankruptcy Code (it being understood and agreed, however, that the
proceeds of any such causes of action shall be available to repay the
Obligations); all corporate and other business records; all loans, royalties,
and other obligations receivable; all inventions, designs, trade secrets,
computer programs, software, printouts and other computer materials, goodwill,
registrations, copyrights, licenses, franchises, customer lists, credit files,
correspondence, and advertising materials (to the extent the same are
assignable); all customer and supplier contracts, firm sale orders, rights under
license and franchise agreements (including all license agreements with any
other Person in
2
<PAGE>
connection with any of the Patents and Trademarks or such other Person's names
or marks, whether such Grantor is a licensor or licensee under any such license
agreement but only to the extent such license agreements are assignable), and
other contracts and contract rights; all interests in partnerships and joint
ventures; all tax refunds and tax refund claims; all right, title and interest
under leases, subleases, licenses and concessions and other agreements to the
extent assignable relating to real or personal property; all payments due or
made to each of the Grantors in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of any property by any person or
governmental authority; all deposit accounts (general or special) with any bank
or other financial institution; all credits with and other claims against
carriers and shippers; all rights to indemnification; all reversionary interests
in pension and profit sharing plans and reversionary, beneficial and residual
interest in trusts; all proceeds of insurance of which each of the Grantors is
beneficiary; and all letters of credit, guaranties, liens, security interest and
other security held by or granted to each of the Grantors; and all other
intangible property, whether or not similar to the foregoing (collectively, the
"General Intangibles");
-------------------
(6) all chattel paper, all instruments, all notes and debt
instruments and all payments thereunder and instruments and other property from
time to time delivered in respect thereof or in exchange therefor, and all bills
of lading, warehouse receipts and other documents of title and documents, in
each instance whether now owned or hereafter acquired by each of the Grantors;
(7) all property or interests in property now or hereafter acquired
by each of the Grantors which may be owned or hereafter may come into the
possession, custody or control of the Agent or any agent or affiliate of the
Agent in any way or for any purpose (whether for safekeeping, deposit, custody,
pledge, transmission, collection or otherwise), and all rights and interests of
each of the Grantors, now existing or hereafter arising and however and wherever
arising, in respect of any and all (i) notes, drafts, letters of credits,
stocks, bonds, and debt and equity securities, whether or not certificated, and
warrants, options, puts and calls and other rights to acquire or otherwise
relating to the same; (ii) money (including all cash and cash equivalents held
in the Letter of Credit Account (as defined and referred to in the Credit
Agreement)); (iii) proceeds of loans, including, without limitation, Loans made
under the Credit Agreement; and (iv) insurance proceeds and books and records
relating to any of the property covered by this Agreement; together, in each
instance, with all accessions and additions thereto, substitutions therefor, and
replacements, proceeds and products thereof;
(8) all trademarks, trade names, trade styles, service marks, prints
and labels on which said trademarks, trade names, trade styles and service marks
have appeared or appear, designs and general intangibles of like nature, now
existing or hereafter adopted or acquired, and all registrations and recordings
thereof, including, without limitation, applications, registrations and
recordings in the United States Patent and Trademark Office or in any similar
office or agency of the United States, any State thereof, or any other country
or political subdivision thereof (except for "intent to use" applications for
trademark or service mark registrations filed pursuant to Section 1(b) of the
Lanham Act, unless and until an Amendment to Allege Use or a Statement of Use
under Sections 1(c) and 1(d) of said Act has been filed), all whether now owned
or hereafter acquired by
3
<PAGE>
each of the Grantors, including, but not limited to, those described in Schedule
3 annexed hereto and made a part hereof, and all reissues, extensions or
renewals thereof and all licenses thereof (together, in each case, with the
goodwill of the business connected with the use of, and symbolized by each such
trademark, service mark, trade name and trade dress, all of the foregoing being
herein referred to as the "Trademarks");
----------
(9) all letters patent of the United States or any other country, and
all registrations and recordings thereof, including, without limitation,
applications, registrations and recordings in the United States Patent and
Trademark Office or in any similar office or agency of the United States, any
State thereof or any other country or any political subdivision thereof, all
whether now owned or hereafter acquired by each of the Grantors, including, but
not limited to, those described in Schedule 4 annexed hereto and made a part
hereof, and (ii) all reissues, continuations, continuations-in-part or
extensions thereof and all licenses thereof (all of the foregoing being herein
referred to as the "Patents");
-------
(10) all copyrights of the United States, or any other country, and
all registrations and recordings thereof, including, without limitation,
applications, registrations and recordings in the United States Copyright Office
or in any similar office or agency of the United States, any State thereof, or
any other country or political subdivision thereof, all whether now owned or
hereafter acquired by each of the Grantors, including, but not limited to, those
described in Schedule 5 hereto and all renewals and extensions thereof and all
licenses thereof (all of the foregoing being herein referred to as the
"Copyrights");
- -----------
(11) all books, records, ledger cards and other property at any time
evidencing or relating to the Accounts, Equipment, General Intangibles,
Trademarks, Patents or Copyrights;
(12) (i) all the shares of capital stock owned by each Grantor, as
applicable, listed on Schedule 6 hereto of the issuers listed thereon
(individually, an "Issuer", and collectively, the "Issuers") and all shares of
------ -------
capital stock of any Issuer obtained in the future by such Grantor and the
certificates representing or evidencing all such shares (the "Pledged Shares");
--------------
all other property which may be delivered to and held by the Agent in respect of
the Pledged Shares pursuant to the terms hereof; (iii) subject to Section 9
below, all dividends, cash, instruments and other property from time to time
received, receivable or otherwise distributed, in respect of, in exchange for or
upon the conversion of the securities referred to in clauses (i) and (ii) above;
and (iv) subject to Section 9 below, all rights and privileges of each Grantor,
as applicable, with respect to the securities and other property referred to in
clauses (i), (ii) and (iii) (the items referred to in clauses (i) through (iv)
being collectively called the "Pledged Collateral");
------------------
(13) all other personal property of each of the Grantors, whether
tangible or intangible, and whether now owned or hereafter acquired; and
(14) all proceeds and products of any of the foregoing, in any form,
including, without limitation, any claims against third parties for loss or
damage to or destruction of any or all of the foregoing and to the extent not
otherwise included, all (i) payments under insurance (whether
4
<PAGE>
or not the Agent is the loss payee thereof), or any indemnity, warranty or
guaranty, payable by reason of loss or damage to or otherwise with respect to
any of the foregoing Collateral and (ii) cash.
Notwithstanding anything contained herein to the contrary, the total amount of
shares of capital stock or other ownership interests of any Person pledged
pursuant to this Agreement that is not incorporated or organized in the United
States shall in no event exceed sixty-six percent (66%) of the total outstanding
shares of capital stock or such other ownership interests thereof.
SECTION 2. Security for Obligations. This Agreement and the Collateral
------------------------
secure the payment of all obligations of each of the Grantors, now or hereafter
existing, under the Credit Agreement and the other Loan Documents (and any other
documents in respect of such obligations), and in respect of Indebtedness
permitted by Section 6.03(vi) of the Credit Agreement, whether for principal,
interest, fees, expenses or otherwise, and all obligations of each of the
Grantors now or hereafter existing under or in respect of this Agreement (all
such obligations of the Grantor being herein called the "Obligations").
-----------
SECTION 3. Delivery of Pledged Collateral; Other Action. Upon written
--------------------------------------------
request by the Agent (and without further order of the Bankruptcy Court), all
certificates or instruments representing or evidencing the Pledged Collateral
not subject to a pledge in favor of any Real Estate Financier shall be
delivered to and held by the Agent pursuant hereto and shall be accompanied by
duly executed instruments of transfer or assignment in blank, all in form and
substance satisfactory to the Agent. All such certificates or instruments
previously delivered by the Grantors to the Pre-Petition Agent shall be deemed
to be held by the Agent. Upon the occurrence and during the continuance of any
Event of Default, the Agent shall have the right (for the ratable benefit of
the Banks), at any time in its discretion and upon giving notice to the
Grantors of its intent to exercise such rights, to transfer to or to register
in the name of the Agent or any of its nominees any or all of the Pledged
Collateral.
SECTION 4. Representations and Warranties. Each Grantor, jointly and
------------------------------
severally, represents and warrants (but only with regard to itself) as follows:
(1) All of the Inventory and/or Equipment is located at the places
specified in Schedule 1 hereto. The chief places of business and chief executive
offices of each of the Grantors and the offices where each Grantor keeps its
records concerning any Accounts and all originals of all chattel paper which
evidence any Account are located at the places specified in Schedule 2 hereto.
All trade names under which each of the Grantors have sold and will sell
Inventory are listed on Schedule 3 hereto.
(2) Each of the Grantors owns the Collateral free and clear of any
lien, security interest, charge or encumbrance except for the security interest
created by this Agreement and except as permitted under Section 6.01 of the
Credit Agreement. No effective financing statement or other instrument similar
in effect covering all or any part of the Collateral is on file in any recording
office, except (x) such as may have been filed in favor of the Agent relating to
this Agreement and (y) in favor of any holder of a Lien permitted under Section
6.01 of the Credit Agreement.
5
<PAGE>
(3) As of the Filing Date, no Grantor owns any material Trademarks,
Patents or Copyrights or has any material Trademarks, Patents or Copyrights
registered in, or the subject of pending applications in, the United States
Patent and Trademark Office or any similar office or agency in any other country
or any political subdivision thereof, other than those described in Schedules 3,
4 and 5 hereto. The registrations for the Collateral disclosed on such Schedules
3, 4 and 5 hereto are valid and subsisting and in full force and effect. None of
the material Patents or Copyrights have been abandoned or dedicated.
(4) The Pledged Shares have been duly authorized and validly issued
and are fully paid and non-assessable.
(5) Each Grantor, as the case may be, is the legal and beneficial
owner of the Pledged Shares as described on Schedule 6 free and clear of any
lien, security interest, option or other charge or encumbrance, except for the
security interest created by this Agreement and the Orders and Liens permitted
under Section 6.01.
(6) Except as disclosed on Schedule 6, the Pledged Shares described
in Section 1(l) hereof constitute all of the issued and outstanding shares of
stock of each of the Issuers and no Issuer is under any contractual obligation
to issue any additional shares of stock or any other securities, rights or
indebtedness.
(7) Except for the Orders, no authorization, approval or other action
by, and no notice to or filing with, any governmental authority or regulatory
body is required for the grant and pledge by each of the Grantors of the
security interests granted hereby or for the execution, delivery or performance
of this Agreement by each of the Grantors.
SECTION 5. Further Assurances.
------------------
(1) Each of the Grantors agrees that from time to time, at the
expense of the Grantors, it will promptly execute and deliver all further
instruments and documents, and take all further action, that may be necessary,
or that the Agent may reasonably request, in order to perfect and protect any
security interest granted or purported to be granted hereby or to enable the
Agent to exercise and enforce any of its rights and remedies hereunder with
respect to any Collateral. Without limiting the generality of the foregoing, and
without further order of the Bankruptcy Court, each of the Grantors will execute
and file such financing or continuation statements, or amendments thereto, and
such other instruments or notices, as may be necessary, or as the Agent may
reasonably request, in order to perfect and preserve the security interests
granted or purported to be granted hereby.
(2) Each Grantor hereby authorizes the Agent to file one or more
financing or continuation statements, and amendments thereto, relative to all or
any part of the Collateral without the signature of such Grantor where permitted
by law.
(3) Each Grantor will furnish to the Agent from time to time
statements and schedules further identifying and describing the Collateral and
such other reports in connection with
6
<PAGE>
the Collateral as the Agent may reasonably request in connection with any
prospective sale of Collateral pursuant to Section 15 hereof, all in reasonable
detail.
SECTION 6. As to Equipment and Inventory. Each Grantor shall:
-----------------------------
(1) Keep the Equipment and Inventory (other than Inventory sold in
the ordinary course of business) at the places specified therefor in Schedule 1
hereto or, upon 30 days' written notice to the Agent following any transfer
thereof to a different jurisdiction, at other places in jurisdictions where all
action required by Section 5 shall have been taken to assure the continuation of
the perfection of the security interest of the Agent (for its benefit and the
ratable benefit of the Banks) with respect to the Equipment and Inventory.
(2) Subject to provisions of the Credit Agreement, maintain or cause
to be maintained in good repair, working order and condition, excepting ordinary
wear and tear and damage due to casualty, all of the Equipment, and make or
cause to be made all appropriate repairs, renewals and replacements thereof, to
the extent not obsolete and consistent with past practice of such Grantor, as
quickly as practicable after the occurrence of any loss or damage thereto which
are necessary or reasonably desirable to such end, except where the failure to
do any of the foregoing would not result in a Material Adverse Effect.
(3) Until satisfaction in full of the Obligations, at any time when
an Event of Default has occurred and is continuing: (i) each Grantor will
perform any and all reasonable actions requested by the Agent to enforce the
Agent's security interest in the Inventory and all of the Agent's rights
hereunder, such as subleasing warehouses to the Agent or its designee (to the
extent such subleases are not prohibited), placing and maintaining signs,
appointing custodians, transferring Inventory to warehouses, and delivering to
the Agent warehouse receipts and documents of title in the Agent's name; (ii) if
any Inventory is in the possession or control of any of the Grantors' agents,
contractors or processors or any other third party, each such Grantor will
notify the Agent thereof and will notify such agents, contractors or processors
or third party of the Agent's security interest therein and, upon request,
instruct them to hold all such Inventory for the Agent and such Grantor's
account, as their interests may appear, and subject to the Agent's instructions;
(iii) the Agent shall have the right to hold all Inventory subject to the
security interest granted hereunder; and (iv) the Agent shall have the right to
take possession of the Inventory or any part thereof and to maintain such
possession on such Grantor's premises or to remove any or all of the Inventory
to such other place or places as the Agent desires in its sole discretion. If
the Agent exercises its right to take possession of the Inventory, such Grantor,
upon the Agent's demand, will assemble the Inventory and make it available to
the Agent at such Grantor's premises at which it is located.
7
<PAGE>
SECTION 7. As to Accounts.
--------------
(1) Each Grantor shall keep its chief place of business and chief
executive office and the offices where it keeps its records concerning the
Accounts, and the offices where it keeps all originals of all chattel paper
which evidence Accounts, at the location or locations therefor specified in
Section 4(a) or, upon 15 days' prior written notice to the Agent, at such other
locations in a jurisdiction where all actions required by Section 5 shall have
been taken with respect to the Accounts. Each Grantor will hold and preserve
such records and chattel paper and will permit representatives of the Agent, at
any time during normal business hours and upon reasonable prior written notice,
to inspect and make abstracts from such records and chattel paper in accordance
with Section 5.08 of the Credit Agreement.
(2) Except as otherwise provided in this subsection (b), each
Grantor shall continue to collect in accordance with its customary practice, at
its own expense, all amounts due or to become due to such Grantor under the
Accounts and, prior to the occurrence and continuance of an Event of Default,
such Grantor shall have the right to adjust, settle or compromise the amount or
payment of any Account, or release wholly or partly any account debtor or
obligor thereof, or allow any credit or discount thereon, all in accordance with
its customary practices. In connection with such collections, the Grantors may,
upon the occurrence and during the continuation of an Event of Default, take
(and at the direction of the Agent shall take) such action as the Grantors or
the Agent may reasonably deem necessary or advisable to enforce collection of
the Accounts; provided, that upon written notice by the Agent to any Grantor,
--------
following the occurrence and during the continuation of an Event of Default, of
its intention so to do but subject to subsection (c) below, the Agent shall have
the right to notify the account debtors or obligors under any Accounts of the
assignment of such Accounts to the Agent and to direct such account debtors or
obligors to make payment of all amounts due or to become due to such Grantor
thereunder directly to the Agent and, upon such notification and at the expense
of such Grantor, to enforce collection of any such Accounts, and to adjust,
settle or compromise the amount or payment thereof, in the same manner and to
the same extent as such Grantor might have done. After receipt by such Grantor
of the notice referred to in the proviso to the preceding sentence, and unless
-------
and until such notice is rescinded by the Agent by written notice to such
Grantor (i) all amounts and proceeds (including instruments) received by such
Grantor in respect of the Accounts shall be received in trust for the benefit of
the Agent (for the ratable benefit of the Banks) hereunder, shall be segregated
from other funds of the Grantors and shall be forthwith paid over to the Agent
in the same form as so received (with any necessary endorsement) to be held as
cash collateral and either (A) released to the Grantors if such Event of Default
shall have been cured or waived or (B) if such Event of Default shall be
continuing, applied as provided by Section 15, and (ii) the Grantors shall not
adjust, settle or compromise the amount or payment of any Account, or release
wholly or partly any account debtor or obligor thereof, or allow any credit or
discount thereon.
(3) Notwithstanding the provisions of Section 7, the Agent shall
not collect or enforce payment of any Account, the Account Debtor of which is a
Governmental Authority (a "Governmental Account") if and to the extent that such
--------------------
collection or enforcement is prohibited under 42 U.S.C. (S)(S)1395(g) or 1396(a)
or under any comparable provision of federal or state law. To the
8
<PAGE>
extent the Agent's rights as to any Governmental Account are limited pursuant to
this Section 7, upon the occurrence and during the continuation of an Event of
Default, each Grantor will (i) use its reasonable and diligent best efforts to
collect and enforce payment of such Governmental Account, (ii) immediately
deposit in the exact form received, duly indorsed by such Grantor to the Agent
if required, in a collateral account maintained under the sole dominion and
control of the Agent, subject to withdrawal by the Agent for the account of the
Banks only as provided in Section 16, and until so turned over, shall be held by
such Grantor in trust for the Agent and the Banks, segregated from other funds
of such Grantor and (iii) upon written demand by the Agent at any time and from
time to time, remit (and cause the depository bank for such collateral account
to remit) directly to the Agent, as proceeds of the Collateral and for
application to the payment of the Obligations pursuant to Section 16, all
finally collected funds on deposit in such collateral account.
SECTION 8. As to Trademarks, Patents and Copyrights.
----------------------------------------
(1) Each Grantor shall, either itself or through licensees, continue
to use the Trademarks as each is currently used in the Grantor's business in
order to maintain the Trademarks in full force free from any claim of
abandonment for nonuse and each such Grantor will not (and will not permit any
licensee thereof to) do any act or knowingly omit to do any act whereby any
Trademark may become invalidated, unless such failure to use a Trademark is not
reasonably likely to have a material adverse effect on the condition (financial
or otherwise), operation or properties of the Grantors taken as a whole.
(2) No Grantor will do any act, or omit to do any act, whereby the
Patents or Copyrights may become abandoned or dedicated and each such Grantor
shall notify the Agent immediately if it knows of any reason or has reason to
know that any application or registration may become abandoned or dedicated,
unless such abandonment or dedication is not reasonably likely to have a
material adverse effect on the condition (financial or otherwise), operations or
properties of the Grantors taken as a whole.
(3) No Grantor will, either itself or through any agent, employee,
licensee or designee, (i) file an application for the registration of any Patent
or Trademark with the United States Patent and Trademark Office or any similar
office or agency in any other country or any political subdivision thereof or
(ii) file any assignment of any patent or trademark, which such Grantor may
acquire from a third party, with the United States Patent and Trademark Office
or any similar office or agency in any other country or any political
subdivision thereof, unless such Grantor shall, within 30 days after the date of
------
such filing, notify the Agent thereof, and, upon request of the Agent, execute
and deliver any and all assignments, agreements, instruments, documents and
papers as the Agent may request to evidence the Agent's interest in such Patent
or Trademark and the goodwill and general intangibles of such Grantor relating
thereto or represented thereby, and such Grantor hereby constitutes the Agent
its attorney-in-fact to execute and file all such writings for the foregoing
purposes, all lawful acts of such attorney being hereby ratified and confirmed;
such power being coupled with an interest is irrevocable until the Obligations
are paid in full.
(4) Each Grantor will take all necessary steps in any proceeding
before the United States Patent and Trademark Office, the United States
Copyright Office or any similar office or
9
<PAGE>
agency in any other country or any political subdivision thereof, to maintain in
all material respects each application and registration of all material
Trademarks, Patents and Copyrights, including, without limitation, filing of
renewals, affidavits of use, affidavits of incontestability and opposition,
interference and cancellation proceedings.
(5) Each Grantor will, without further order of the Bankruptcy Court,
perform all acts and execute and deliver all further instruments and documents,
including, without limitation, assignments for security in form suitable for
filing with the United States Patent and Trademark Office, and the United States
Copyright Office, respectively, reasonably requested by the Agent at any time to
evidence, perfect, maintain, record and enforce the Agent's interest in all
material Trademarks, Patents and Copyrights or otherwise in furtherance of the
provisions of this Agreement, and each Grantor hereby authorizes the Agent to
execute and file one or more accurate financing statements (and similar
documents) or copies thereof or of this Security Agreement with respect to
material Patents, Trademarks and Copyrights signed only by the Agent.
(6) Each Grantor will, upon acquiring knowledge of any use by any
person of any term or design likely to cause confusion with any material
Trademark, promptly notify the Agent of such use, and if requested by the Agent,
shall join with the Agent, at such Grantor's expense, in such action as the
Agent, in its reasonable discretion, may deem advisable for the protection of
the Agent's interest in and to the Trademarks.
SECTION 9. As to the Pledged Collateral; Voting Rights; Dividends; Etc.
------------------------------------------------------------
(1) So long as no Event of Default shall have occurred and be
continuing and no written notice thereof shall have been given by the Agent to
the Grantors revoking all of the following rights pursuant to Section 9(b)(i)
hereof:
(1) the Grantors (as applicable) shall be entitled to exercise
any and all voting and other consensual rights pertaining to the
Pledged Collateral or any part thereof for any purpose not
inconsistent with the terms of this Agreement;
(2) notwithstanding the provisions of Section 1 hereof, such
Grantors shall be entitled to receive and retain any and all dividends
and other distributions paid in respect of the Pledged Collateral;
provided, that any and all
--------
(A) dividends paid or payable other than in cash in respect of,
and instruments and other property received, receivable or
otherwise distributed in respect of, or in exchange for, any
Pledged Collateral, and
(B) dividends and other distributions paid or payable in cash in
respect of any Pledged Collateral in connection with a
partial or total liquidation or dissolution or in connection
with a reduction of capital, capital surplus or paid-in-
surplus,
10
<PAGE>
(C) cash paid, payable or otherwise distributed in respect of, or
in redemption of, or in exchange for, any Pledged Shares;
shall be, and shall be forthwith delivered to the Agent, to hold as Pledged
Collateral and shall, if received by any of the Grantors, be received in
trust for the benefit of the Agent, be segregated from the other property or
funds of such Grantor, and be forthwith delivered to the Agent as Pledged
Collateral in the same form as so received (with any necessary endorsement);
and
(3) the Agent shall execute and deliver (or cause to be executed
and delivered) to the Grantors (as applicable) all such proxies and other
instruments as the Grantors (as applicable) may reasonably request for
the purpose of enabling such Grantor to exercise the voting and other
rights which it is entitled to exercise pursuant to paragraph (i) above
and to receive the dividends which it is authorized to receive and retain
pursuant to paragraph (ii) above;
(2) Upon the occurrence and during the continuance of an Event of
Default:
(1) upon written notice from the Agent to the Grantors (as
applicable) to such effect, all rights of such Grantors (as applicable)
to exercise the voting and other consensual rights which it would
otherwise be entitled to exercise pursuant to Section 9(a)(i) and to
receive the dividends which it would otherwise be authorized to receive
and retain pursuant to Section 9(a)(ii) shall cease, and all such rights
shall thereupon become vested in the Agent, who shall thereupon have the
sole right to exercise such voting and other consensual rights and to
receive and hold as Pledged Collateral any such dividends; and
(2) all dividends which are received by such Grantors contrary to
the provisions of paragraph (i) of this Section 9(b) shall be received in
trust for the benefit of the Agent, shall be segregated from other funds
of the Grantors and shall be forthwith paid over to the Agent as Pledged
Collateral in the same form as so received (with any necessary
endorsement).
SECTION 10. Insurance. Upon the occurrence and during the continuance of
---------
any Event of Default, all insurance payments in respect of Inventory and
Equipment shall be held, applied and paid to the Agent as specified in Section
15 hereof.
SECTION 11. Transfers to Others; Liens; Additional Shares. Each Grantor
---------------------------------------------
shall not:
(1) Sell, assign (by operation of law or otherwise) or otherwise
dispose of any of the Collateral, except for dispositions otherwise permitted by
the Credit Agreement.
(2) Create or suffer to exist any lien, security interest or other
charge or encumbrance upon or with respect to any of the Collateral to secure
any obligation of any person or
11
<PAGE>
entity, except for the security interest created by this Agreement and the
Orders, or except as otherwise permitted by the Credit Agreement.
(3) Each of the Grantors (as applicable) agrees that it will (i)
cause each of the Issuers that are wholly-owned Subsidiaries not to issue any
stock or other securities in addition to or substitution for the Pledged Shares
issued by such Issuer, except to the respective Grantor and (ii) pledge
hereunder, immediately upon its acquisition (directly or indirectly) thereof,
any and all such additional shares of stock or other securities of each Issuer
of the Pledged Shares.
SECTION 12. Agent Appointed Attorney-in-Fact. Each Grantor hereby
--------------------------------
irrevocably appoints the Agent such Grantor's attorney-in-fact (which
appointment shall be irrevocable and deemed coupled with an interest), with full
authority in the place and stead of such Grantor and in the name of such Grantor
or otherwise, from time to time in the Agent's discretion, upon and during the
occurrence and continuation of an Event of Default, to take any action and to
execute any instrument which the Agent may deem necessary or advisable to
accomplish the purposes of this Agreement, including, without limitation:
(1) to obtain and adjust insurance required to be paid to the
Agent pursuant to Section 10,
(2) to ask, demand, collect, sue for, recover, compound,
receive and give acquittance and receipts for moneys due and to become
due under or in respect of any of the Collateral,
(3) to receive, endorse, and collect any drafts or other
instruments, documents and chattel paper, in connection with clause (i)
or (ii) above,
(4) to receive, endorse and collect all instruments made
payable to the Grantors representing any dividend or other distribution
in respect of the Pledged Collateral or any part thereof and to give
full discharge for the same, and
(5) to file any claims or take any action or institute any
proceedings which the Agent may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights
of the Agent with respect to any of the Collateral.
SECTION 13. Agent May Perform. If any Grantor fails to perform any
-----------------
agreement contained herein, the Agent may itself perform, or cause performance
of, such agreement, and the reasonable expenses of the Agent incurred in
connection therewith (as to which invoices have been furnished) shall be payable
by the Grantors under Section 16(b).
SECTION 14. The Agent's Duties. The powers conferred on the Agent
------------------
hereunder are solely to protect its interest and the interests of the Banks in
the Collateral and shall not impose any duty upon it to exercise any such
powers. Except for the safe custody of any Collateral in its possession and the
accounting for moneys actually received by it hereunder, the Agent shall have no
12
<PAGE>
duty as to any Collateral or as to the taking of any necessary steps to preserve
rights against prior parties or any other rights pertaining to any Collateral,
including, without limitation, ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders or other matters relative to
any Pledged Collateral, whether or not the Agent has or is deemed to have
knowledge of such matters.
SECTION 15. Remedies. If any Event of Default shall have occurred and be
--------
continuing, and subject to the provisions of Section 7 of the Credit Agreement:
(1) The Agent may exercise in respect of the Collateral, in addition
to other rights and remedies provided for herein or otherwise available to it,
and without application to or order of the Bankruptcy Court, all the rights and
remedies of a secured party on default under the Uniform Commercial Code and
also may (i) require each Grantor to, and each Grantor hereby agrees that it
will at its expense and upon request of the Agent forthwith, assemble all or
part of the Collateral as directed by the Agent and make it available to the
Agent at a place to be designated by the Agent which is reasonably convenient to
both parties and (ii) without notice except as specified in the following
sentence, sell the Collateral or any part thereof in one or more parcels at
public or private sale, at any of the Agent's offices or elsewhere, for cash, on
credit or for future delivery, and at such price or prices and upon such other
terms as the Agent may deem commercially reasonable. Each Grantor agrees that,
to the extent notice of such sale shall be required by law, at least ten days'
notice to the Grantors of the time and place of any public sale or the time
after which any private sale is to be made shall constitute reasonable
notification. The Agent shall not be obligated to make any sale of Collateral
regardless of notice of sale having been given. The Agent may adjourn any
public or private sale from time to time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned.
(2) The Agent may instruct the Grantors not to make any further use
of the Patents, Copyrights or Trademarks or any mark similar thereto for any
purpose to the extent that such use would be inconsistent with the exercise by
the Agent of any other remedies under this Section.
(3) The Agent may license, whether general, special or otherwise, and
whether on an exclusive or nonexclusive basis, any of the Trademarks, Patents or
Copyrights throughout the world for such term or terms, on such conditions, and
in such manner, as the Agent shall in its sole discretion determine; provided,
--------
however, that any such license shall not conflict with any existing license or
sublicense.
(4) The Agent may (without assuming any obligations or liability
thereunder), at any time, enforce (and shall have the exclusive right to
enforce) against any licensee or sublicensee all rights and remedies of the
Grantors in, to and under any one or more license agreements with respect to the
Collateral, and take or refrain from taking any action under any thereof, and
each of the Grantors hereby releases the Agent from, and agrees to hold the
Agent free and harmless from and against any claims arising out of, any action
taken or omitted to be taken with respect to any such license agreement except
claims involving gross negligence, willful misconduct or bad faith of the Agent.
13
<PAGE>
(5) In the event of any such license, assignment, sale or other
disposition of the Collateral, or any of it, each Grantor shall supply its know-
how and expertise relating to the Trademarks, Patents or Copyrights, and its
customer lists and other records relating to the Trademarks, Patents or
Copyrights to the Agent or its designee.
(6) In order to implement the assignment, sale or other disposal of
any of the Trademarks, Patents or Copyrights, the Agent may, at any time,
pursuant to the authority granted in Section 12 hereof, execute and deliver on
behalf of the Grantors, one or more instruments of assignment of the Trademarks,
Patents or Copyrights (or any application of registration thereof), in form
suitable for filing, recording or registration in any country.
(7) All cash proceeds received by the Agent in respect of any sale
of, collection from, or other realization upon all or any part of the Collateral
may, in the discretion of the Agent, be held by the Agent as collateral for, and
then or at any time thereafter applied (after payment of any amounts payable to
the Agent pursuant to Section 16 hereof) in whole or in part against, all or any
part of the Obligations in such order as the Agent shall elect. Any surplus of
such cash or cash proceeds held by the Agent and remaining after payment in full
of all the Obligations shall be paid over to the Grantors or to whomsoever may
be lawfully entitled to receive such surplus.
(8) If at any time when the Agent shall determine to exercise its
right to sell all or any part of the Pledged Collateral pursuant to this Section
15, such Pledged Collateral or the part thereof to be sold shall not be
effectively registered under the Securities Act of 1933, as amended, and as from
time to time in effect, and the rules and regulations thereunder (the
"Securities Act"), the Agent is hereby expressly authorized to sell such Pledged
--------------
Collateral or such part thereof by private sale in such manner and under such
circumstances as the Agent may deem necessary or advisable in order that such
sale may legally be effected without such registration. Without limiting the
generality of the foregoing, in any such event the Agent, in compliance with
applicable securities laws, (a) may proceed to make such private sale
notwithstanding that a registration statement for the purpose of registering
such Pledged Collateral or such part thereof shall have been filed under such
Securities Act, (b) may approach and negotiate with a restricted number of
potential purchasers to effect such sale and (c) may restrict such sale to
purchasers as to their number, nature of business and investment intention
including without limitation to purchasers each of whom will represent and agree
to the satisfaction of the Agent that such purchaser is purchasing for its own
account, for investment, and not with a view to the distribution or sale of such
Pledged Collateral, or part thereof, it being understood that the Agent may
cause or require each Grantor, and each Grantor hereby agrees upon the written
request of the Agent, to cause (i) a legend or legends to be placed on the
certificates to be delivered to such purchasers to the effect that the Pledged
Collateral represented thereby have not been registered under the Securities Act
and setting forth or referring to restrictions on the transferability of such
securities; and (ii) the issuance of stop transfer instructions to such Issuer's
transfer agent, if any, with respect to the Pledged Collateral, or, if such
Issuer transfers its own securities, a notation in the appropriate records of
such Issuer. In the event of any such sale, each Grantor does hereby consent
and agree that the Agent shall incur no responsibility or liability for selling
all or any part of the Pledged Collateral at a price which the Agent may deem
reasonable
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<PAGE>
under the circumstances, notwithstanding the possibility that a substantially
higher price might be realized if the sale were public and deferred until after
registration as aforesaid.
SECTION 16. Indemnity and Expenses.
----------------------
(1) Each Grantor, jointly and severally, agrees to indemnify the
Agent from and against any and all claims, losses and liabilities growing out of
or resulting from this Agreement (including, without limitation, enforcement of
this Agreement), except claims, losses or liabilities directly arising from the
Agent's own gross negligence, willful misconduct or bad faith.
(2) The Grantors will upon demand pay to the Agent the amount of any
and all reasonable expenses (as to which invoices have been furnished),
including the reasonable fees and disbursements of its counsel and of any
experts and agents, which the Agent may incur in connection with (i) the
administration of this Agreement, (ii) the custody, preservation, use or
operation of, or the sale of, collection from, or other realization upon, any of
the Collateral, (iii) the exercise or enforcement of any of the rights of the
Agent hereunder or (iv) the failure by any of the Grantors to perform or observe
any of the provisions hereof.
(3) The Grantors assume all responsibility and liability arising from
the use of the Trademarks, Patents and Copyrights.
(4) Each of the Grantors agrees that the Agent does not assume, and
shall have no responsibility for, the payment of any sums due or to become due
under any agreement or contract included in the Collateral or the performance of
any obligations to be performed under or with respect to any such agreement or
contract by any of the Grantors, and except as the same may have resulted from
the gross negligence, willful misconduct or bad faith of the Agent, each of the
Grantors hereby jointly and severally agree to indemnify and hold the Agent
harmless with respect to any and all claims by any person relating thereto.
SECTION 17. Security Interest Absolute. All rights of the Agent and
--------------------------
security interests hereunder, and all obligations of each of the Grantors
hereunder, shall be absolute and unconditional, irrespective of any circumstance
which might constitute a defense available to, or a discharge of, any guarantor
or other obligor in respect of the Obligations.
SECTION 18. Amendments; Etc. No amendment or waiver of any provision of
---------------
this Agreement, nor any consent to any departure by any of the Grantors
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the party against whom enforcement is sought, and then such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given.
SECTION 19. Addresses for Notices. All notices and other communications
---------------------
provided for hereunder shall be in writing and shall be given in accordance with
the applicable provisions of the Credit Agreement.
15
<PAGE>
SECTION 20. Continuing Security Interest. This Agreement shall create a
----------------------------
continuing security interest in the Collateral and shall (i) remain in full
force and effect until payment in full of the Obligations, (ii) be binding upon
each of the Grantors, their successors and assigns and (iii) inure, together
with the rights and remedies of the Agent hereunder, to the benefit of the Agent
and each of the Banks and their respective successors, transferees and assigns.
Upon the payment in full of the Obligations, the security interest granted
hereby shall terminate and all rights to the Collateral shall revert to the
Grantors subject to any existing liens, security interests or encumbrances on
such Collateral. Upon any such termination, the Agent will, at the Grantor's
expense, execute and deliver to the Grantors such documents as the Grantors
shall reasonably request to evidence such termination.
SECTION 21. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York, except as
required by mandatory provisions of law and except to the extent that the
validity or perfection of the security interest hereunder, or remedies
hereunder, in respect of any particular Collateral are governed by the laws of a
jurisdiction other than the State of New York and by Federal law (including,
without limitation, the Bankruptcy Code) to the extent the same has pre-empted
the law of the State of New York or such other jurisdiction.
SECTION 22. Headings. Section headings in this Agreement are included
--------
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
[SIGNATURE PAGES FOLLOW]
IN WITNESS WHEREOF, each of the Grantors and the Agent have caused this
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.
GRANTORS:
MARINER POST-ACUTE NETWORK, INC.
By:__________________________________
Name:
Title:
AMERICAN MEDICAL INSURANCE BILLING SERVICES, INC.
AMERICAN PHARMACEUTICAL SERVICES, INC.
AMERICAN REHABILITY SERVICES, INC.
AMERICAN-CAL MEDICAL SERVICES, INC.
AMERRA PROPERTIES, INC.
AMS GREEN TREE, INC.
16
<PAGE>
AMS PROPERTIES, INC.
APS HOLDING COMPANY, INC.
APS PHARMACY MANAGEMENT, INC.
BRIAN CENTER HEALTH &
RETIREMENT/ALLEGHANY, INC.
BRIAN CENTER HEALTH &
RETIREMENT/BASTIAN, INC.
BRIAN CENTER HEALTH &
RETIREMENT/TAMPA, INC.
BRIAN CENTER HEALTH &
RETIREMENT/WALLACE, INC.
BRIAN CENTER MANAGEMENT CORPORATION
BRIAN CENTER NURSING CARE/AUSTELL, INC.
BRIAN CENTER NURSING CARE/FINCASTLE, INC.
BRIAN CENTER NURSING CARE/HICKORY, INC.
BRIAN CENTER NURSING CARE/POWDER SPRINGS, INC.
BRIAN CENTER OF ASHEBORO, INC.
BRIAN CENTER OF CENTRAL COLUMBIA, INC.
CAMBRIDGE BEDFORD, INC.
CAMBRIDGE EAST, INC.
CAMBRIDGE NORTH, INC.
CAMBRIDGE SOUTH, INC.
CLINTONAIRE NURSING HOME, INC.
CONNERWOOD HEALTHCARE, INC.
CORNERSTONE HEALTH MANAGEMENT COMPANY
CRESTMONT HEALTH CENTER, INC.
DEVCON HOLDING COMPANY
EH ACQUISITION CORP.
EH ACQUISITION CORP. II
EH ACQUISITION CORP. III
EVERGREEN HEALTHCARE LTD., L.P.
EVERGREEN HEALTHCARE, INC.
FRENCHTOWN NURSING HOME, INC.
GC SERVICES, INC.
GCI BELLA VITA, INC.
GCI CAMELLIA CARE CENTER, INC.
GCI COLTER VILLAGE, INC.
17
<PAGE>
GCI EAST VALLEY MEDICAL & REHABILITATION CENTER, INC.
GCI FAITH NURSING HOME, INC.
GCI HEALTH CARE CENTERS, INC.
GCI JOLLEY ACRES, INC.
GCI PALM COURT, INC.
GCI PRINCE GEORGE, INC.
GCI REHAB, INC.
GCI SPRINGDALE VILLAGE, INC.
GCI THERAPIES, INC.
GCI VILLAGE GREEN, INC.
GCI-CAL THERAPIES COMPANY
GCI-WISCONSIN PROPERTIES, INC.
GRANCARE HOME HEALTH SERVICES, INC.
GRANCARE OF MICHIGAN, INC.
GRANCARE OF NORTH CAROLINA, INC.
GRANCARE OF NORTHERN CALIFORNIA, INC.
GRANCARE SOUTH CAROLINA, INC.
GRANCARE, INC.
HAWK'S-PERIMETER, INC.
HERITAGE NURSING HOME, INC.
HERITAGE OF LOUISIANA, INC.
HMI CONVALESCENT CARE, INC.
HOSPICE ASSOCIATES OF AMERICA, INC.
HOSTMASTERS, INC.
INTERNATIONAL HEALTH CARE MANAGEMENT, INC.
INTERNATIONAL X-RAY, INC.
LC MANAGEMENT COMPANY
LCA OPERATIONAL HOLDING COMPANY
LCR, INC.
LIVING CENTERS - EAST, INC.
LIVING CENTERS - PHCM, INC.
LIVING CENTERS - ROCKY MOUNTAIN, INC.
LIVING CENTERS - SOUTHEAST DEVELOPMENT CORPORATION
LIVING CENTERS - SOUTHEAST, INC.
LIVING CENTERS DEVELOPMENT COMPANY
LIVING CENTERS HOLDING COMPANY
18
<PAGE>
LIVING CENTERS LTCP DEVELOPMENT COMPANY
LIVING CENTERS OF TEXAS, INC.
MADONNA NURSING CENTER, INC.
MED-THERAPY REHABILITATION SERVICES, INC.
MIDDLEBELT NURSING HOME, INC.
MIDDLEBELT-HOPE NURSING HOME, INC.
NAN-DAN CORP.
NATIONAL HERITAGE REALTY, INC.
NIGHTINGALE EAST NURSING CENTER, INC.
OMEGA/INDIANA CARE CORP.
PROFESSIONAL HEALTH CARE MANAGEMENT, INC.
PROFESSIONAL RX SYSTEMS, INC.
REHABILITY HEALTH SERVICES, INC.
RENAISSANCE MENTAL HEALTH CENTER, INC.
ST. ANTHONY NURSING HOME, INC.
SUMMIT HOSPITAL HOLDINGS, INC.
SUMMIT HOSPITAL OF EAST GEORGIA, INC.
SUMMIT HOSPITAL OF SOUTHEAST ARIZONA, INC.
SUMMIT HOSPITAL OF SOUTHEAST TEXAS, INC.
SUMMIT HOSPITAL OF SOUTHWEST LOUISIANA, INC.
SUMMIT HOSPITAL OF WEST GEORGIA, INC.
SUMMIT INSTITUTE FOR PULMONARY MEDICINE AND
REHABILITATION, INC.
SUMMIT INSTITUTE OF AUSTIN, INC.
SUMMIT INSTITUTE OF WEST MONROE, INC.
SUMMIT MEDICAL HOLDINGS, LTD.
SUMMIT MEDICAL MANAGEMENT, INC.
By: _______________________________
Name:
Title:
19
<PAGE>
THE CHASE MANHATTAN BANK
as Agent
By:_____________________________
Name:
Title:
20
<PAGE>
EXHIBIT 10.98
SECURITY AGREEMENT
SECURITY AGREEMENT dated as of January 20, 2000 ("Agreement") among MARINER
HEALTH GROUP, INC. ("MHG") and the OTHER BORROWERS (this and other capitalized
terms used in this introduction and the recitals below are defined in Section 1
hereof), each as debtor and debtor-in-possession, PNC BANK, NATIONAL
ASSOCIATION, as Collateral Agent and for purposes of Section 6 hereof, First
Union National Bank.
WHEREAS, the Borrowers are entering into the Credit Agreement described in
Section 1 below, pursuant to which the Borrowers intend to borrow funds and
obtain letters of credit, all on the terms and conditions set forth therein;
WHEREAS, the Borrowers are willing to secure their obligations under the
Credit Agreement and the other Financing Documents by granting Liens on their
respective assets to the Collateral Agent as provided in this Agreement and the
other Collateral Documents;
WHEREAS, the Lenders and the LC Issuing Bank are not willing to make loans
or maintain, issue or participate in letters of credit under the Credit
Agreement unless the foregoing obligations of the Borrowers are secured by Liens
on their assets as provided in the Collateral Documents; and
WHEREAS, upon any foreclosure or other enforcement of the Collateral
Documents, the net proceeds of the relevant Collateral are to be received by or
paid over to the Collateral Agent and applied as provided in Section 15 of this
Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. Definitions. Terms defined in the Credit Agreement and not
otherwise defined herein have, as used herein, the respective meanings provided
for therein. The following additional terms, as used herein, have the following
meanings:
"Accounts" means, with respect to any Grantor, all " accounts" (as defined
in the UCC) now owned or hereafter acquired by such Grantor, and also means and
includes all Medicare Receivables, Medicaid Receivables, VA Receivables,
accounts receivable, contract rights, book debts, notes, drafts and other
obligations or indebtedness owing to such Grantor arising from the performance
of services by it and/or the sale, lease or exchange of goods or other property
by it (including, without limitation, any such obligation or indebtedness which
might be characterized as an account, contract right or general intangible under
the Uniform Commercial Code in effect in any applicable jurisdiction) and all of
such Grantor's rights in, to and under all contracts or purchase orders for
goods, services or other property, and all of such Grantor's rights to any
goods, services or other property represented by any of the foregoing and all
monies due to or to become due to such Grantor under all contracts for the
performance of services by it and/or the sale, lease or exchange of goods or
other property by it (whether or not yet earned by performance on the part of
such Grantor), in each case whether now existing or hereafter arising
<PAGE>
or acquired, including, without limitation, the right to receive the proceeds of
said contracts and purchase orders and all collateral security and guarantees of
any kind given by any Person with respect to any of the foregoing.
"Borrowers" means Mariner Health Group, Inc. and each of its Subsidiaries
party as a "Borrower" to the Credit Agreement.
"Cash Distributions" means dividends, interest and other payments and
distributions made in cash upon or with respect to the Collateral.
"Cash Management System" means the cash management system of the Borrowers
described in the Credit Agreement.
"Cash Proceeds Account" has the meaning set forth in Section 7(d).
"Casualty Proceeds Account" has the meaning set forth in Section 7(b).
"Collateral" means all property, whether now owned or hereafter acquired,
in which a security interest or other Lien is granted or purported to be granted
to the Collateral Agent pursuant to the Collateral Documents. When used with
respect to a specific Grantor, the term "Collateral" means all such property in
which such a security interest or other Lien is granted or purported to be
granted to the Collateral Agent by such Grantor.
"Collateral Accounts" means the Casualty Proceeds Accounts, the Cash
Proceeds Accounts and the LC Collateral Account.
"Collateral Agent" means PNC Bank, National Association, in its capacity as
Collateral Agent for the holders of the Secured Obligations under the Collateral
Documents, and its successors in such capacity.
"Collateral Documents" means this Agreement, the Mortgages and all other
supplemental or additional security agreements, mortgages or similar instruments
delivered pursuant hereto or thereto.
"Concentration Account Bank" has the meaning set forth in Section 6(a).
"Concentration Accounts" has the meaning set forth in Section 6(a).
"Contingent Secured Obligation" means, at any time, any Secured Obligation
(or portion thereof) that is contingent in nature at such time, including
(without limiting the generality of the foregoing):
(i) any obligation to reimburse a bank for drawings not yet made
under a letter of credit issued by such bank, or any Guarantee of any such
obligation;
(ii) any obligation to provide collateral to or for the benefit of a
bank to secure reimbursement obligations arising from drawings not yet made
under a letter of credit issued by such bank, or any Guarantee of any such
obligation; and
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<PAGE>
(iii) any other Secured Obligation which is contingent in nature at
the time of determination.
"Copyright License" means any agreement now or hereafter in existence
granting to any Grantor, or pursuant to which any Grantor has granted to any
other Person, any right to use, copy, reproduce, distribute, prepare derivative
works, display or publish any records or other materials on which a Copyright is
in existence or may come into existence.
"Copyrights" means all the following: (i) all copyrights under the laws of
the United States or any other country (whether or not the underlying works of
authorship have been published), all registrations and recordings thereof, all
copyrightable works of authorship (whether or not published), and all
applications for copyrights under the laws of the United States or any other
country, including, without limitation, registrations, recordings and
applications in the United States Copyright Office or in any similar office or
agency of the United States, any State thereof or any other country or any
political subdivision thereof, (ii) all renewals thereof, (iii) all claims for,
and rights to sue for, past or future infringements of any of the foregoing, and
(iv) all income, royalties, damages and payments now or hereafter due or payable
with respect to any of the foregoing, including, without limitation, damages and
payments for past or future infringements thereof.
"Credit Agreement" means the Debtor-In-Possession Credit Agreement dated as
of January 20, 2000 among the Borrowers, the Lenders, First Union National Bank,
as Syndication Agent, PNC Capital Markets, Inc. and First Union Securities,
Inc., as Co-Arrangers and PNC Bank, National Association, as Collateral Agent
and Administrative Agent, and as an issuing bank for Letters of Credit
thereunder, as amended from time to time.
"Documents" means, with respect to any Grantor, all "documents" (as defined
in the UCC) or other receipts covering, evidencing or representing goods, now
owned or hereafter acquired by such Grantor.
"Enforcement Notice" means a notice delivered to the Collateral Agent by
the Administrative Agent pursuant to Section 8.03 of the Credit Agreement
directing the Collateral Agent to exercise one or more specific rights or
remedies under the Collateral Documents.
"Equipment" means, with respect to any Grantor, all "equipment" (as defined
in the UCC) now owned or hereafter acquired by it, wherever located.
"Equity Interest" means (i) in the case of a corporation, any shares of its
capital stock, (ii) in the case of a limited liability company, any membership
interest therein, (iii) in the case of a partnership, any partnership interest
(whether general or limited) therein, (iv) in the case of any other business
entity, any participation or other interest in the equity or profits thereof or
(v) any warrant, option or other right to acquire any Equity Interest described
in the foregoing clauses (i), (ii), (iii) and (iv).
"General Intangibles" means, with respect to any Grantor, all "general
intangibles" (as defined in the UCC) now owned or hereafter acquired by such
Grantor, including, without limitation, (i) all obligations or indebtedness
owing to such Grantor (other than Accounts) from whatever source arising, (ii)
all Intellectual Property, goodwill, trade names, service marks, trade
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<PAGE>
secrets, permits and licenses, (iii) all rights or claims in respect of refunds
for taxes paid and (iv) all rights in respect of any pension plan or similar
arrangement maintained for employees of any member of the ERISA Group.
"Goods" means, with respect to any Grantor, all "goods" (as defined in the
UCC) now owned or hereafter acquired by it, wherever located.
"Grantor" means any Borrower.
"Instruments" means, with respect to any Grantor, all "instruments",
"chattel paper" or "letters of credit" (each as defined in the UCC) evidencing,
representing, arising from or existing in respect of, relating to, securing or
otherwise supporting the payment of, any Account or other obligation or
indebtedness owing to such Grantor, including (but not limited to) promissory
notes, drafts, bills of exchange and trade acceptances, now owned or hereafter
acquired by such Grantor.
"Intellectual Property" means (i) Patents, (ii) Patent Licenses, (iii)
Trademarks, (iv) Trademark Licenses, (v) Copyrights and (vi) Copyright Licenses,
and all rights in or under any of the foregoing.
"Inventory" means, with respect to any Grantor, all "inventory" (as defined
in the UCC), now owned or hereafter acquired by it, wherever located.
"LC Collateral Account" has the meaning set forth in Section 7(e).
"Liquid Investments" has the meaning set forth in Section 7(g).
"Medicaid Receivable" means any Account with respect to which the obligor
is a state governmental authority (or agent thereof) obligated to pay, pursuant
to federal or state Medicaid program statutes or regulations, for services
rendered to eligible beneficiaries thereunder.
"Medicare Receivable" means any Account with respect to which the obligor
is a federal governmental authority (or agent thereof) obligated to pay,
pursuant to federal Medicare program statutes or regulations, for services
rendered to eligible beneficiaries thereunder.
"Non-Contingent Secured Obligation" means at any time any Secured
Obligation (or portion thereof) that is not a Contingent Secured Obligation at
such time.
"Notice of Redirection" has the meaning set forth in Section 6.
"Patent License" means any agreement now or hereafter in existence granting
any Grantor, or pursuant to which any Grantor has granted to any other Person,
any right with respect to any Patent or any invention now or hereafter in
existence, whether patentable or not, whether a patent or application for patent
is in existence on such invention or not, and whether a patent or application
for patent on such invention may come into existence or not.
"Patents" means (i) all letters patent and design letters patent of the
United States or any other country and all applications for letters patent and
design letters patent of the United States
4
<PAGE>
or any other country, including, without limitation, applications in the United
States Patent and Trademark Office or in any similar office or agency of the
United States, any State thereof or any other country or any political
subdivision thereof, (ii) all reissues, divisions, continuations, continuations-
in-part, revisions and extensions thereof, (iii) all claims for, and rights to
sue for, past or future infringements of any of the foregoing and (iv) all
income, royalties, damages and payments now or hereafter due or payable with
respect to any of the foregoing, including, without limitation, damages and
payments for past or future infringements thereof.
"Perfection Certificate" means, with respect to any Grantor, a certificate
substantially in the form of Exhibit A hereto, completed and supplemented with
---------
the schedules and attachments contemplated thereby to the satisfaction of the
Collateral Agent, and duly executed by a duly authorized officer of such
Grantor.
"Permitted Liens" means (i) the Security Interests and (ii) the other Liens
on the Collateral permitted to be created or assumed or to exist pursuant to
Section 7.02 of the Credit Agreement.
"Personal Property Collateral" means at any time, with respect to any
Grantor, all its property included in the Collateral at such time, other than
its Real Property Collateral.
"Personal Property Security Interests" means the security interests in
Personal Property Collateral granted by the Grantors under the Collateral
Documents.
"Pledged Equity Interests" means at any time all Equity Interests included
in the Collateral at such time.
"Pledged Equity Securities" means at any time all "certificated securities"
(as such term is defined in Article 8 of the UCC) that evidence or represent
Pledged Equity Interests at such time.
"Pledged Instruments" means at any time all Instruments included in the
Collateral at such time.
"Pledged LLC Interest" means at any time any membership interest or similar
interest in a limited liability company that is included in the Pledged Equity
Interests at such time.
"Pledged Partnership Interest" means at any time any partnership interest
(whether general or limited) that is included in the Pledged Equity Interests at
such time.
"Post-Petition Interest" means any interest which accrues after the
commencement of any case, proceeding or other action relating to the bankruptcy,
insolvency or reorganization of the Borrowers, whether or not such interest is
allowed or allowable as a claim in any such proceeding.
"Proceeds" means, with respect to any Grantor, all proceeds of, and all
other profits, products, rents or receipts, in whatever form, arising from the
collection, sale, lease, exchange, assignment, licensing or other disposition
of, or other realization upon, its Collateral, including without limitation all
claims of such Grantor against third parties for loss of, damage to or
5
<PAGE>
destruction of, or for proceeds payable under, or unearned premiums with respect
to, policies of insurance in respect of, any of its Collateral, and any
condemnation or requisition payments with respect to any of its Collateral, in
each case whether now existing or hereafter arising.
"Real Property Collateral" means at any time, with respect to any Grantor,
all its real property (including leasehold interests in real property) included
in the Collateral at such time.
"Real Property Security Interests" means the security interests in Real
Property Collateral granted by the Grantors under the Mortgages and the other
Collateral Documents.
"Secured Obligations" means the Obligations including, without limitation,
Obligations arising under this Agreement.
"Secured Parties" means the holders from time to time of the Secured
Obligations.
"Secured Parties Requesting Notice" means, at any time, each Secured Party
which has, at least five Business Days prior thereto, delivered to the
Collateral Agent a written notice (a) stating that it holds one or more Secured
Obligations and wishes to receive copies of the notices referred to in Section
16(i) and (b) setting forth its address or facsimile number to which copies of
such notices should be sent.
"Security Interests" means the Personal Property Security Interests and the
Real Property Security Interests.
"Trademark License" means any agreement now or hereafter in existence
granting to any Grantor, or pursuant to which any Grantor has granted to any
other Person, any right to use any Trademark.
"Trademarks" means: (i) all trademarks, trade names, corporate names,
company names, business names, fictitious business names, trade styles, service
marks, logos, brand names, trade dress, prints and labels on which any of the
foregoing have appeared or appear, package and other designs, and any other
source or business identifiers, and general intangibles of like nature, and the
rights in any of the foregoing which arise under applicable law, (ii) the
goodwill of the business symbolized thereby or associated with each of them,
(iii) all registrations and applications in connection therewith, including,
without limitation, registrations and applications in the United States Patent
and Trademark Office or in any similar office or agency of the United States,
any State thereof or any other country or any political subdivision thereof,
(iv) all renewals thereof, (v) all claims for, and rights to sue for, past or
future infringements of any of the foregoing and (vi) all income, royalties,
damages and payments now or hereafter due or payable with respect to any of the
foregoing, including, without limitation, damages and payments for past or
future infringements thereof.
"UCC" means the Uniform Commercial Code as in effect on the date hereof in
the State of New York; provided that if, by reason of mandatory provisions of
law, the perfection or the effect of perfection or non-perfection of any
Security Interest in any Collateral is governed by the Uniform Commercial Code
as in effect in a jurisdiction other than New York, "UCC" means the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the
provisions hereof relating to such perfection or effect of perfection or non-
perfection.
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<PAGE>
"VA Receivable" means any Account with respect to which the obligor is the
Veterans' Administration or any successor thereto (or any agent thereof).
SECTION 2. Representations and Warranties. Each Grantor represents and
warrants that:
(a) As of the Closing Date, such Grantor owns the Equity Interests listed
as being owned by it in Schedule 3 to the Credit Agreement, free and clear of
any Lien other than Permitted Liens. All shares of capital stock identified in
such Schedule as being beneficially owned by such Grantor have been duly
authorized and validly issued, are fully paid and non-assessable, and are
subject to no option to purchase or similar right of any Person. Such Grantor
is not and will not become a party to or otherwise bound by any agreement, other
than the Financing Documents and the Organizational Documents of the issuer of
such Pledged Equity Interests, which restricts in any manner the rights of any
present or future holder of any Pledged Equity Interest with respect thereto.
(b) Such Grantor has good and marketable title to all of its Collateral,
free and clear of any Liens other than Permitted Liens. Such Grantor has taken
all actions necessary under the UCC to perfect its interest in any Accounts
purchased or otherwise acquired by it, as against its assignors and creditors of
its assignors.
(c) Other than granting Permitted Liens, such Grantor has not performed
any acts that might prevent the Collateral Agent from enforcing any of the
provisions of the Collateral Documents or that would limit the Collateral Agent
in any such enforcement. No financing statement, security agreement, mortgage or
similar or equivalent document or instrument covering all or any part of the
Collateral owned by it is on file or of record in any jurisdiction in which such
filing or recording would be effective to perfect or record a Lien on such
Collateral, except financing statements, mortgages or other similar or
equivalent documents with respect to Permitted Liens. After the Closing, no
Collateral owned by it will be in the possession of any Person (other than such
Grantor) asserting any claim thereto or security interest therein (except
Permitted Liens), except that (i) the Collateral Agent or its designee may have
possession of Collateral as contemplated hereby and (ii) cash and Temporary Cash
Investments may be held in the Concentration Accounts or in other accounts to
the extent permitted by Section 7.13 of the Credit Agreement.
(d) Such Grantor has delivered a Perfection Certificate to the Collateral
Agent. The information set forth therein is correct and complete as of the
Closing Date.
(e) The Security Interests constitute valid security interests in all
Collateral owned by such Grantor, thereby securing its Secured Obligations, and,
upon entry of the Interim Borrowing Order or the Borrowing Order, constitute
security interests therein prior to all other Liens other than Liens permitted
under the Credit Agreement to be senior in priority to the liens of the Lenders.
(f) Such Grantor's Collateral is insured in accordance with, and to the
extent required by, the requirements of the Credit Agreement.
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SECTION 3. The Security Interests.
(a) In order to secure the full and punctual payment of its Secured
Obligations in accordance with the terms thereof, each Grantor hereby pledges
and assigns to the Collateral Agent and grants to the Collateral Agent for the
benefit of the Secured Parties a continuing security interest in and to all
right, title and interest of such Grantor in, to and under all of the following
property of such Grantor, whether now owned or existing or hereafter acquired or
arising and regardless of where located:
(i) all Accounts;
(ii) all Documents;
(iii) all Equipment;
(iv) all General Intangibles;
(v) all Goods;
(vi) all Instruments;
(vii) all Inventory;
(viii) all Equity Interests in other Persons now or hereafter
beneficially owned by such Grantor, all rights and privileges of such Grantor
with respect to such Equity Interests, and all dividends, distributions and
other payments with respect thereto;
(ix) all Real Property;
(x) all books and records (including, without limitation, customer
lists, credit files, computer programs, printouts and other computer materials
and records) of such Grantor pertaining to any of its Collateral;
(xi) such Grantor's ownership interest in all Deposit Accounts in
the Cash Management System including, without limitation, the Collateral
Accounts, all cash deposited therein from time to time, all Liquid Investments
made with amounts on deposit therein and all of such Grantor's other monies and
property of any kind in the possession or under the control of the Collateral
Agent; and
(xii) all Proceeds of the collateral described in the foregoing
clauses (i) through (xi).
(b) The Security Interests are granted as security only and shall not
subject the Collateral Agent or any other Secured Party to, or transfer or in
any way affect or modify, any obligation or liability of any Grantor with
respect to any of the Collateral or any transaction in connection therewith.
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Notwithstanding the foregoing, the security interest granted under clause
(xi) shall be subject to rights in favor of any bank administering any account
in the Cash Management System under any applicable order of the Court or under
Applicable Law.
SECTION 4. Delivery of Certain Collateral. (a) On the Closing Date, each
Grantor is delivering to the Collateral Agent as Collateral hereunder all stock
certificates or other certificates representing Equity Interests in other
Persons then owned by it and not previously delivered to the "Collateral Agent"
under the Existing Credit Facilities. All such previously delivered certificates
held on the Closing Date by such "Collateral Agent" shall be deemed held by the
Collateral Agent hereunder.
(b) After the Closing Date, if any Grantor receives (i) any stock
certificate or other certificate representing Equity Interests in another Person
then owned by it or (ii) any Instrument, in which a security interest is granted
pursuant to Section 3 hereof, such Grantor will immediately deliver such
certificate or Instrument to the Collateral Agent to be held by it as Collateral
hereunder.
(c) Notwithstanding the foregoing, so long as no Event of Default shall
have occurred and be continuing, each Grantor may retain for collection in the
ordinary course any Instruments received by it in the ordinary course of
business, and the Collateral Agent shall, promptly upon request by such Grantor,
make appropriate arrangements for making any other Instrument pledged by such
Grantor hereunder available to it for purposes of presentation, collection or
renewal (any such arrangement to be effected, to the extent deemed appropriate
by the Collateral Agent, against trust receipt or like document).
(d) All Pledged Equity Securities delivered to the Collateral Agent
hereunder will be delivered in suitable form for transfer by delivery, or
accompanied by duly executed instruments of transfer or assignment in blank, all
in form and substance satisfactory to the Collateral Agent. All Pledged
Instruments delivered to the Collateral Agent hereunder will be endorsed to the
order of the Collateral Agent, or accompanied by duly executed instruments of
assignment, all in form and substance satisfactory to the Collateral Agent.
SECTION 5. Further Assurances; Covenants. Each Grantor covenants as
follows:
(a) It will not change its name, identity or corporate structure in any
manner unless permitted by Section 7.03 of the Credit Agreement and unless such
Grantor shall have given the Collateral Agent prior notice thereof and delivered
an updated Perfection Certificate.
(b) It will not change (i) the location of its chief executive office or
principal place of business or (ii) the locations where it keeps or holds any
Collateral or any records relating thereto from the applicable locations
described in its Perfection Certificate (after the delivery of such Perfection
Certificate), unless such Grantor shall have given the Collateral Agent prior
notice thereof. It will not in any event change the location of any Collateral
owned by it if such change would cause the Security Interests in such Collateral
to lapse or, if perfected prior to such change of location, cease to be
perfected.
(c) It will, from time to time, at its expense, execute, deliver, file and
record any statement, assignment, instrument, document, agreement or other paper
and take any other action
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(including, without limitation, any Intellectual Property Filings and any
filings of financing or continuation statements under the UCC) that from time to
time may be reasonably necessary or desirable, or that the Collateral Agent may
reasonably request, in order to create, preserve, perfect, confirm or validate
the Security Interests in such Grantor's Collateral or to enable the Collateral
Agent and the other Secured Parties to obtain the full benefits of the
Collateral Documents, or to enable the Collateral Agent to exercise and enforce
any of its rights, powers and remedies thereunder with respect to any of such
Grantor's Collateral. To the extent permitted by applicable law, such Grantor
authorizes the Collateral Agent to execute and file such financing statements or
continuation statements without such Grantor's signature appearing thereon. Such
Grantor agrees that a carbon, photographic, photostatic or other reproduction of
this Agreement or of a financing statement is sufficient as a financing
statement. Such Grantor shall pay the costs of, or incidental to, any recording
or filing of any such financing or continuation statements in which it is named
as the debtor. Such Grantor hereby constitutes the Collateral Agent its
attorney-in-fact to execute and file all Intellectual Property Filings required
or so requested for the foregoing purposes, all acts of such attorney being
hereby ratified and confirmed; and such power, being coupled with an interest,
shall be irrevocable until such Grantor's Collateral is released pursuant to
Section 18.
(d) At least 30 days before it takes any action contemplated by Section
5(a) or 5(b), such Grantor will, at its expense, cause to be delivered to the
Collateral Agent an officer's certificate, in form and substance satisfactory to
the Collateral Agent, to the effect that all financing statements and amendments
or supplements thereto, continuation statements and other documents required to
be recorded or filed in order to perfect and protect the Security Interests
against all creditors of and purchasers from such Grantor (except any
continuation statements specified in such officer's certificate that are to be
filed more than six months after the date thereof) have been filed in each
filing office necessary for such purpose and that all filing fees and taxes, if
any, payable in connection with such filings have been paid to the Collateral
Agent or otherwise paid in full.
(e) If any of its Collateral is at any time in the possession or control
of any warehouseman, bailee or agent, such Grantor will notify such
warehouseman, bailee or agent of the Security Interests and instruct it to hold
all such Collateral for the Collateral Agent's account subject to the Collateral
Agent's instructions.
(f) It shall keep full and accurate books and records relating to its
Collateral, and stamp or otherwise mark such books and records in such manner as
the Collateral Agent may reasonably request in order to reflect the Security
Interests.
(g) It shall use its best efforts, consistent with past practices, to
cause to be collected from its account debtors, as and when due, any and all
amounts owing under or on account of each of its Accounts (including, without
limitation, Accounts which are delinquent, such Accounts to be collected in
accordance with lawful collection procedures) and shall apply forthwith upon
receipt thereof all such amounts as are so collected to the outstanding balance
of such Accounts. Subject to the rights of the Collateral Agent and the other
Secured Parties hereunder if an Event of Default shall have occurred and be
continuing, such Grantor may allow in the ordinary course of business as
adjustments to amounts owing under its Accounts (i) an extension or renewal of
the time or times of payment, or settlement for less than the total unpaid
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balance, which such Grantor finds appropriate in accordance with sound business
judgment and (ii) refunds or credits, all in accordance with such Grantor's
ordinary course of business consistent with its historical collection practices.
The reasonable costs and expenses (including, without limitation, attorney's
fees) of collection, whether incurred by such Grantor or the Collateral Agent,
shall be borne by such Grantor.
(h) If an Enforcement Notice is in effect, such Grantor will, consistent
with the terms of the Credit Agreement, the Interim Borrowing Order and the
Borrowing Order, if requested to do so by the Collateral Agent, promptly notify
(and such Grantor hereby authorizes the Collateral Agent so to notify) each
account debtor in respect of any of its Accounts or Instruments that such
Collateral has been assigned to the Collateral Agent hereunder, and that any
payments due or to become due in respect of such Collateral are to be made
directly to the Collateral Agent or its designee.
(i) Such Grantor will not sell, lease, exchange, assign or otherwise
dispose of, or grant any option with respect to, any of its Collateral; provided
that, unless an Enforcement Notice is in effect, such Grantor may sell, lease or
exchange its Inventory and surplus or worn-out Equipment in the ordinary course
of business and such Grantor may sell any of its Collateral if (x) the sale
thereof does not violate any covenant in the Credit Agreement and (y) in the
case of an Asset Sale, the Net Cash Proceeds thereof are applied to prepay Loans
if required by and as provided in Section 2.08 of the Credit Agreement.
Concurrently with any sale or exchange permitted by the foregoing proviso, the
Security Interests in the assets sold or exchanged (but not in any Proceeds
arising from such sale or exchange) shall cease immediately without any further
action on the part of the Collateral Agent or any other Secured Party. Upon any
such release of the Security Interests with respect to particular Collateral,
the Collateral Agent will, at the expense of the relevant Grantor, execute and
deliver to such Grantor such documents as such Grantor shall reasonably request
to evidence the release of such Security Interests.
(j) Such Grantor will, promptly upon request, provide to the Collateral
Agent all information and evidence it may reasonably request concerning its
Collateral to enable the Collateral Agent to enforce the provisions of the
Collateral Documents.
(k) Such Grantor shall notify the Collateral Agent promptly if it knows
that any application or registration relating to any material Intellectual
Property owned or licensed by it may become abandoned or dedicated, or of any
adverse determination or development (including, without limitation, the
institution of, or any such determination or development in, any proceeding in
the United States Copyright Office, the United States Patent and Trademark
Office or any court) regarding such Grantor's ownership of such material
Intellectual Property, its right to register or patent the same, or its right to
keep and maintain the same. If any of such Grantor's rights to any material
Intellectual Property are infringed, misappropriated or diluted by a third
party, such Grantor shall notify the Collateral Agent within 30 days after it
learns thereof and shall, unless such Grantor shall reasonably determine that
any such action would be of negligible value, economic or otherwise, promptly
sue for infringement, misappropriation or dilution and to recover any and all
damages for such infringement, misappropriation or dilution, and take such other
actions as such Grantor shall reasonably deem appropriate under the
circumstances to protect such Intellectual Property.
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SECTION 6. Concentration Accounts. (a) MHG shall establish one or more
accounts (collectively, the "Concentration Accounts") which shall be maintained
under the sole dominion and control of the Collateral Agent with First Union
National Bank (in such capacity, the "Concentration Account Bank") and into
which all deposits and collected cash owned by the Borrowers shall be deposited
from time to time.
(b) In relationship to the Concentration Bank and all persons and entities
other than the Borrowers, and notwithstanding designation of any of the
Concentration Accounts as in the name of MHG, the Collateral Agent, for the
benefit of itself and the Lenders, shall possess sole dominion and control over
all of the items from time to time on deposit in the Concentration Accounts and
their proceeds, and the Concentration Bank shall be the Collateral Agent's agent
for the purpose of holding and collecting such items and their proceeds. The
Borrowers hereby expressly acknowledge and agree that, except as expressly
provided in clause (c) of this Section 6, the Borrowers do not have any dominion
or control over the use of, or any right or power to withdraw any funds
contained in, to direct any payment from, or to debit, the Concentration
Accounts. The Collateral Agent hereby acknowledges for the benefit of the
Borrowers that the Collateral Agent holds all amounts on deposit from time to
time in the Concentration Accounts, and all proceeds thereof, as collateral
security for the obligations of the Borrowers under the Financing Documents.
(c) Subject to clause (d) of this Section 6, the Collateral Agent hereby
delegates to MHG, prior to delivery by the Collateral Agent to the Concentration
Bank and MHG of written notice substantially in the form of Exhibit B annexed
---------
hereto (any such notice a "Notice of Redirection"), the exclusive right to
instruct the Concentration Bank with respect to matters relating to the
operation and administration of the Concentration Accounts and to withdraw funds
contained in, to direct payments from, and to debit the Accounts; provided that,
--------
upon the delivery by the Collateral Agent to the Concentration Bank and the
Company of a Notice of Redirection, such delegation shall terminate, in which
case the Collateral Agent shall thereafter have the exclusive right with respect
to all such matters relating to the Concentration Accounts and to take all such
actions with respect thereto, unless and until the Collateral Agent notifies the
Concentration Bank to the contrary; and provided further, that nothing in this
-------- -------
Agreement shall affect the obligation of the Borrowers to maintain the Cash
Management System as required under the Credit Agreement. The Concentration Bank
may rely on all instructions given to it by MHG in accordance with this clause
(c) as fully as if such instructions were given by the Collateral Agent. The
Concentration Bank may rely upon any Notice of Redirection and any other
instructions received from the Collateral Agent without independent
determination of whether the Lenders have authorized issuance of such notice or
other instructions or whether such notice or other instructions are otherwise
validly given, and shall have no liability or responsibility to the Borrowers,
the Collateral Agent, any Lender or any other party by reason of any action
taken in conformity with any such Notice of Redirection or other instruction
received from the Collateral Agent.
(d) The Borrowers hereby agree that except as the Collateral Agent and the
Concentration Bank may otherwise agree in advance, no funds and deposits in the
Concentration Accounts shall be invested except pursuant to (i) the "Amended and
Restated CashPivot Agreement" (the "CashPivot Agreement"), a copy of which is
attached as Exhibit C or (ii) the "Repurchase Master Agreement" (the "Repurchase
---------
Agreement"), a copy of which is attached
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as Exhibit D, in either case, only upon the approval of the Court. The Borrowers
---------
hereby assign to the Collateral Agent, as additional collateral for the
Obligations, a security interest in the Borrowers' interest in (i) the CashPivot
Trust Account and the MMA Account, as each is defined in the CashPivot
Agreement, as well as in any other funds that may from time to time be the
subject of investments pursuant to the CashPivot Agreement and (ii) the
Securities, as defined in the Repurchase Agreement.
(e) The Concentration Bank shall deliver its regular bank statements with
respect to the Accounts to the Borrowers and the Collateral Agent at their
notice addresses specified in Section 9.
(f) If an Enforcement Notice is in effect, the Collateral Agent may,
consistent with the terms of the Interim Borrowing Order and the Borrowing
Order, (i) instruct the Concentration Account Bank to retain, in any
Concentration Account, the CashPivot Trust Account or the MMA Account maintained
by it, all cash or other funds and deposits then held by it in the Concentration
Account, the CashPivot Trust Account or the MMA Account, (ii) instruct the
Concentration Account Bank to cease investing any funds and deposits in the
Concentration Account pursuant to the Cash Payout Agreement and/or (iii)
withdraw any amounts held in any Concentration Account, the CashPivot Trust
Account or the MMA Account and apply such amounts in the manner specified in
Section 15.
(g) The Concentration Bank shall in no event be liable or otherwise
responsible to the Borrowers, the Collateral Agent, any Lender or any other
person, firm or corporation for any action taken or any omission under or with
respect to this Agreement in the absence of the Concentration Bank's own gross
negligence or willful misconduct. The Borrowers agree to indemnify, pay and hold
the Concentration Bank and its officers, directors, employees and agents
(collectively the "Indemnitees") harmless from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, expenses and disbursements of any kind or nature whatsoever
(including, without limitation, the reasonable fees and disbursements of counsel
for Indemnitees in connection with any investigative, administrative or judicial
proceeding, whether or not such Indemnitees shall be designated a party thereto)
which may be imposed on, incurred by, or asserted against such Indemnitees, in
any manner relating to or arising out of this Agreement or the Concentration
Accounts (the "Indemnified Liabilities"); provided that the Borrowers shall not
--------
have any obligations to an Indemnitee hereunder with respect to Indemnified
Liabilities arising from the gross negligence or willful misconduct of such
Indemnitee. Nothing in this Agreement shall be construed to limit any right of
the Concentration Bank to close or terminate the Concentration Account or any
other account in the Cash Management System or otherwise to terminate its
relationship with any Borrower.
SECTION 7. Collateral Accounts.
(a) Promptly after the Collateral Agent determines that any Casualty
Proceeds are to be deposited pursuant to Section 5.08 of the Credit Agreement
with respect to property of any Grantor, the Collateral Agent shall establish an
account (such Grantor's "Casualty Proceeds Account") with the Collateral Agent,
in the name and under the exclusive control of the
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Collateral Agent, into which all Casualty Proceeds to be deposited with respect
to property of such Grantor shall be deposited from time to time.
(b) So long as no Enforcement Notice is in effect, Casualty Proceeds to be
released from a Casualty Proceeds Account pursuant to Section 5.08(a)(i) of the
Credit Agreement shall be distributed by the Collateral Agent to the relevant
Grantor at such times and in such amounts as such Grantor shall request for the
purpose of restoring, repairing, replacing or rebuilding the asset in respect of
which such Casualty Proceeds were received. Any such request shall be
accompanied by a certificate of a Financial Officer describing in reasonable
detail the restoration, repair, replacement or rebuilding for which such funds
have been or will be expended and the date (which shall not be later than 30
days after the date of such certificate) by which such Grantor is obligated to
make such payment, provided that no such certificate shall be required if the
aggregate Casualty Proceeds requested for the restoration, repair, replacement
or rebuilding of the relevant asset is less than $100,000 with respect to any
Casualty Event. If immediately available cash on deposit in any Grantor's
Casualty Proceeds Account is not sufficient to make any such distribution to it,
the Collateral Agent shall cause to be liquidated, as promptly as practicable,
such Liquid Investments in such Casualty Proceeds Account as shall be required
to obtain sufficient cash to make such distribution and, notwithstanding any
other provision of this Section 7, such distribution shall not be made until
such liquidation has taken place.
(c) So long as no Enforcement Notice is in effect, the Collateral Agent
shall distribute to the Administrative Agent, at its request from time to time,
the amounts on deposit in the Casualty Proceeds Account which are required to be
applied to prepay Loans in accordance with Section 2.08(e) of the Credit
Agreement.
(d) Promptly after the Collateral Agent determines that any cash proceeds
of any Grantor's Collateral are to be realized upon any exercise of remedies
pursuant to the Collateral Documents, the Collateral Agent shall establish an
account with respect to such Grantor (such Grantor's "Cash Proceeds Account")
with the Collateral Agent, in the name and under the exclusive control of the
Collateral Agent, into which all such cash proceeds of such Grantor's Collateral
shall be deposited from time to time (unless required to be deposited in another
Collateral Account). This subsection (e) shall not apply to any cash proceeds
that are deposited in a Concentration Account and are not required to be
deposited in any Collateral Account.
(e) Promptly after the Collateral Agent determines that any cash
collateral is to be deposited to secure LC Reimbursement Obligations pursuant to
Section 8.04 of the Credit Agreement or in the event any prepayment amounts are
applied pursuant to Section 2.08 of the Credit Agreement to reduce the Tranche A
Commitments below the aggregate amount of the LC Exposure, the Collateral Agent
shall establish a cash collateral account (the "LC Collateral Account") with the
Collateral Agent, in the name and under the exclusive control of the Collateral
Agent, into which all cash collateral deposited pursuant to said Section 2.08(h)
or 8.04 shall be deposited. If and when any LC Issuing Bank pays a draft drawn
under any outstanding Letter of Credit on which any deposit in the LC Collateral
Account was based, the amount so paid by it (but not more than the amount in the
LC Collateral Account at the time) shall, promptly after such LC Issuing Bank
notifies the Collateral Agent of such payment, be withdrawn by the Collateral
Agent from the LC Collateral Account and paid to the relevant LC
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Issuing Bank or the Lenders, as appropriate. If at any time the amount in the LC
Collateral Account exceeds the aggregate amount then required to pay all
unreimbursed drawings under, and to cover all possible subsequent drawings
under, all outstanding Letters of Credit on which any deposits in the LC
Collateral Account were based, the excess amount shall, so long as no
Enforcement Notice is in effect, be withdrawn by the Collateral Agent and paid
to the Borrowers. If immediately available cash on deposit in the LC Collateral
Account is not sufficient to make any distribution referred to in this
subsection (e), the Collateral Agent shall cause to be liquidated, as promptly
as practicable, such Liquid Investments in the LC Collateral Account as shall be
required to obtain sufficient cash to make such distribution and,
notwithstanding any other provision of this Section 7, such distribution shall
not be made until such liquidation has taken place.
(f) Amounts on deposit in any Collateral Account shall be invested and re-
invested from time to time in such Liquid Investments as MHG, as agent or
attorney-in-fact for the relevant Grantor shall direct. Any income received with
respect to the balance from time to time standing to the credit of any
Collateral Account, including any interest or capital gains on Liquid
Investments, shall remain, or be deposited, in such Collateral Account. All
right, title and interest in and to the cash amounts on deposit from time to
time in any Collateral Account together with any Liquid Investments from time to
time made pursuant to this subsection (f) shall vest in the Collateral Agent,
shall constitute part of the relevant Grantor's Collateral hereunder and shall
not constitute payment of its Secured Obligations until applied thereto as
provided in Section 15. If an Enforcement Notice is in effect, any amounts held
in any Collateral Account shall be retained in such Collateral Account and, if
and when requested by the Administrative Agent, shall be withdrawn by the
Collateral Agent and applied in the manner specified in Section 15.
(g) For purposes hereof, "Liquid Investments" means any Temporary Cash
Investment that (i) matures within 30 days after it is acquired by or for the
account of the Collateral Agent and (ii) in order to provide the Collateral
Agent, for the benefit of the Secured Parties, with a perfected security
interest therein, either:
(i) is issued in the name of the Collateral Agent or a financial
intermediary acting for its account or is evidenced by a negotiable
certificate or instrument which (together with any appropriate instrument
of transfer) is delivered to, and held by, the Collateral Agent or an agent
thereof (which shall not be any Grantor or any of its Affiliates) in a
State where possession thereof perfects the Security Interest therein; or
(ii) if not so issued or evidenced, is a Temporary Cash Investment
which is subject to pledge under applicable law and regulations and as to
which (in the opinion of counsel to the Collateral Agent) appropriate
measures shall have been taken to perfect the relevant Security Interest.
(h) For the purposes hereof, any accounts presently existing pursuant to
the Existing Credit Facilities that correspond to accounts which are required to
be created pursuant to the provisions of this Section 7 shall be deemed to be
the same accounts as are required to be created for the purposes of this Section
7; provided, that the terms of such accounts shall be deemed to be governed
exclusively by the provisions of the Financing Documents and all amounts therein
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shall be applied as set forth herein until all the Commitments shall have
expired or been terminated, all Letters of Credit shall have expired or been
canceled or been secured with cash collateral in an amount and on terms
satisfactory to the relevant LC Issuing Bank, and all outstanding Secured
Obligations shall have been paid in full, whereupon any amounts remaining in
such accounts shall be governed by and distributed in accordance with the
provisions of the Existing Credit Facilities.
SECTION 8. Record Ownership of Pledged Equity Securities. If directed to
do so by the Required Lenders at any time when an Event of Default has occurred
and is continuing, the Collateral Agent shall cause the Pledged Equity
Securities (or any portion thereof specified in such directions) to be
transferred of record into the name of the Collateral Agent or its nominee.
Promptly upon receiving any such directions, the Collateral Agent will notify
each relevant Grantor thereof. Each Grantor will promptly give to the Collateral
Agent copies of any notices and other communications received by it with respect
to Pledged Equity Securities registered in its name, and the Collateral Agent
will promptly give to such Grantor copies of any notices and other
communications received by the Collateral Agent with respect to such Grantor's
Pledged Equity Securities registered in the name of the Collateral Agent or its
nominee. So long as no Enforcement Notice is in effect, the Collateral Agent
shall pay over to each relevant Grantor all Cash Distributions received by the
Collateral Agent upon or with respect to any Pledged Equity Securities held of
record in the name of the Collateral Agent or its nominee.
SECTION 9. Right to Vote Pledged Equity Securities. (a) Unless an
Enforcement Notice directing the Collateral Agent to vote the Pledged Equity
Securities is in effect, each Grantor shall have the right, from time to time,
to vote and to give consents, ratifications and waivers with respect to the
Pledged Equity Securities owned by it, and the Collateral Agent shall, upon
receiving a written request from such Grantor, deliver to such Grantor or as
specified in such request such proxies, powers of attorney, consents,
ratifications and waivers in respect of any of such Pledged Equity Securities
which are registered in the name of the Collateral Agent or its nominee as shall
be specified in such request and be in form and substance satisfactory to the
Collateral Agent. Unless an Enforcement Notice directing the Collateral Agent to
do so is in effect, the Collateral Agent shall have no right to take any action
which the owner of a Pledged Partnership Interest or Pledged LLC Interest is
entitled to take with respect thereto, except the right to receive and retain
payments and other distributions to the extent provided in Section 10.
(b) If an Enforcement Notice directing the Collateral Agent to do so is in
effect, the Collateral Agent shall have the right to the extent permitted by law
(and, in the case of a Pledged Partnership Interest or Pledged LLC Interest, by
the relevant partnership agreement, operating agreement or other governing
document) and each Grantor shall take all such action as may be necessary or
appropriate to give effect to such right, to vote and to give consents,
ratifications and waivers, and take any other action with respect to any or all
of the Pledged Equity Interests with the same force and effect as if the
Collateral Agent were the absolute and sole owner thereof.
SECTION 10. Right to Receive Distributions on Collateral. Subject to
Section 18, the Collateral Agent shall have the right to receive and to retain
as Collateral hereunder all dividends, interest and other payments and
distributions made upon or with respect to the Pledged Equity Interests and each
Grantor shall take all such action as the Collateral Agent may
16
<PAGE>
reasonably deem necessary or appropriate to give effect to such right; provided
that, unless an Enforcement Notice is in effect, this sentence shall not apply
to Cash Distributions. All such dividends, interest and other payments and
distributions which are received by any Grantor (except Cash Distributions
received when no Enforcement Notice is in effect) shall be received in trust for
the benefit of the Secured Parties and shall be segregated from other assets of
such Grantor and shall, promptly upon such Grantor's receipt thereof, be
delivered or paid over to the Collateral Agent in the same form as received
(with any necessary endorsements or executed assignments in blank), together
with a statement identifying the source of such Collateral and stating that it
is being delivered to the Collateral Agent to be held as Collateral under this
Agreement. If an Enforcement Notice is withdrawn pursuant to Section 21 (and no
other Enforcement Notice is then in effect), the Collateral Agent's right to
retain Cash Distributions under this Section 10 shall cease and the Collateral
Agent shall pay over to the relevant Grantor(s) any Cash Distributions retained
by it during the continuance of such Enforcement Notice.
SECTION 11. General Authority. Each Grantor hereby irrevocably appoints
the Collateral Agent its true and lawful attorney, with full power of
substitution, in the name of such Grantor, any Secured Party or otherwise, for
the sole use and benefit of the Secured Parties, but at the expense of such
Grantor, to the extent permitted by law to exercise, at any time and from time
to time while an Enforcement Notice directing it to do so is in effect, all or
any of the following powers with respect to all or any of such Grantor's
Collateral:
(i) to demand, sue for, collect, receive and give acquittance for
any and all monies due or to become due upon or by virtue thereof,
(ii) to settle, compromise, compound, prosecute or defend any action
or proceeding with respect thereto,
(iii) to sell, transfer, assign or otherwise deal in or with the same
or the proceeds or avails thereof, as fully and effectually as if the
Collateral Agent were the absolute owner thereof, and
(iv) to extend the time of payment of any or all thereof and to make
any allowance and other adjustments with reference thereto;
provided that the Collateral Agent shall give such Grantor not less than ten
days' prior written notice of the time and place of any sale or other intended
disposition of any Personal Property Collateral owned by such Grantor and such
other notices as may be required by the Credit Agreement, the Interim Borrowing
Order and the Borrowing Order, except any such Personal Property Collateral
which threatens to decline speedily in value or is of a type customarily sold on
a recognized market. The Collateral Agent and each Grantor agree that such
notice constitutes "reasonable notification" within the meaning of Section 9-
504(3) of the UCC.
SECTION 12. Remedies Upon Enforcement Notice. (a) Upon being instructed to
do so in an Enforcement Notice or in written instructions given by the Required
Lenders at any time while an Enforcement Notice is in effect, the Collateral
Agent may exercise (or cause its co-
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agents and co-trustees, if any, to exercise) any or all of the remedies
available to it (or to such co-agents or co-trustees) under the Collateral
Documents.
(b) Upon being instructed to do so in an Enforcement Notice or in written
instructions given by the Required Lenders at any time while an Enforcement
Notice is in effect, the Collateral Agent may exercise on behalf of the Secured
Parties all the rights of a secured party under the UCC (whether or not in
effect in the jurisdiction where such rights are exercised) with respect to any
Collateral and, in addition, the Collateral Agent may, without being required to
give any notice, except as provided in the Credit Agreement, the Interim
Borrowing Order and the Borrowing Order or herein or as may be required by
mandatory provisions of law, withdraw all cash and Temporary Cash Investments
held in any of the Collateral Accounts or Concentration Accounts and apply such
cash and Temporary Cash Investments and other cash, if any, then held by it as
Collateral as specified in Section 15 and, if there shall be no such cash or if
such cash shall be insufficient to pay all the Secured Obligations in full, sell
the Collateral or any part thereof at public or private sale or at any broker's
board or on any securities exchange, for cash, upon credit or for future
delivery, and at such price or prices as the Required Lenders shall have advised
the Collateral Agent are satisfactory. Any Secured Party may be the purchaser of
any or all of the Collateral so sold at any public sale (or, if the Collateral
is of a type customarily sold in a recognized market or is of a type which is
the subject of widely distributed standard price quotations, at any private
sale). The Collateral Agent is authorized, in connection with any such sale, if
it deems it advisable so to do, to restrict the prospective bidders on or
purchasers of any of the securities included in the Collateral to a limited
number of sophisticated investors who will represent and agree that they are
purchasing for their own account for investment and not with a view to the
distribution or sale of any of such securities, to cause to be placed on any
security included in the Collateral a legend to the effect that such security
has not been registered under the Securities Act of 1933 and may not be disposed
of in violation of the provisions of said Act, and to impose such other
limitations or conditions in connection with any such sale as the Collateral
Agent deems necessary or advisable in order to comply with said Act or any other
law. Each Grantor agrees that it will execute and deliver such documents and
take such other action as the Collateral Agent deems necessary or advisable in
order that any such sale may be made in compliance with law. Upon any such sale
the Collateral Agent shall have the right to deliver, assign and transfer to the
purchaser thereof the Collateral so sold. Each purchaser at any such sale shall
hold the Collateral so sold absolutely and free from any claim or right of
whatsoever kind, including any equity or right of redemption of any Grantor
which may be waived, and each Grantor, to the extent permitted by law, hereby
specifically waives all rights of redemption, stay or appraisal which it has or
may have under any law now existing or hereafter adopted. Notice of any such
sale shall be given to the relevant Grantor(s) as required by Section 11
(including, as required by the Credit Agreement, the Interim Borrowing Order and
the Borrowing Order) and shall in case of a public sale, state the time and
place fixed for such sale, in case of sale at a broker's board or on a
securities exchange, state the board or exchange at which such sale is to be
made and the day on which the Collateral, or the portion thereof so being sold,
will first be offered for sale at such board or exchange, and in case of a
private sale, state the day after which such sale may be consummated. Any such
public sale shall be held at such time or times within ordinary business hours
and at such place or places as the Collateral Agent may fix in the notice of
such sale. At any such sale the Collateral may be sold in one lot as an entirety
or in separate parcels, as the Collateral Agent may determine. The Collateral
Agent shall not be obligated to make any such sale pursuant to any such notice.
The Collateral Agent may, without notice or
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publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for the
sale, and such sale may be made at any time or place to which the same may be so
adjourned. In case of any sale of all or any part of the Collateral on credit or
for future delivery, the Collateral so sold may be retained by the Collateral
Agent until the selling price is paid by the purchaser thereof, but the
Collateral Agent shall not incur any liability in case of the failure of such
purchaser to take up and pay for the Collateral so sold and, in case of any such
failure, such Collateral may again be sold upon like notice. Upon being
instructed to do so by the Required Lenders in an Enforcement Notice or in
written instructions given at any time while an Enforcement Notice is in effect,
the Collateral Agent, instead of exercising the power of sale herein conferred
upon it, may proceed by a suit or suits at law or in equity to foreclose the
Security Interests and sell the Collateral, or any portion thereof, under a
judgment or decree of a court or courts of competent jurisdiction. The foregoing
provisions of this subsection shall apply to Real Property Collateral only to
the extent permitted by applicable law and the provisions of any applicable
Mortgage or other document.
(c) For the purpose of enforcing any and all rights and remedies under
this Agreement, the Collateral Agent may (i) require each Grantor to, and each
Grantor agrees that it will, at its expense and upon the request of the
Collateral Agent, forthwith assemble all or any part of its Personal Property
Collateral as directed by the Collateral Agent and make it available at a place
designated by the Collateral Agent which is, in its opinion, reasonably
convenient to the Collateral Agent and such Grantor, whether at the premises of
such Grantor or otherwise, (ii) to the extent permitted by applicable law,
enter, with or without process of law and without breach of the peace, any
premises where any of the Personal Property Collateral is or may be located, and
without charge or liability to it seize and remove such Personal Property
Collateral from such premises, (iii) have access to and use such Grantor's books
and records relating to its Collateral and (iv) prior to the disposition of its
Personal Property Collateral, store or transfer it without charge in or by means
of any storage or transportation facility owned or leased by such Grantor,
process, repair or recondition it or otherwise prepare it for disposition in any
manner and to the extent the Collateral Agent deems appropriate and, in
connection with such preparation and disposition, use without charge any
trademark, trade name, copyright, patent or technical process used by such
Grantor. The Collateral Agent may also render any or all of such Personal
Property Collateral unusable at such Grantor's premises and may dispose of such
Personal Property Collateral on such premises without liability for rent or
costs. The foregoing provisions of this subsection shall apply to Real Property
Collateral only to the extent permitted by applicable law and the provisions of
any applicable Mortgage or other document.
(d) Without limiting the generality of the foregoing, if an Enforcement
Notice is in effect,
(i) the Collateral Agent may, upon proper notice as provided in
Section 11 hereof, license, or sublicense, whether general, special or
otherwise, and whether on an exclusive or non-exclusive basis, any
Intellectual Property included in the Collateral throughout the world for
such term or terms, on such conditions and in such manner as the Collateral
Agent shall in its sole discretion determine; provided that such licenses
do not conflict with any existing licenses or sublicenses;
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(ii) the Collateral Agent may, upon proper notice as provided in
Section 11 hereof (without assuming any obligations or liability
thereunder), at any time and from time to time, in its sole and reasonable
discretion, enforce (and shall have the exclusive right to enforce) against
any licensee or sublicensee all rights and remedies of any Grantor in, to
and under any of its Intellectual Property and take or refrain from taking
any action under any thereof, and each Grantor hereby releases the
Collateral Agent and each of the other Secured Parties from, and agrees to
hold the Collateral Agent and each of the other Secured Parties free and
harmless from and against any claims and expenses arising out of, any
lawful action so taken or omitted to be taken with respect thereto, except
for claims and expenses arising from the Collateral Agent's or such Secured
Party's gross negligence or willful misconduct; and
(iii) upon request by the Collateral Agent (which shall not be
construed as implying any limitation on the rights or powers of the
Collateral Agent), each Grantor will execute and deliver to the Collateral
Agent a power of attorney, in form and substance satisfactory to the
Collateral Agent, for the implementation of any lease, assignment, license,
sublicense, grant of option, sale or other disposition of an Intellectual
Property owned by such Grantor or any action related thereto. In the event
of any such disposition pursuant to this Section, subject to
confidentiality restrictions imposed on such Grantor in any license or
similar agreement, and upon request by the Collateral Agent, such Grantor
shall supply its know-how and expertise relating to or the products or
services made or rendered in connection with Patents, and its customer
lists and other records relating to such Intellectual Property and to the
distribution of said products or services, to the Collateral Agent.
SECTION 13. Fees and Expenses; Indemnification. The Borrowers agree that
they will forthwith upon demand pay to the Collateral Agent:
(i) the amount of any taxes which the Collateral Agent may have been
required to pay by reason of the Security Interests or to free any of the
Collateral from any Lien thereon;
(ii) the amount of any and all reasonable out-of-pocket expenses,
including transfer taxes and reasonable fees and disbursements of counsel
and of any other experts, which the Collateral Agent may incur in
connection with (w) the administration or enforcement of this Agreement,
including such expenses as are incurred to preserve the value of the
Collateral and the validity, perfection, rank and value of any Security
Interest, and all insurance expenses and all expenses of protecting,
storing, warehousing, appraising, insuring, handling, maintaining and
shipping any Collateral, (x) the collection, sale or other disposition of
any Collateral, (y) the exercise by the Collateral Agent of any of the
rights or powers conferred upon it hereunder or (z) any Enforcement Notice;
(iii) the amount of any fees that the Borrowers shall have agreed in
writing to pay to the Collateral Agent and that shall have become due and
payable in accordance with such written agreement; and
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(iv) the amount required to indemnify the Collateral Agent for, or hold it
harmless and defend it against, any loss, liability or expense (including the
reasonable fees and expenses of its counsel and any experts or co-agents
appointed hereunder) incurred or suffered by the Collateral Agent in connection
with this Agreement, except to the extent that such loss, liability or expense
arises from the Collateral Agent's gross negligence or willful misconduct or a
breach of any duty that the Collateral Agent has under this Agreement (after
giving effect to Sections 14 and 16).
Any such amount not paid to the Collateral Agent on demand shall bear interest
for each day until paid at a rate per annum equal to the Tranche A Default Rate.
SECTION 14. Limitation on Duty of Collateral Agent in Respect of
Collateral. Beyond the exercise of reasonable care in the custody and
preservation thereof, the Collateral Agent shall have no duty as to any
Collateral in its possession or control or in the possession or control of any
agent or bailee or any income thereon or as to the preservation of rights
against prior parties or any other rights pertaining thereto. The Collateral
Agent shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if such Collateral is accorded
treatment substantially equal to that which it accords its own property, and
shall not be liable or responsible for any loss or damage to any of the
Collateral, or for any diminution in the value thereof, by reason of any act or
omission of any agent or bailee selected by the Collateral Agent in good faith
or by reason of any act or omission by the Collateral Agent pursuant to
instructions from the Required Lenders (including, without limitation, any
voting instruction pursuant to Section 9), except to the extent that such
liability arises from the Collateral Agent's gross negligence or willful
misconduct.
SECTION 15. Application Of Proceeds. (a) Upon being instructed to do so
in an Enforcement Notice or in written instructions given by the Required
Lenders at any time while an Enforcement Notice is in effect, the Collateral
Agent shall apply the proceeds of any sale of, or other realization upon, all
or any part of the Collateral, any cash held in the Cash Proceeds Accounts and
any cash withdrawn by it from the Concentration Accounts in the following order
of priorities:
first, to pay the expenses of such sale or other realization, including
reasonable compensation to agents of and counsel for the Collateral Agent,
and all expenses, liabilities and advances incurred or made by the
Collateral Agent in connection with the Collateral Documents, and any other
amounts then due and payable to the Collateral Agent pursuant to Section 13
hereof and to the other Agents pursuant to Section 11.03 of the Credit
Agreement;
second, to pay the unpaid principal of the Secured Obligations ratably (or
provide for the payment thereof pursuant to subsection (b) of this
Section), until payment in full of the principal of all Secured Obligations
shall have been made (or so provided for);
third, to pay all interest (including Post-Petition Interest) on the
Secured Obligations and all letter of credit fees and commitment fees
payable under the Credit Agreement ratably, until payment in full of all
such interest and fees shall have been made;
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fourth, to pay all other Secured Obligations ratably (or provide for the
payment thereof pursuant to subsection (b) of this Section), until payment
in full of all such other Secured Obligations shall have been made (or so
provided for); and
finally, to pay to the relevant Grantor or its successors or assigns, or as
a court of competent jurisdiction may direct, any surplus then remaining
from the proceeds of the Collateral owned by it.
The Collateral Agent may make such distributions hereunder in cash or in kind
or, on a ratable basis, in any combination thereof.
(b) If at any time any portion of any monies collected or received by the
Collateral Agent would, but for the provisions of this subsection (b), be
payable pursuant to subsection (a) of this Section in respect of a Contingent
Secured Obligation, the Collateral Agent shall not apply any monies to pay such
Contingent Secured Obligation but instead shall request the holder thereof, at
least 10 days before each proposed distribution hereunder, to notify the
Collateral Agent as to the maximum amount of such Contingent Secured Obligation
if then ascertainable (e.g., in the case of a letter of credit, the maximum
amount available for subsequent drawings thereunder). If the holder of such
Contingent Secured Obligation does not notify the Collateral Agent of the
maximum ascertainable amount thereof at least two Business Days before such
distribution, such holder shall not be entitled to share in such distribution.
If such holder does so notify the Collateral Agent as to the maximum
ascertainable amount thereof, the Collateral Agent will allocate to such holder
a portion of the monies to be distributed in such distribution, calculated as if
such Contingent Secured Obligation were outstanding in such maximum
ascertainable amount. However, the Collateral Agent shall not apply such
portion of such monies to pay such Contingent Secured Obligation, but instead
shall hold such monies or invest such monies in Liquid Investments at the
direction of MHG as agent and attorney-in-fact for the relevant Grantor. The
Collateral Agent shall hold all such monies and all such Liquid Investments and
the net proceeds thereof in trust until such time as all or part of such
Contingent Secured Obligation becomes a Non-Contingent Secured Obligation,
whereupon the Collateral Agent at the request of the relevant Secured Party
shall apply the amount so held in trust to pay such Non-Contingent Secured
Obligation; provided that, if the other Secured Obligations theretofore paid
pursuant to the same clause of subsection (a) (i.e., clause second or fourth)
were not paid in full, the Collateral Agent shall apply the amount so held in
trust to pay the same percentage of such Non-Contingent Secured Obligation as
the percentage of such other Secured Obligations theretofore paid pursuant to
the same clause of subsection (a). If (i) the holder of such Contingent Secured
Obligation shall advise the Collateral Agent that no portion thereof remains in
the category of a Contingent Secured Obligation and (ii) the Collateral Agent
still holds any amount held in trust pursuant to this subsection (b) in respect
of such Contingent Secured Obligation (after paying all amounts payable pursuant
to the preceding sentence with respect to any portions thereof that became Non-
Contingent Secured Obligations), such remaining amount shall be applied by the
Collateral Agent in the order of priorities set forth in subsection (a) of this
Section.
(c) In making the payments and allocations required by this Section, the
Collateral Agent may rely upon information supplied to it pursuant to Section
16(f). All distributions made by the Collateral Agent pursuant to this Section
shall be final (except in the event of manifest
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error) and the Collateral Agent shall have no duty to inquire as to the
application by the Secured Parties of any amount distributed to them.
SECTION 16. Concerning The Collateral Agent. (a) The Collateral Agent is
authorized to take all such action as is provided or permitted to be taken by it
as Collateral Agent under the Collateral Documents and all other action
reasonably incidental thereto. As to any matters not expressly provided for
herein or in an Enforcement Notice or in written requests, directions or
instructions given as expressly provided in Section 6, 7, 9, 12 or 15 ,
including, without limitation, the timing and methods of realization upon the
Collateral, the Collateral Agent shall act or refrain from acting in accordance
with written instructions from the Required Lenders or, in the absence of such
instructions, in accordance with its discretion (subject to Section 16(c));
provided that the Collateral Agent shall not be obligated to comply with any
such instructions that are inconsistent with the provisions of the Collateral
Documents.
(b) The Collateral Agent shall not be responsible for the existence,
genuineness or value of any Collateral or for the validity, perfection, priority
or enforceability of the Security Interests in any Collateral, whether impaired
by operation of law or by reason of any action or omission to act on its part
under the Collateral Documents. The Collateral Agent shall have no duty to
ascertain or inquire as to the performance or observance of any of the terms of
this Agreement, the Credit Agreement or any other agreement relating to the
Secured Obligations.
(c) The obligations of the Collateral Agent under the Collateral Documents
are only those expressly set forth therein. In any case in which the Collateral
Agent is authorized to exercise any power or discretion, the Collateral Agent
may refrain from such exercise unless directed in writing by the Required
Lenders to act in the manner specified in such direction. Without limiting the
generality of the foregoing, the Collateral Agent shall not be required to take
any action with respect to any Enforcement Notice, except as expressly provided
in Sections 12 and 15.
(d) The Collateral Agent may:
(i) consult with legal counsel (who may be counsel for any MHG
Company) and
(ii) to the extent that the Collateral Agent in good faith deems it
appropriate in connection with its duties hereunder to do so, consult with
independent public accountants and other experts selected by it in
connection with any matter arising under the Collateral Documents and shall
not be liable for any action taken or omitted to be taken by it in good
faith in accordance with the advice of such counsel, accountants or
experts.
(e) Neither the Collateral Agent nor any of its directors, officers,
agents, or employees shall be liable for any action taken or not taken by it in
connection with any Collateral Document in accordance with directions set forth
in an Enforcement Notice or with the consent or at the request of the Required
Lenders or in the absence of its own gross negligence or willful misconduct.
However, nothing in this subsection (e) shall affect any rights any Grantor may
have (x) against the Required Lenders for requesting the Administrative Agent to
give the
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directions set forth in an Enforcement Notice or (y) against the Required
Lenders for giving any other consent, request, notice or instruction. Neither
the Collateral Agent nor any of its directors, officers, agents or employees
shall be responsible for or have any duty to ascertain, inquire into or verify
(i) any statement, warranty or representation made in connection with any
Collateral Document, (ii) the performance or observance of any of the covenants
or agreements of any Grantor or (iii) the validity, effectiveness or genuineness
of any Collateral Document or any other instrument or writing furnished in
connection therewith. The Collateral Agent shall not incur any liability by
acting in reliance upon any notice, consent, certificate, statement or other
writing (which may be a bank wire, telex, facsimile or similar writing) believed
by it to be genuine or to be signed by the proper party or parties.
(f) For all purposes of the Collateral Documents, including without
limitation determining from time to time the amounts of the Secured Obligations,
whether a Secured Obligation is a Contingent Secured Obligation or not, or
whether any notice, direction or instruction has been given by the Required
Lenders or any other Secured Party or Secured Parties entitled to give the same
under any provision of the Collateral Documents, the Collateral Agent shall be
entitled to rely upon information from the following sources (and may refrain
from acting on the basis of such information until two Business Days after it
receives all such information required to enable it to take such action):
(i) the Administrative Agent for information as to the Lender
Parties and their respective Secured Obligations outstanding under the
Credit Agreement (including whether any action has been taken or
instruction given by the Required Lenders);
(ii) any Secured Party for information as to itself and its Secured
Obligations, to the extent that the Collateral Agent has not received such
information from the Administrative Agent; and
(iii) any Grantor for information as to any Secured Party and its
Secured Obligations, to the extent that the Collateral Agent has not
received such information from the sources referred to in clauses (i) and
(ii) above.
(g) The Collateral Agent shall have no liability to any Grantor or any
Secured Party for actions taken in reliance on such information, except to the
extent that such liability arises from the Collateral Agent's gross negligence
or willful misconduct.
(h) The Collateral Agent may resign at any time (effective upon acceptance
by a successor Collateral Agent of its appointment hereunder) by giving written
notice thereof to the Administrative Agent, each of the Secured Parties
Requesting Notice and the Borrowers. Upon any such resignation, the Required
Lenders shall have the right to appoint a successor Collateral Agent. If no
successor Collateral Agent shall have been so appointed by the Required Lenders,
and shall have accepted such appointment, within 30 days after the retiring
Collateral Agent gives notice of resignation, the retiring Collateral Agent may,
on behalf of the Secured Parties, appoint a successor Collateral Agent, which
shall be a commercial bank organized or licensed under the laws of the United
States or of any State thereof and having a combined capital and surplus of at
least $100,000,000. Upon the acceptance of its appointment as Collateral Agent
hereunder by a successor Collateral Agent, such successor Collateral Agent shall
thereupon
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succeed to and become vested with all the rights and duties of the retiring
Collateral Agent, and the retiring Collateral Agent shall be discharged from its
duties and obligations hereunder. After any retiring Collateral Agent's
resignation hereunder as Collateral Agent, the provisions of this Section and
Sections 13 and 14 shall inure to its benefit as to any actions taken or omitted
to be taken by it while it was the Collateral Agent.
(i) Within two Business Days after it receives or sends any notice
referred to in this subsection (i), the Collateral Agent shall send to the
Administrative Agent and each of the Secured Parties Requesting Notice, copies
of any Enforcement Notice received by the Collateral Agent, any notice
withdrawing an Enforcement Notice received by the Collateral Agent pursuant to
Section 21 and any other notice given by the Collateral Agent to any Grantor, or
received by it from any Grantor, pursuant to Section 11, 12, 15 or 18. The
Collateral Agent shall also send to the Grantors copies of any Enforcement
Notice or any notice withdrawing an Enforcement Notice received by the
Collateral Agent.
(j) The Collateral Agent may refuse to act on any notice, direction or
instruction from the Administrative Agent, the Required Lenders or any Secured
Party, or any agent, trustee or similar representative thereof which, in the
Collateral Agent's opinion, is contrary to law or the provisions of any
Collateral Document, is unduly prejudicial to Secured Parties not joining in
such notice, direction or instruction or may expose the Collateral Agent to
liability (unless the Collateral Agent shall have been adequately indemnified
for such liability by the Secured Parties that gave, or instructed the
Administrative Agent to give, such notice, direction or instruction).
SECTION 17. Appointment of Co-Collateral Agents. At any time or times, in
order to comply with any legal requirement in any jurisdiction, the Collateral
Agent may appoint another bank or trust company or one or more other persons,
either to act as co-agent or co-agents, jointly with the Collateral Agent, or to
act as separate agent or agents on behalf of the Secured Parties with such power
and authority as may be necessary for the effectual operation of the provisions
of any Collateral Document and may be specified in the instrument of appointment
(which may, in the discretion of the Collateral Agent, include provisions for
the protection of such co-agent or separate agent similar to the provisions of
Section 16).
SECTION 18. Termination of Security Interests; Release of Collateral. (a)
When (i) all the Commitments shall have expired or been terminated, (ii) all
Letters of Credit shall have expired or been canceled or been secured with cash
collateral in an amount and on terms satisfactory to the relevant LC Issuing
Bank, and (iii) all outstanding Secured Obligations shall have been paid in
full, the Security Interests shall terminate and all rights to each item of
Collateral shall revert to the Grantor that owns such item of Collateral.
(b) At any time before the Security Interests terminate pursuant to
subsection (a) of this Section, so long as an Enforcement Notice is not in
effect, the Collateral Agent shall, upon the written request of the Borrowers
and the approval of the Court (to the extent that such Court approval is
required pursuant to an order of the Court or the Bankruptcy Code), release any
of the Collateral (but not all or substantially all of the Collateral) with the
prior written consent of the Required Lenders. Upon any such termination of the
Security Interests or release of Collateral, the Collateral Agent will, at the
expense of the relevant Grantor, execute and deliver
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to such Grantor such documents as such Grantor shall reasonably request to
evidence the termination of the Security Interests or the release of such
Collateral, as the case may be.
SECTION 19. [** Reserved **]
SECTION 20. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including facsimile transmission or
similar writing) and shall be given to such party in the manner set forth in the
Credit Agreement.
SECTION 21. Withdrawal of Enforcement Notice. An Enforcement Notice, once
given, shall remain in effect unless and until the Required Lenders notify the
Collateral Agent that they wish to withdraw such Enforcement Notice, no monies
have been applied to pay any Secured Obligations pursuant to Section 15 (except
pursuant to clause first thereof) as a result of such Enforcement Notice and the
Collateral Agent determines that the withdrawal of such Enforcement Notice will
not result in any liability or unreimbursed loss to the Collateral Agent by
reason of actions taken by it in reliance thereon.
SECTION 22. Waivers, Remedies Not Exclusive. No failure on the part of
the Collateral Agent to exercise, and no delay in exercising and no course of
dealing with respect to, any right or remedy under any Collateral Document shall
operate as a waiver thereof; nor shall any single or partial exercise by the
Collateral Agent of any right or remedy under the Credit Agreement or any
Collateral Agreement preclude any other or further exercise thereof or the
exercise of any other right or remedy. The rights and remedies specified in the
Collateral Documents and the Credit Agreement are cumulative and are not
exclusive of any other rights or remedies provided by law.
SECTION 23. Successors And Assigns. This Agreement is for the benefit of
the Collateral Agent and the Secured Parties and their respective successors and
assigns, and in the event of an assignment of all or any of the Secured
Obligations, the rights of the holder thereof hereunder, to the extent
applicable to the indebtedness so assigned, shall be deemed transferred with
such indebtedness. This Agreement shall be binding on the Grantors and their
respective successors and assigns.
SECTION 24. Changes In Writing. Neither this Agreement nor any provision
hereof may be amended, waived, discharged or terminated except in accordance
with Section 11.05 of the Credit Agreement.
SECTION 25. NEW YORK LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE BANKRUPTCY CODE (WITH RESPECT ONLY TO THOSE PROVISIONS
OF THE AGREEMENT WHICH, BY THEIR EXPRESS TERMS, ARE GOVERNED BY THE BAKRUPTCY
CODE) AND, EXCEPT WITH RESPECT TO CONCENTRATION ACCOUNTS AND OTHER CASH
MANAGEMENT SYSTEM ACCOUNTS (WHICH SHALL CONTINUE TO BE GOVERNED BY THE LAW OF
JURISDICTION(S) SPECIFIED IN AGREEMENTS EXECUTED WITH RESPECT TO SUCH ACCOUNTS),
THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE
GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO
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CONFLICTS OF LAWS PRINCIPLES, EXCEPT AS OTHERWISE REQUIRED BY MANDATORY
PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THAT REMEDIES PROVIDED BY THE LAWS OF
ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK ARE GOVERNED BY THE LAWS OF
SUCH JURISDICTION.
SECTION 26. Severability. If any provision of any Collateral Document is
invalid or unenforceable in any jurisdiction, then, to the fullest extent
permitted by law, the other provisions of the Collateral Documents shall remain
in full force and effect in such jurisdiction and shall be liberally construed
in favor of the Collateral Agent and the Secured Parties in order to carry out
the intentions of the parties thereto as nearly as may be possible; and the
invalidity or unenforceability of any provision thereof in any jurisdiction
shall not affect the validity or enforceability of such provision in any other
jurisdiction.
[Remainder of page intentionally left blank]
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
BORROWERS:
- ---------
Mariner Health Group, Inc.
Aid & Assistance, Inc.
Beechwood Heritage Retirement Community, Inc.
Bride Brook Nursing & Rehabilitation Center, Inc.
Compass Pharmacy Services, Inc.
Compass Pharmacy Services of Maryland, Inc.
Compass Pharmacy Services of Texas, Inc.
Cypress Nursing Facility, Inc.
Long Ridge Nursing and Rehabilitation Center, Inc.
Long Wood Rehabilitation Center, Inc.
Mariner Health at Bonifay, Inc.
Mariner Health Care, Inc.
Mariner Health Care of Atlantic Shores, Inc.
Mariner Health Care of Deland, Inc.
Mariner Health Care of Fort Wayne, Inc.
Mariner Health Care of Great Laurel, Inc.
Mariner Health Care of Inverness, Inc.
Mariner Health Care of Lake Worth, Inc.
Mariner Health Care of MacClenny, Inc.
Mariner Health Care of Metrowest, Inc.
Mariner Health Care of Nashville, Inc.
Mariner Health Care of North Hills, Inc.
Mariner Health Care of Orange City, Inc.
Mariner Health Care of Palm City, Inc.
Mariner Health Care of Pinellas Point, Inc.
Mariner Health Care of Port Orange, Inc.
Mariner Health Care of Southern Connecticut, Inc.
Mariner Health Care of Toledo, Inc.
Mariner Health Care of Tuskawilla, Inc.
Mariner Health Care of West Hills, Inc.
Mariner Health Central, Inc.
Mariner Health Home Care, Inc.
Mariner Health of Florida, Inc.
Mariner Health of Jacksonville, Inc.
Mariner Health of Maryland, Inc.
Mariner Health of Orlando, Inc.
Mariner Health of Palmetto, Inc.
Mariner Health of Seminole County, Inc.
Mariner Health of Tampa, Inc.
Mariner Health Resources, Inc.
Mariner Physician Services, Inc.
Mariner Practice Corporation
S-1
<PAGE>
Mariner - Regency Health Partners, Inc.
MarinerSelect Staffing Solutions, Inc.
Mariner Supply Services, Inc.
MedRehab, Inc.
MedRehab of Indiana, Inc.
MedRehab of Louisiana, Inc.
MedRehab of Missouri, Inc.
Merrimack Valley Nursing & Rehabilitation Center,
Inc.
Methuen Nursing & Rehabilitation Center, Inc.
MHC Rehab. Corp.
MHC Transportation, Inc.
Mystic Nursing & Rehabilitation Center, Inc.
National Health Strategies, Inc.
Park Terrace Nursing & Rehabilitation Center, Inc.
Pendleton Nursing & Rehabilitation Center, Inc.
Pinnacle Care Corporation
Pinnacle Care Corporation of Huntington
Pinnacle Care Corporation of Nashville
Pinnacle Care Corporation of Seneca
Pinnacle Care Corporation of Sumter
Pinnacle Care Corporation of Williams Bay
Pinnacle Care Corporation of Wilmington
Pinnacle Care Management Corporation
Pinnacle Pharmaceuticals, Inc.
Pinnacle Pharmaceutical Services, Inc.
Pinnacle Rehabilitation, Inc.
Pinnacle Rehabilitation of Missouri, Inc.
Prism Care Centers, Inc.
Prism Health Group, Inc.
Prism Home Care Company, Inc.
Prism Home Care, Inc.
Prism Home Health Services, Inc.
Prism Hospital Ventures, Inc.
Prism Rehab Systems, Inc.
Regency Health Care Center of Seminole County,
Inc.
Sassaquin Nursing & Rehabilitation Center, Inc.
Tampa Medical Associates, Inc.
The Ocean Pharmacy, Inc.
Tri-State Health Care, Inc.
Windward Health Care, Inc.
By: ____________________________________
Boyd P. Gentry
Vice President for each of the foregoing
Borrowers
S-2
<PAGE>
IHS Rehab Partnership, Ltd.
By: Mariner Health Care Of Nashville, Inc., its
General Partner
By:___________________________________
Name:
Title:
Mariner Health Properties IV, Ltd.
By: Mariner Health Of Florida, Inc., its General
Partner
By:___________________________________
Name:
Title:
Mariner Health Properties VI, Ltd.
By: Mariner Health Of Florida, Inc., its General
Partner
By:___________________________________
Name:
Title:
Seventeenth Street Associates Limited Partnership
By: Tri-state Health Care, Inc., its General Partner
By:___________________________________
Name:
Title:
S-3
<PAGE>
Allegis Health and Living Center at Heritage
Harbour, L.L.C.
By: Mariner Health of Maryland, Inc., its
Managing Member
By:___________________________________
Name:
Title:
S-4
<PAGE>
PNC Bank, National Association,
as Collateral Agent
By: _________________________________
Name:
Title:
S-5
<PAGE>
LIMITED JOINDER. First Union National Bank ("First Union") joins in this
- ---------------
Security Agreement for the sole purpose of evidencing its agreement to serve as
"Concentration Bank" subject to the terms, provisions and protections of Section
6; neither execution nor any term or provision of this Security Agreement shall
be interpreted or construed as a representation, warranty or other affirmation
by First Union as to the validity or priority of any security interest or
agreement between and among the Borrowers, the Collateral Agent, and Lenders or
any other party, or to impose upon First Union any obligation or responsibility
except as expressly provided in Section 6 of the Security Agreement.
First Union National Bank,
as Concentration Bank
By: _________________________________
Name:
Title:
S-6
<PAGE>
EXHIBIT A
to Security Agreement
PERFECTION CERTIFICATE
The undersigned, an authorized officer of [NAME OF GRANTOR], a
[jurisdiction of incorporation] corporation/1/ (the "Company"), hereby certifies
with reference to the Security Agreement dated as of January __,2000 among the
Company, the other Grantors and PNC Bank, National Association, as Collateral
Agent (terms defined therein being used herein as therein defined), to the
Collateral Agent and each other Lender Party as follows:
1. Names/1/ (a) The exact corporate name of the Company as it appears in
its certificate of incorporation is as follows:
(b) Set forth below is each other corporate name the Company has had
since its organization, together with the date of the relevant change.
(c) Except as set forth in Schedule 1, the Company has not changed
its identity or corporate structure in any way within the past five years.
[Changes in identity or corporate structure would include mergers,
consolidations and acquisitions, as well as any change in the form, nature
or jurisdiction of corporate organization. If any such change has occurred,
include in Schedule 1 the information required by paragraphs 1, 2 and 3 of
this certificate as to each acquiree or constituent party to a merger or
consolidation.]
(d) The following is a list of all other names (including trade names
or similar appellations) used by the Company or any of its divisions or
other business units at any time during the past five years:
2. Current Locations. (a) The chief executive office of the Company is
located at the following address:
(b) The following are all the locations where the Company maintains
any books or records relating to any Accounts:
(c) The following are all the places of business of the Company not
identified above:
_______________
/1/ Modify as needed for any Grantor that is not a corporation.
A-1
<PAGE>
(d) The following are all the locations where the Company maintains
any Inventory not identified above:
(e) The following are the names and addresses of all Persons other
than the Company which have possession of any of the Company's Inventory:
3. Prior Locations. (a) Set forth below is the information required by
subparagraphs 2(a), 2(b) and 2(c) above with respect to each location or place
of business maintained by the Company at any time during the past five years:
(b) Set forth below is the information required by subparagraphs 2(d)
and 2(e) above with respect to each location or bailee where or with whom
Inventory has been lodged at any time during the past four months:
4. Unusual Transactions. Except as set forth in Schedule 4, all Accounts
have been originated by the Company and all Inventory and Equipment has been
acquired by the Company in the ordinary course of its business.
5. File Search Reports. Attached hereto as Schedule 5(A) is a true copy
of a file search report from the Uniform Commercial Code filing officer in each
jurisdiction identified in paragraph 2 or 3 above with respect to each name set
forth in paragraph 1 above. Attached hereto as Schedule 5(B) is a true copy of
each financing statement or other filing identified in such file search reports.
6. UCC Filings. A duly signed financing statement on Form UCC-1 in the
form required by Collateral Agent pursuant to the Security Agreement has been
provided to the Collateral Agent for due filing in the Uniform Commercial Code
filing office in each jurisdiction identified in paragraph 2 hereof.
A-2
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Perfection
Certificate this __ day of __________, 2000.
By: ____________________________
Name:
Title:
A-3
<PAGE>
EXHIBIT B
to
Security Agreement
[Letterhead of Collateral Agent]
Notice of Redirection
_______________, 2000
First Union National Bank
NC0737
301 South College Street, TW5
Charlotte, NC 28288-0737
Attn: __________
Re: ________________, Account Nos. _____________ (the "Accounts")
Ladies and Gentlemen:
Reference is made to that certain Security Agreement dated as of
January ___, 2000 (the "Security Agreement") among you, us, as Collateral Agent,
and Mariner Health Group, Inc. and the other borrowers party thereto pursuant to
which we, for our benefit and for the benefit of Lenders (as defined in the
Security Agreement), were given exclusive dominion and control over the
Accounts. This notice is given in accordance with the terms of the Security
Agreement.
Effective immediately and continuing until we shall authorize you in
writing to do otherwise, we hereby (i) give you notice of our sole control over
the Accounts and all financial assets credited thereto and instruct you not to
accept any direction, instructions or entitlement order with respect to the
Accounts or the financial assets credited thereto from any person other than the
undersigned, and (ii) direct you to transfer, by wire transfer of immediately
available funds not later than 3:00 p.m. E.S.T. on each banking day, all
collected funds contained in the Accounts in accordance with the following
transfer instructions:
[insert appropriate transfer instructions]
Very truly yours,
PNC BANK, NATIONAL ASSOCIATION,
as Collateral Agent
By:________________________________
Title:_____________________________
B-1
<PAGE>
Exhibit C
[See Attached]
C-1
<PAGE>
Exhibit D
[See Attached]
D-1
<PAGE>
EXHIBIT 21
Mariner Post-Acute Network
Subsidiaries
December 6, 1999
Aid & Assistance, Inc.
Allegis Health and Living Center at Heritage Harbour, L.L.C.
American Geriatric Management Services, Inc.
American Pharmaceutical Services, Inc.
American Rehability Services, Inc.
American-Cal Medical Services, Inc.
Amerra Properties, Inc.
AMS Green Tree, Inc.
AMS Properties, Inc.
APS - Summit Care Pharmacy, L.L.C.
APS Holding Company, Inc.
APS Pharmacy Management, Inc.
Beechwood Heritage Retirement Community, Inc.
Brian Center Health & Rehabilitation/Tampa, Inc.
Brian Center Health & Retirement/Alleghany, Inc.
Brian Center Health & Retirement/Bastian, Inc.
Brian Center Health & Retirement/Wallace, Inc.
Brian Center Management Corporation
Brian Center Nursing Care/Austell, Inc.
Brian Center Nursing Care/Fincastle, Inc.
Brian Center Nursing Care/Hickory, Inc.
Brian Center Nursing Care/Powder Springs, Inc.
Brian Center of Asheboro, Inc.
Brian Center of Central Columbia, Inc.
Bride Brook Nursing & Rehabilitation Center, Inc.
Brightview of Bel Air, LLC
Cambridge Bedford, Inc.
Cambridge East, Inc.
Cambridge North, Inc.
Cambridge South, Inc.
Clintonaire Nursing Home, Inc.
Compass Pharmacy Services of Maryland, Inc.
Compass Pharmacy Services of Texas, Inc.
Compass Pharmacy Services, Inc.
Connerwood Healthcare, Inc.
Coordinated Home Health Services, Inc.
Cornerstone Health Management Company
Crestmont Health Center, Inc.
Cypress Nursing Facility, Inc.
Devcon Holding Company
EH Acquisition Corp.
EH Acquisition Corp. II
EH Acquisition Corp. III
Evergreen HealthCare Ltd., L.P.
Evergreen Healthcare, Inc.
Frenchtown Nursing Home, Inc.
GC Services, Inc.
GCI Bella Vita, Inc.
<PAGE>
Subsidiaries December 6, 1999
- --------------------------------------------------------------------------------
GCI Camellia Care Center, Inc.
GCI Colter Village, Inc.
GCI East Valley Medical & Rehabilitation Center, Inc.
GCI Faith Nursing Home, Inc.
GCI Health Care Centers, Inc.
GCI Indemnity, Inc.
GCI Jolley Acres, Inc.
GCI Palm Court, Inc.
GCI Prince George, Inc.
GCI Rehab, Inc.
GCI Springdale Village, Inc.
GCI Therapies, Inc.
GCI Village Green, Inc.
GCI-Cal Health Care Centers, Inc.
GCI-Cal Therapies Company
GCI-Wisconsin Properties, Inc.
Global Healthcare Center - Bethesda, L.L.C.
GranCare Home Health Services, Inc.
GranCare Nursing Services And Hospice, Inc.
GranCare of Michigan, Inc.
GranCare of North Carolina, Inc.
GranCare of Northern California, Inc.
GranCare South Carolina, Inc.
GranCare, Inc.
Heritage Nursing Home, Inc.
Heritage of Louisiana, Inc.
HMI Convalescent Care, Inc.
Hospice Associates of America, Inc.
HostMasters, Inc.
IHS Rehab Partnership, Ltd.
International Health Care Management, Inc.
International X-Ray, Inc.
LC Management Company
LCA Insurance Co. Ltd.
LCA Operational Holding Company
LCR, Inc.
Living Centers - East, Inc.
Living Centers - PHCM, Inc.
Living Centers - Rocky Mountain, Inc.
Living Centers - Southeast Development Corporation
Living Centers - Southeast, Inc.
Living Centers Development Company
Living Centers Holding Company
Living Centers LTCP Development Company
Living Centers of Texas, Inc.
Long Ridge Nursing and Rehabilitation Center, Inc.
Longwood Rehabilitation Center, Inc.
Madonna Nursing Center, Inc.
Mariner - Regency Health Partners, Inc.
Page 2
<PAGE>
Subsidiaries December 6, 1999
- --------------------------------------------------------------------------------
Mariner Health at Bonifay, Inc.
Mariner Health Care of Atlantic Shores, Inc.
Mariner Health Care of Deland, Inc.
Mariner Health Care of Fort Wayne, Inc.
Mariner Health Care of Greater Laurel, Inc.
Mariner Health Care of Inverness, Inc.
Mariner Health Care of Lake Worth, Inc.
Mariner Health Care of MacClenny, Inc.
Mariner Health Care of Metrowest, Inc.
Mariner Health Care of Nashville, Inc.
Mariner Health Care of North Hills, Inc.
Mariner Health Care of Orange City, Inc.
Mariner Health Care of Palm City, Inc.
Mariner Health Care of Pinellas Point, Inc.
Mariner Health Care of Port Orange, Inc.
Mariner Health Care of Southern Connecticut, Inc.
Mariner Health Care of Toledo, Inc.
Mariner Health Care of Tuskawilla, Inc.
Mariner Health Care of West Hills, Inc.
Mariner Health Care, Inc.
Mariner Health Central, Inc.
Mariner Health Group, Inc.
Mariner Health Home Care, Inc.
Mariner Health of Bel Air, LLC
Mariner Health of Florida, Inc.
Mariner Health of Forest Hill, LLC
Mariner Health of Jacksonville, Inc.
Mariner Health of Maryland, Inc.
Mariner Health of Orlando, Inc.
Mariner Health of Palmetto, Inc.
Mariner Health of Seminole County, Inc.
Mariner Health of Tampa, Inc.
Mariner Health Properties IV, LTD.
Mariner Health Properties VI, LTD.
Mariner Health Resources, Inc.
Mariner Healthcare Management Company
Mariner Physician Services, Inc.
Mariner Post-Acute Network, Inc.
Mariner Practice Corporation
Mariner Supply Services, Inc.
MarinerSelect Staffing Solutions, Inc.
Med-Therapy Rehabilitation Services, Inc.
MedRehab of Indiana, Inc.
Medrehab of Louisiana, Inc.
MedRehab of Missouri, Inc.
MedRehab, Inc.
Merrimack Valley Nursing & Rehabilitation Center, Inc.
Methuen Nursing & Rehabilitation Center, Inc.
MHC Rehab Corp.
Page 3
<PAGE>
Subsidiaries December 6, 1999
- --------------------------------------------------------------------------------
MHC Transportation, Inc.
Middlebelt Nursing Home, Inc.
Middlebelt-Hope Nursing Home, Inc.
Mystic Nursing & Rehabilitation Center, Inc.
Nan-Dan Corp.
National Health Strategies, Inc.
National Heritage Realty, Inc.
New Hanover/Mariner Health, LLC
Nightingale East Nursing Center, Inc.
Ocean Pharmacy, Inc.
Omega/Indiana Care Corp.
Park Terrace Nursing & Rehabilitation Center, Inc.
Pendleton Nursing & Rehabilitation Center, Inc.
Pinnacle Care Corporation
Pinnacle Care Corporation of Huntington
Pinnacle Care Corporation of Nashville
Pinnacle Care Corporation of Seneca
Pinnacle Care Corporation of Sumter
Pinnacle Care Corporation of Williams Bay
Pinnacle Care Corporation of Wilmington
Pinnacle Care Management Corporation
Pinnacle Pharmaceutical Services, Inc.
Pinnacle Pharmaceuticals, Inc.
Pinnacle Rehabilitation of Missouri, Inc.
Pinnacle Rehabilitation, Inc.
Prism Care Centers, Inc.
Prism Health Group, Inc.
Prism Home Care Company, Inc.
Prism Home Care, Inc.
Prism Home Health Services, Inc.
Prism Hospital Ventures, Inc.
Prism Rehab Systems, Inc.
Professional Health Care Management, Inc.
Professional Rx Systems, Inc.
Regency Health Care Center of Seminole County, Inc.
Rehability Health Services, Inc.
Renaissance Mental Health Center, Inc.
River Parishes Rehabilitation Center Partnership
Sassaquin Nursing & Rehabilitation Center, Inc.
Seventeenth Street Associates Limited Partnership
St. Anthony Nursing Home, Inc.
Summit Hospital Holdings, Inc.
Summit Hospital of East Georgia, Inc.
Summit Hospital of Southeast Arizona, Inc.
Summit Hospital of Southeast Texas, Inc.
Summit Hospital of Southwest Louisiana, Inc.
Summit Hospital of West Georgia, Inc.
Summit Institute for Pulmonary Medicine and Rehabilitation, Inc.
Summit Institute of Austin, Inc.
Page 4
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements (No.
333-57339 (as amended), 333-62859 and 333-39485 (as amended)) pertaining to (i)
the 1995 Non-Employee Director Stock Option Plan and Outstanding Options of
Mariner Health Group, Inc.; (ii) the Paragon Health Network, Inc. Employee Stock
Purchase Plan, and (iii) the Paragon Health Network, Inc. Long-Term Incentive
Plan; GranCare, Inc. 401(k) Savings Plan; GranCare, Inc. 1996 Stock Incentive
Plan; GranCare, Inc. 1996 Replacement Stock Option Plan; GranCare, Inc. Outside
Directors' Stock Incentive Plan; and Evergreen Healthcare, Inc. Employees'
401(k) Profit Sharing Plan, of our report dated January 19, 2000, with respect
to the consolidated financial statements and schedule of Mariner Post-Acute
Network, Inc. included in this Annual Report (Form 10-K) for the year ended
September 30, 1999.
Ernst & Young LLP
January 19, 2000
Atlanta, Georgia
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 71,817
<SECURITIES> 0
<RECEIVABLES> 394,637
<ALLOWANCES> 87,066
<INVENTORY> 22,866
<CURRENT-ASSETS> 441,656
<PP&E> 793,261
<DEPRECIATION> 333,708
<TOTAL-ASSETS> 1,274,971
<CURRENT-LIABILITIES> 2,387,571
<BONDS> 113,618
0
0
<COMMON> 737
<OTHER-SE> (1,386,756)
<TOTAL-LIABILITY-AND-EQUITY> 1,274,971
<SALES> 2,272,580
<TOTAL-REVENUES> 2,272,580
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,713,241
<LOSS-PROVISION> 142,474
<INTEREST-EXPENSE> 195,261
<INCOME-PRETAX> (1,778,396)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,778,282)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,778,282)
<EPS-BASIC> (24.21)
<EPS-DILUTED> (24.21)
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