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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION
REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE
ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
Commission file number 0-21512
MARINER HEALTH GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 06-1251310
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1881 WORCESTER ROAD
FRAMINGHAM, MA 01701
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (860) 701-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Series A Junior Participating Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by checkmark 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 this
Form 10-K. [ ]
The aggregate market value of the Common Stock, $.01 par value, of the
registrant held by non-affiliates of the registrant as of March 23, 1998
(computed based on the closing price of such stock on The Nasdaq National Market
on March 23, 1998) was $465,846,287.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of March 23, 1998 was 29,577,542 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, or indicated portions thereof, have been
incorporated herein by reference:
1. Specifically identified information in the Registrant's definitive proxy
statement for its annual meeting of stockholders which is currently
expected to be filed with the Securities and Exchange Commission within
120 days of December 31, 1997 and is incorporated by reference into Part
III hereof.
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ITEM 1. BUSINESS
Mariner Health Group, Inc. ("Mariner" or the "Company") is a leading
provider of outcomes-oriented, post-acute health care services in selected
markets, with a particular clinical expertise in the treatment of short-stay
subacute patients in cost-effective alternate sites. The Company's services and
products include pre-acute care, inpatient care, comprehensive inpatient and
outpatient rehabilitation services, medical services and products (including
institutional and home pharmacy services, respiratory and infusion therapy and
durable medical equipment), home care and physician services, hospital unit
management and rehabilitation staffing. By providing this continuum of care in
selected markets, the Company believes that it will be better able to maintain
quality of care and control costs while coordinating the treatment of patients
from the onset of illness to recovery. The Company seeks to cluster facilities
and other post-acute health care services around large metropolitan areas and
major medical centers with large acute care hospitals from which to generate
post-acute admissions. Mariner currently operates or manages 94 inpatient
facilities and 39 hospital skilled nursing facilities or units with an aggregate
of approximately 13,304 beds, 42 outpatient rehabilitation clinics and, as of
February 28, provides contract rehabilitation services within 471 skilled
nursing facilities.
Mariner has established standardized clinical programs based on defined
protocols to address the medical requirements of large groups of patients with
similar diagnoses in a high-quality, cost-effective manner. The Company's
MarinerCare(R) clinical programs, such as the orthopedic recovery, cardiac
recovery and pulmonary management programs, are short-stay regimens based on
defined protocols that address the needs of subacute patients. Subacute patients
are medically stable and generally require three to six hours of skilled nursing
care per day. MarinerCare programs typically involve 20 to 45 days of inpatient
care and utilize the Company's nursing, rehabilitation, pharmacy and other
ancillary medical services, with patients generally discharged directly to their
homes. Mariner is also developing standardized clinical home care programs. The
Company believes that careful adherence to its clinical programs enables it to
produce consistent and measurable clinical and financial outcomes for patients
and payors and to conduct clinical programs consistently in all of its sites.
Using a case management approach, patients' progress is carefully monitored so
that the appropriate level of care is being delivered at the right time and in
the appropriate setting under the applicable clinical program. Mariner believes
that its standardized approaches to delivering care and measuring outcomes are
particularly attractive to managed care organizations and large payors and
positions the Company to contract with payors on a case rate or capitated basis.
MARINER'S STRATEGY
Mariner's goal is to be a low cost provider of high-quality, post-acute
health care services in its markets with a particular emphasis on short-stay
subacute patients. The Company believes that being the lowest cost provider will
significantly enhance its ability to respond to potential changes in
reimbursement programs and managed care competition, including its ability to
contract with payors on a case rate or capitated basis.
Mariner's strategies to achieve this goal include the following:
Patient-Focused Programmatic Care: Mariner has developed standardized
clinical programs based on defined protocols to address the medical requirements
of large groups of patients with similar diagnoses in a high-quality,
cost-effective manner at alternate site treatment settings. Each clinical
program incorporates an interdisciplinary approach to care and treatment with an
intense focus on rehabilitation and lifestyle retraining with the goal of
guiding patients to the best possible recovery in the shortest period of time
and improving patients' overall functional ability. The Company has also
designed its MarinerCare programs to include home health care. The Company
believes that careful adherence to these clinical programs enables it to better
produce consistent clinical and financial outcomes for patients and payors and
to implement clinical programs consistently in all its sites.
Outcomes and Case Management: The ability to measure clinical and
financial outcomes is central to Mariner's delivery of care. Mariner has
implemented a program to measure patients functional ability on admission, at
discharge and, for certain patients, six weeks after discharge. Each patient's
rehabilitation potential is evaluated using a standardized measurement system,
which rates a patient's independence in performing a number of basic activities
of daily living. This rating system permits Mariner to initially assess
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whether the patient will benefit from the Company's programs, document the
severity of a patient's initial impairment and measure the outcome and cost of
the patient's recuperation. Using a case management approach, a patient's
progress is continually monitored so that the appropriate level of care is being
delivered at the right time and in the appropriate setting under the applicable
clinical program. Mariner believes that its standardized approaches to
delivering care and measuring outcomes are particularly attractive to managed
care organizations and large third-party payors because they facilitate such
organizations' and payors' increasing desire to be provided with outcomes data
in order to manage and contain costs. The Company spent approximately $6,100,000
in 1997 and currently plans to spend approximately $9,000,000 in 1998 to upgrade
its information systems in order to enhance its ability to collect clinical and
financial outcomes information on a timely basis.
Regional Post-Acute Networks of Care: Mariner is organized into five
regions: Florida, Northeast, Central, Mid-Atlantic and Southwest. By providing
directly a broad continuum of care within a region, Mariner positions itself to
coordinate the treatment of patients from the onset of illness to recovery. By
providing this continuum of care in selected markets, the Company believes that
it will be better able to maintain quality of care, control costs and attract
managed care organizations and third-party payors.
Partnering with Key Referral Sources: Utilizing its standardized clinical
programs, regional post-acute networks of care and outcomes management approach,
Mariner seeks to allow patients and payors to coordinate all of their post-acute
health care with Mariner. By establishing relationships with physicians, payors
and managed care organizations, as well as skilled nursing facilities and other
traditional health care providers, the Company seeks to position itself to
provide care for patients who would benefit from Mariner's clinical programs and
to contract with payors on a case rate or capitated basis.
Commitment to Employee Training: The Company's success depends on its
ability to deliver standardized services throughout its markets and to maintain
a high quality level of care. Thus, Mariner is committed to an on-going training
process designed to ensure the integrity and consistency of its clinical
programs.
Market Driven Development: The Company introduces its clinical programs in
strategically selected metropolitan areas throughout the United States. Mariner
targets areas with strong demand for its services and the potential for the
Company to establish relationships with leading local health care providers and
payors. The Company typically establishes a presence in a market by acquiring,
leasing or managing one or more inpatient facilities. Once Mariner enters a
target market, it seeks to establish other sites and expand the range of health
care services it provides in that market.
As part of its expansion strategy, Mariner may acquire additional health
care facilities and businesses. Acquisition candidates include individual
inpatient facilities, businesses that operate multiple inpatient facilities and
other health care services businesses. The Company continuously identifies and
evaluates acquisition candidates and in many cases engages in discussions and
negotiations regarding potential acquisitions or dispositions. There can be no
assurance that any of the Company's discussions or negotiations will result in
an acquisition or dispositions. Further, if Mariner makes any acquisitions,
there can be no assurance that it will be able to operate any acquired
facilities or businesses profitably or otherwise successfully implement its
expansion strategy.
MARINER CLINICAL PROGRAMS AND SERVICES
MarinerCare(R) Programs
Each MarinerCare(R) program is designed to address the medical requirements
of a large group of patients with similar diagnoses in a high-quality,
cost-effective manner. MarinerCare(R) programs are inpatient short-stay regimens
based on defined protocols and utilize various medical services provided by
Mariner. These programs are focused on the needs of patients who are
recuperating from a major injury, surgery or illness, and incorporate specific
patient admission, evaluation and discharge criteria and standardized treatment
protocols and regimens, which have been developed over several years based on
the Company's clinical experience. Using these criteria, the Company evaluates
which patients would benefit most from its programs prior to their admission.
Upon admission, a care plan and projected discharge date are established for
each patient.
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Throughout a patient's inpatient stay, the Company carefully monitors and
evaluates the patient's progress and makes adjustments to the patient's
treatment. Educating patients regarding their ailments and treatments also
comprises a part of each program. MarinerCare(R) programs typically involve
inpatient treatment periods of 20 to 45 days. At its inpatient facilities, the
Company offers a mix of MarinerCare(R) programs tailored to serve the demands of
the local markets. In the facilities it acquires, the Company intends to focus
increasingly on treating subacute patients and implementing appropriate
MarinerCare(R) programs or other clinical programs.
The Company currently offers the following MarinerCare(R) programs:
Orthopedic Recovery. Patients who are recovering from orthopedic surgery
(such as joint replacements or amputations) or serious fractures may be admitted
into this MarinerCare program as early as three days after surgery or injury.
These patients typically require comprehensive rehabilitation, including
physical or occupational therapies, following stabilization of their conditions
or after surgery, and may require traction or fixation devices.
Cardiac Recovery. Patients who are recuperating from heart attacks or
heart surgery, or associated complications, are provided with the nursing and
rehabilitation services necessary to enable them to enter an outpatient
rehabilitation program.
Pulmonary Management. Patients with acute or chronic lung disease,
including those with tracheotomies and those who are on ventilators, are
provided with short-term intensive programs of pulmonary, physical or
occupational therapies.
Vascular and Wound Management. Patients who are recovering from surgery
for circulatory problems or from difficult-to-heal wounds or burns receive
services designed to further the healing process, such as state-of-the-art
dressing techniques, specialized bed therapies, nutritional support and physical
or occupational therapies.
Oncology Management. Patients who have undergone surgery, chemotherapy,
radiation, immunotherapy or hormone therapy as a result of cancer are provided
with a range of services, including pain management and nutritional and
psychological support.
Stroke Recovery. Patients who are recovering from strokes and require
treatment for related neurological and physical problems are provided with a
range of services, including physical, occupational and speech therapy.
Medically Complex. Under this program Mariner treats patients with medical
complications that prolong their recuperative period from a major illness. These
secondary complications must be resolved or brought under control before their
primary diagnosis can be addressed. These patients typically require many
ancillary services and therapies. The goal of this program is to return patients
to their homes with or without support services or to have them re-enter an
acute care hospital for additional surgery or treatment.
Mariner Rehabilitation Programs
Mariner rehabilitation programs are designed to assist skilled nursing
facilities in providing comprehensive rehabilitation services and in attracting
patients who would benefit from these services. The Company provides a
contracting facility with the physical, occupational and speech therapists
necessary to provide comprehensive rehabilitation services to the facility's
patients. In selected facilities the Company also provides MarinerCare(R)
rehabilitation programs which include case management and quality assurance
services, as well as coordination of admissions functions with key referral
services. The Company also offers consulting services regarding managed care
reimbursement and cost containment strategies to these facilities. By utilizing
Mariner's rehabilitation programs, the Company believes that skilled nursing
facilities are able to offer a cost effective rehabilitation program which will
make the facilities service package more attractive to managed care
organizations. The Company provides rehabilitation programs for 471 skilled
nursing facilities.
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In implementing a facility's rehabilitation programs, therapists screen
each patient in the facility to assess and identify those with functional
problems. A therapist, together with the patient's attending physician and staff
of the facility, designs a plan of care with specific long and short-term goals.
Therapists with specializations appropriate for the patient's condition meet
with the patient on a regular basis and render the prescribed rehabilitation
services. The Company's therapists assist the facility in working with local
hospitals, payors and managed care organizations to identify and admit patients
who can benefit from the facility's rehabilitation services. Services are
typically rendered in a dedicated room located in the facility which is equipped
with rehabilitation equipment.
In addition to providing comprehensive rehabilitation services at its
inpatient facilities and other skilled nursing facilities, the Company operates
42 outpatient rehabilitation clinics located primarily in metropolitan areas.
These clinics provide routine physical and occupational therapy to patients who
suffer from occupational, athletic or other injuries and are capable of being
treated on an outpatient basis. The Company also manages several pediatric
programs, provides temporary staffing to schools, and provides therapists to
clinics.
Other Inpatient Services
In Mariner's inpatient facilities, all patients receive basic medical
services including nursing care, special diets, nutrition supplements and
various medical equipment. Inpatient care is provided by registered nurses,
licensed practicing 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. Each of Mariner's facilities provides a broad range of case
management services over the course of treatment, including, as appropriate,
admission into the Company's MarinerCare(R) programs, ongoing medical
evaluation, social service needs, specialty equipment requirements, outcomes
measurement, discharge planning and arrangement for home care.
Medical Products And Services
As part of its strategy of providing a continuum of care, the Company also
offers the following products and services in selected markets:
Pharmacy Services. Mariner provides pharmaceutical goods and services
customized to meet the needs of its patients, and pharmacy consulting services
designed to evaluate, guide and monitor the administration of medication. The
Company currently has pharmacy operations in six states.
Infusion Therapy. 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.
Medical Equipment and Supplies. Mariner 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.
Clinical Respiratory Services. The Company provides clinical programs for
managing the pulmonary disease process for patients with acute or chronic lung
diseases. These services include rehabilitation and provision of supplies and
equipment.
Home Care
The Company provides skilled nursing, rehabilitation, pharmacy, infusion
therapy and respiratory services and durable medical equipment and supplies to
individuals needing such services in their homes, allowing Mariner to continue
to meet the nursing care needs of patients discharged from its facilities.
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Physician Services
Mariner provides management support services designed to allow physicians
to focus on the delivery of quality patient care, while the Company manages the
physicians' practice.
SOURCES OF REVENUE
The following table sets forth certain information relating to the sources
of Mariner's revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1995 1996 1997
--------------- --------------- ---------------
$ % $ % $ %
-------- --- -------- --- -------- ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Private Payors(1)..................... $177,479 50% $221,446 37% $248,471 34%
Medicare.............................. 102,713 29 217,271 37 260,296 35
Medicaid.............................. 74,614 21 152,092 26 224,709 31
-------- --- -------- --- -------- ---
Total....................... $354,806 100% $590,809 100% $733,476 100%
======== === ======== === ======== ===
</TABLE>
- ---------------
(1) Includes indemnity insurers, health maintenance organizations, employers
individuals and other non-governmental payors, payments from skilled nursing
facilities for services performed under rehabilitation management programs,
and revenue classified as "other revenue."
The sources and amounts of Mariner's patient revenues are determined by a
number of factors, including the capacities of its facilities, occupancy rate,
the mix of patients and the rates of reimbursement among payor categories
(private payors, Medicare and Medicaid). Patient length of stay is critical to
the level of reimbursement Mariner receives for each patient. Shorter-term
patients generally have a larger number of potential payors than do longer-term
patients, who generally depend to a greater extent on Medicaid. Reimbursement
levels generally are linked to the level of care provided, and short-stay
recuperating patients typically are more medically demanding, have higher acuity
levels and require greater ancillary services. In addition, Medicare and, in
certain cases, private payors, typically cease reimbursement after defined
lengths of stay or levels of expenditure, following which Mariner is generally
dependent on the patient's own resources or Medicaid for reimbursement. Once
admitted, a patient can be discharged involuntarily only for limited reasons
under Federal and state laws, which generally do not include payor source.
The Company's rehabilitation program contracts typically have a term of one
year but frequently include automatic renewals and in general are terminable on
notice of 30 to 90 days by either party. Under certain contracts, Mariner bills
Medicare or another third-party payor directly. Under other contracts, the
Company is compensated on a fee for service basis and in general directly bills
the skilled nursing facility, which in turn receives reimbursement from
Medicare, Medicaid, private insurance or the patient. Mariner recognizes
payments under these latter contracts as payments from private payors. Under
these latter contracts, Mariner also generally indemnifies its customers against
reimbursement denials by third-party payors for services provided by Mariner at
costs in excess of reasonable costs in such customer's market area. In addition,
Mariner generally indemnifies its customers against reimbursement denials by
third-party payors for services determined not to be medically necessary.
Mariner has established internal documentation standards and systems to minimize
denials and typically has the right to appeal denials at its expense. However,
in January, 1998, the Health Care Finance Administration ("HCFA") published new
salary equivalency guidelines. These guidelines, which are effective April 1,
1998, will be used by Medicare fiscal intermediaries to determine the maximum
allowable costs for rehabilitation services. Mariner is currently evaluating the
effects of these new guidelines. There can be no assurance that the impact of
these guidelines will not have a material adverse effect on the Company's
business and result of operations.
Private Payors. Private pay revenues include payments from individuals and
contract payors who pay directly for services without governmental assistance
and certain payments from skilled nursing facilities for services performed
under rehabilitation management programs. Contract payors include indemnity
insurers,
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health maintenance organizations, preferred provider organizations, workers'
compensation programs and other similar non-governmental third-party payment
sources. Payments from private payors are typically based on negotiated
contracts or on patient-specific terms. Typically, private payor contracts
permit such organizations to place patients in Mariner's facilities for a
negotiated per diem charge that varies with patient category, or for a per diem
base rate plus Mariner's charges for ancillary services. Certain of these
contracts require Mariner to provide specified health care services for a set
per diem payment rate. These contracts are generally automatically renewed
annually unless a party provides written notice. In most of these contracts,
either party may terminate such contract without cause on 90 days' written
notice or with cause on 30 days' written notice. The amount Mariner charges to
private patients in its facilities is not subject to regulatory control in any
of the states in which Mariner operates facilities.
Medicare. Under Medicare, the Federal government provides payment for
skilled nursing care, room and board therapies, drugs supplies and other
subacute services provided by Mariner to eligible patients (generally, those
over age 65 and certain disabled persons). Medicare patients are subject to a
20% co-payment, all or some of which may be paid by private payors, Medicaid,
Medigap insurance or the patient. Medicare generally does not provide
reimbursement for inpatient stays beyond the first 100 days, but may provide
reimbursement for certain therapies and supplies. Medicare provides Mariner with
interim payments during the year, which are subject to later adjustment to
reflect actual allowable costs. These costs include the reasonable direct and
indirect costs (including depreciation interest and overhead) of the services
furnished at Mariner's inpatient facilities subject to prospectively determined
ceilings on routine operating costs except when the facility is granted an
exception for the delivery of atypical services. Medicare does not pay a rate of
return on equity capital. See "Government Regulation."
After the first three full years of a facility's operation, Medicare
reimbursement of routine operating costs is subject to a cap which is related to
regional health care costs. Mariner has received an atypical services exception
for certain of its facilities, which allows payment of the costs over the
ceiling. This exception requires annual Federal approval.
The Balanced Budget Act of 1997 (the "Balanced Budget Act") provides for a
significant change in Medicare reimbursement to many types of providers
including the Company. Skilled nursing facilities will receive a fixed payment
based on their historic costs and a federally calculated rate adjusted for
regional usage variations. The federal rates have not yet been established or
published. This payment will not be cost settled and will commence July 1, 1998
and later to coincide with the facilities' Medicare fiscal year. See "Government
Regulation."
Under arrangements in which the Company bills a skilled nursing facility
for its rehabilitation services on a fee for service basis, Medicare reimburses
the facility based on a reasonable cost standard. Specific guidelines exist for
evaluating the reasonable cost of physical, occupational and speech therapy
services. Medicare applies salary-equivalency guidelines in determining the
reasonable cost of physical therapy services, which is 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. HCFA has published salary equivalency guidelines for all
therapies furnished under these types of arrangements. The guidelines are
applicable for services furnished after April 1, 1998. In addition, Mariner
provides certain services 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 party rule" generally requires that
services between subsidiary Companies or other entities deemed to be related
under the rule be charged at cost. Mariner believes that the services that are
charged at market rates qualify for an exception to Medicare's related party
rule. There can be no assurance, however, that HCFA will accept Mariner's
position and the Medicare reimbursement received for such services may be
subject to audit and recoupment in future years. In the event HCFA does not
agree with the Company's position, this may result in a reduction in
reimbursements in the future periods, and may have a material adverse effect on
the Company's business and results of operations.
A majority of Mariner's provider and rehabilitation contracts provide for
indemnification of the facilities for potential liabilities in connection with
reimbursement for rehabilitation services. There can be no assurance
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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.
During 1996 and continuing in 1997, the Company observed a nationwide
change in the practices of its Medicare fiscal intermediaries which, on behalf
of HCFA, have begun to aggressively and retrospectively change their position on
previously approved costs. This change includes the reclassification of costs
from reimbursable to non-reimbursable and the challenging of payment for costs
which had traditionally been approved. In response to these challenges of the
payment of Medicare costs the Company changed its estimate of required reserves
and provided an additional $10,000,000 reserves in 1996 for potential lower
levels of Medicare reimbursement. While the Company believes the amount of its
current reserves to be sufficient, there can be no assurance that this amount
will be adequate in the future if there is an additional change in the practices
of Mariner's fiscal intermediaries. Accordingly, Mariner may increase the amount
of its reserve based on the practices of its fiscal intermediaries in the
future. Any such increase would adversely effect Mariner's results of
operations.
Medicaid. The Medicaid program is designed to provide medical assistance
to individuals unable to afford medical care. Medicaid is a joint Federal and
state program in which states voluntarily participate. Reimbursement rates, and
reimbursement methods and standards, under the Medicaid program are set by each
participating state (with Federal approval as to certain aspects of the
reimbursement methods and standards), and rates and covered services vary from
state to state. In some of the states in which Mariner operates, Mariner's
inpatient facilities are paid a per diem rate for providing services to Medicaid
patients based on the applicable facility's reasonable allowable costs incurred
in providing services plus a return on equity, subject to cost ceilings for both
operating and fixed costs. In some states in which Mariner operates, individual
facilities are reimbursed, in whole or in part, on a prospective rate system.
Retroactive adjustments, if any, are based on a recomputation of the rate based
upon a field audit of the submitted cost report. In other states, each facility
is assigned a range of rates that vary depending on patient acuity and
historical costs. Certain states are studying methods for reducing expenses
under their Medicaid programs; these initiatives could have a material adverse
effect on Medicaid rates applicable to Mariner or cause delays in payment.
Certain states in which Mariner operates have undertaken a study of acuity
levels and are considering changes in their reimbursement systems to take levels
of acuity into account. Mariner cannot currently determine the potential effect
of any such changes.
Audits, Settlements and Reserves. Under current reimbursement regulations,
funds received under Medicaid and Medicare programs are subject to audit with
respect to proper application of the various payment formulas. These audits can
result in retroactive adjustment of payments received from the program,
resulting in either amounts due to the government agency from Mariner or amounts
due Mariner from the government agency. As a result of certain issues raised by
audits, in the third quarter of 1996, the Company changed its estimate of
required reserves and provided an additional $10,000,000 reserves on its
estimated settlements from third party payors. There can no assurance that there
will not be additional material adjustments in the future.
MARKETING AND PATIENT ADMISSION
Inpatient Facilities
In marketing MarinerCare(R) programs, the Company pursues a two-tiered
strategy. It markets its facilities, programs and services, first to payors and
managed care organizations at the corporate level and, second, to professionals
responsible for discharging patients at local hospitals at the facility level.
At the corporate level, Mariner'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.
Each facility maintains admissions coordinators who develop admissions
goals based on the availability of resources for each of its MarinerCare(R)
programs and who call on acute care hospitals to evaluate patients for admission
to Mariner's facilities. The admissions coordinators work closely with
hospitals, payors and managed care organizations to educate them about the
Company's facilities, programs and services and to
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determine which patients would benefit from the Company's programs. Patients
admitted to Mariner's facilities are generally discharged to the facility from
general acute care hospitals.
Rehabilitation Programs
Mariner markets its rehabilitation programs to skilled nursing facilities
primarily through regional administrators, who contact administrators and other
personnel of skilled nursing facilities. The Company seeks to demonstrate to the
administrator of a skilled nursing facility that Mariner offers a complete
solution to the facility's rehabilitation services needs in a cost-effective
manner. Mariner emphasizes that its therapists are based at the facility and do
not move from site to site, resulting in improved consistency and continuity of
patient care. Depending on the facility's needs, Mariner will also staff the
facility's rehabilitation management program with case managers and admissions,
management and marketing personnel, and will provide reimbursement and other
management support services. These individuals work with the facility's staff to
attract subacute patients whose recovery would be benefited by intensive
rehabilitation therapy, with the goal of improving the utilization of the
facility's rehabilitation management program as well as the facility's other
services.
QUALITY ASSURANCE
Mariner has developed a comprehensive quality assurance program at all of
its facilities and units. This program seeks to ensure that each site meet
Mariner's standards, which include comprehensive training requirements and
satisfactory results on patient satisfaction surveys. Mariner's quality
assurance program includes a training program for all new Mariner employees and
periodic training programs for clinical personnel. Mariner believes that its
utilization of standardized protocols facilitates its clinical staffs' training
and skill retention.
Mariner has developed a patient satisfaction questionnaire which is
included in each patient's discharge package. Facility administrators'
performance reviews and bonuses are dependent in part upon the results of the
facility's quality as measured by regulatory surveys and its patient and family
satisfaction questionnaires.
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FACILITIES
The following table provides information by state about each of the
facilities owned, leased and managed by the Company as of March 23, 1998:
<TABLE>
<CAPTION>
MANAGED
OWNED FACILITIES LEASED FACILITIES FACILITIES AND UNITS TOTAL
------------------ ------------------ --------------------- -------------------
FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS
---------- ----- ---------- ----- ----------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Florida Region
Florida..................... 16 1,933 9 1,128 8 739 33 3,800
Southwest Region:
California.................. -- -- -- -- 1 11 1 11
Colorado.................... -- -- 2 237 1 12 3 249
Kansas(2)................... 1 101 -- -- -- -- 1 101
Oklahoma.................... -- -- 1 161 2 21 3 182
Texas(1).................... 6 952 5 685 11 289 22 1,926
Northeast Region:
Connecticut................. 2 250 1 90 -- -- 3 340
Massachusetts............... 6 748 -- -- 11 1,168 17 1,916
Mid-Atlantic Region:
District of Columbia........ -- -- -- -- 1 19 1 19
Delaware.................... -- -- -- -- 1 99 1 99
Maryland(1)................. 10 1,635 3 576 6 264 19 2,475
New Jersey.................. -- -- -- -- 6 280 6 280
Pennsylvania................ 2 205 -- -- 1 32 3 237
Virginia.................... -- -- -- -- 1 60 1 60
West Virginia............... 1 186 -- -- -- -- 1 186
Central Region:
Georgia..................... 1 165 -- -- -- -- 1 165
Illinois.................... 1 120 -- -- -- -- 1 120
Indiana..................... -- -- -- -- 1 24 1 24
Louisiana................... -- -- -- -- 2 25 2 25
Nevada...................... -- -- -- -- 3 63 3 63
North Carolina.............. 1 150 -- -- -- -- 1 150
Ohio........................ 1 93 -- -- 1 12 2 105
South Carolina.............. 3 308 -- -- -- -- 3 308
Tennessee................... 2 210 2 253 -- -- 4 463
-- ----- -- ----- -- ----- --- ------
Totals................... 53 7,056 23 3,130 57 3,118 133 13,304
== ===== == ===== == ===== === ======
</TABLE>
- ---------------
(1) Three facilities in Maryland, one in North Carolina and one in Texas are
owned under joint venture arrangements.
(2) This facility is under contract for sale.
The Company owns an 80,000 square foot building located in New London,
Connecticut. The Company also leases approximately 31,000 square feet in
Framingham, Massachusetts that serve as its executive offices. The Company's
other leases are generally long-term. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" in Item 7 of this Report.
10
<PAGE> 11
SIGNIFICANT DEVELOPMENTS
1997
1997 Facility Acquisition. During 1997, the Company acquired four skilled
nursing facilities with a total of 587 beds in the Baltimore metropolitan area
for a total purchase price of approximately $37,000,000 (the "1997 Facility
Acquisitions"). The Company borrowed approximately $37,000,000 under its Credit
Facility to finance these acquisitions. Goodwill of $22,000,000 was recorded in
connection with these acquisitions.
Prism and Related Rehabilitation Transaction. In October 1997, the Company
completed its merger with Prism Health Group, Inc. (the "Prism Merger"). All of
the issued and outstanding shares of Prism capital stock were converted into the
right to receive an aggregate of approximately $84,300,000 in cash. In
connection with the Prism Merger the Company also repaid approximately
$9,500,000 in assumed debt and paid expenses of approximately $700,000 prior to
the closing. Goodwill of approximately $91,000,000 was recorded in connection
with this transaction. The Company borrowed approximately $94,500,000 under its
Credit Facility to finance the Prism Merger.
In June, 1997, the Company also acquired another rehabilitation company for
a total purchase price of approximately $15,403,000. The Company made an initial
payment of $2,000,000 and in 1998 paid an additional $3,135,000. These amounts
were funded under the Company's Credit Facility. In addition, the Company
entered into a three year, 7% interest bearing Note for $5,134,000. The Company
also agreed to pay the remaining $5,134,000 in contingent consideration over the
next three years provided certain financial targets were met. Goodwill of
$2,552,000 was recorded in connection with this transaction.
Joint Ventures. The Company entered into three joint venture arrangements
in connection with three of its facilities located in Maryland and North
Carolina. The Company retained a 50% interest in two of the facilities and 60%
in the third facility. The Company received a total of $5,349,000 of capital
contributions from its joint venture partners and recognized a gain of
approximately $1,659,000 from these transactions.
Dispositions. During 1997, the Company sold two nursing facilities which
were located in non-strategic locations. The Company received approximately
$4,890,000 from the sale of these facilities and recognized a pretax loss of
$4,579,000. In 1997, the two facilities generated an aggregate of $6,854,000 and
$550,000 of revenue and income from operations, respectively.
Additionally, during the course of 1997, Mariner commenced operation of
several new home health agencies in Florida and other states.
1996
The Transactions With Convalescent Services, Inc. On January 9, 1995, the
Company, Convalescent Services, Inc. ("CSI"), CSI's stockholders (the "CSI
Stockholders") and certain of their affiliates entered into certain agreements
governing the merger (the "CSI Merger") of Blue Corporation, a Georgia
corporation and wholly owned subsidiary of the Company, with and into CSI and
the acquisition of certain related assets. CSI operated subacute-oriented
skilled nursing facilities that provided restorative nursing care and specialty
medical services, including rehabilitation programs, respiratory therapy,
infusion therapy, wound care treatment and Alzheimer disease management. The
Company acquired 25 skilled nursing facilities, one rehabilitation hospital and
one continuing care retirement community, with an aggregate of 3,801 beds in
connection with this transaction. On January 2, 1996 the CSI Merger was
consummated.
Premier. In January 1996, Mariner entered into an agreement to be the
preferred provider of subacute services to Premier, which is one of the largest
hospital-health care alliance in the United States. As the preferred subacute
provider, Mariner may contract individually with member hospitals and systems to
provide subacute services Pursuant to this arrangement, a Premier affiliate was
granted warrants to purchase 210,000 shares of Mariner Common Stock at an
exercise price of $11.375 per share, as well as warrants to purchase up to an
additional 1,890,000 shares of Mariner Common Stock over a five-year period
depending on the performance of the arrangements between Mariner and
Premier-affiliated facilities. None of such performance based warrants became
exercisable in fiscal 1996 and 1997. The Company recorded a charge of
approximately
11
<PAGE> 12
$850,000 in the first quarter of 1996 as a result of the 210,000 warrants
granted. The Company will receive management fees under the agreements it enters
with Premier-affiliated facilities based on a percentage of such facility's
revenues specified in the agreement.
MedRehab Merger. In March 1996, the Company completed its merger (the
"MedRehab Merger") with MedRehab, Inc. ("MedRehab") which, at the time of the
MedRehab Merger, provided contract physical medicine and rehabilitation services
to approximately 227 sites of which 149 were skilled nursing facilities and the
remaining 78 sites included hospitals and schools.
1996 Florida Acquisition. In May, 1996 the Company completed its
acquisition of a company that operates seven skilled nursing facilities and one
assisted living facility with an aggregate of 960 beds in Florida, Tennessee and
Kansas (the "1996 Florida Acquisition"). All of the issued and outstanding
shares of common stock of that company were converted into the right to receive
an aggregate of approximately $28,050,000 in cash. The Company financed the
consideration paid in the 1996 Florida Acquisition with a portion of the net
proceeds from the sale of its Senior Subordinated Notes and borrowings under its
Credit Facility.
Jacksonville Facility. On October 1, 1996, the Company acquired a 163-bed
facility in Jacksonville, Florida. The total purchase price was $9,850,000.
Mariner funded the purchase price by assuming two US Department of Housing and
Urban Development ("HUD") mortgages in the aggregate principal amount of
approximately $4,236,000. The Company borrowed $6,500,000 under its Credit
Facility to fund the remainder of the cash price and to replace reserves
required by the HUD mortgage agreements.
Allegis. In a two-part closing consummated on October 1, 1996 and November
1, 1996, Mariner acquired certain assets of Allegis Health Services, Inc.
("Allegis") and certain of its affiliates. Under the terms of the acquisition
agreement, the Company purchased five inpatient facilities, assumed two
operating leases and one capital lease and purchased Allegis' institutional
pharmacy and its rehabilitation program management subsidiary. The total
purchase price consisted of the assumption of approximately $12,000,000 in debt,
including the capital lease, and $98,000,000 in cash borrowed under its Credit
Facility. The cash portion of the purchase price was adjusted to $100,000,000
based on a multiple of the net operating income of the assets acquired as
defined in the purchase agreement.
For certain information regarding completed acquisitions, including those
describe above, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" in Item 7 of this
Report.
General
As part of its expansion strategy, Mariner may acquire additional health
care facilities and businesses. Potential acquisition candidates include
individual inpatient facilities, businesses that operate multiple inpatient
facilities, rehabilitation companies and other health care services businesses.
In addition, the Company continuously identifies and evaluates potential
acquisition candidates, evaluates strategic divestitures and in many cases
engages in discussions and negotiations regarding potential acquisitions and
dispositions. There can be no assurance that any of the Company's discussions or
negotiations will result in an acquisition or a disposition. Further, if Mariner
makes any acquisitions, there can be no assurance that it will be able to
operate any acquired facilities or businesses profitably or otherwise
successfully implement its expansion strategy. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" found in Item 7 to this Report.
COMPETITION
Mariner's subacute care facilities compete primarily on a local and
regional basis with other skilled care providers, including general and chronic
care hospitals, skilled nursing facilities, assisted living facilities,
rehabilitation centers and other subacute care providers. Many of such providers
currently have underutilized facilities and are expanding into subacute care by
converting some or all of such facilities to subacute care. In particular, a
number of nursing care facilities and general acute care hospitals are adding
subacute care units. In addition, a number of services provided by the Company
compete with services traditionally provided by
12
<PAGE> 13
general acute care hospitals, rehabilitation facilities and other providers.
Some competing providers have greater financial resources than those of the
Company or may operate on a non-profit basis or as charitable organizations. The
degree of success with which Mariner's facilities compete varies from location
to location and depends on a number of factors. The Company believes that the
programs and quality of care provided, the reputation of its facilities and the
level of its charges for services are significant competitive factors. Mariner
seeks to meet competition through its patient focus and the relatively low cost
of its programs.
Mariner's competition in the rehabilitation business in most markets
reflects the fragmented nature of the rehabilitation services industry. There
are numerous providers of contract rehabilitation services, some of which merely
provide a therapist to a nursing facility and others of which provide total
rehabilitation program management like the Company. Most of the Company's
clinics compete directly or indirectly with outpatient rehabilitation providers,
the rehabilitation therapy departments of acute care hospitals, physicians'
offices, private physical therapy practices and chiropractors.
Mariner's medical services business and home health business face broad
based competition from both large institutional providers as well as regional
and local providers. In addition, several states do not require a certificate of
need to operate home health agencies, thereby causing certain of Mariner's home
health markets to be intensely competitive.
GOVERNMENT REGULATION
The Company and the health care industry generally are subject to extensive
federal, state and local regulation governing licensure, certification, conduct
of operations and participation in reimbursement programs. Political, economic
and regulatory influences are subjecting the health care industry in the United
States to fundamental change. In addition, both the Medicare and Medicaid
programs are subject to statutory and regulatory changes, administrative
rulings, interpretations of policy, intermediary determinations and governmental
funding restrictions, all of which may materially decrease the rate of program
payments to health care facilities. Since 1983, Congress has consistently
attempted to limit the growth of federal spending under the Medicare and
Medicaid programs. The Company can give no assurance that payments under such
programs will in the future remain at a level comparable to the present level or
be sufficient to cover the costs allocable to such patients. In addition many
states are considering reductions in their Medicaid budgets.
Medicare utilizes a cost-based reimbursement system for nursing facilities,
long-term acute care hospitals and home health agencies for reasonable direct
and indirect allowable costs incurred in providing "routine service" (as defined
by the program and subject to certain limits) as well as capital costs and
ancillary costs. The Company is filing Routine Cost Limit Exception requests for
the facilities which exceed the limits and fit the criteria as exception
candidates. The Company may benefit from exceptions to the routine cost limits.
Allowable costs include nursing, administrative and general, dietary,
housekeeping, laundry, social services, activities, central supply, maintenance
and plant operations as well as ancillary and capital costs. There can be no
assurance that any such requests for the Routine Cost Limit Exception will be
granted.
Congress passed a fiscal year 1995 budget reconciliation bill that
contained a provision that would have required Medicare to pay skilled nursing
facilities on a prospective payment basis beginning in October 1997. Although
this bill was ultimately vetoed by the President, the Clinton Administration had
proposed adopting prospective payment for skilled nursing facilities in 1999.
See the discussion of the Balanced Budget Act below for additional discussion
regarding the prospective payment system. Other legislative proposals, including
one adopted by the U.S. Senate, have called for developing a prospective payment
system for specialty medical care programs within acute care hospitals.
Proposals to reduce the growth in Medicare and Medicaid expenditures are under
active consideration in the current session of Congress. The Company cannot
predict at this time whether any of these proposals will be adopted or, if
adopted and implemented, what effect such proposals would have on the Company.
There can be no assurance that payments under state or federal governmental
programs will remain at levels comparable to present levels or will be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to such programs, particularly with respect to the Medicaid programs,
which generally provide lower reimbursement rates than the Medicare program.
13
<PAGE> 14
Balance Budget Act. The Balanced Budget Act, signed into law on August 5,
1997, makes numerous changes to the Medicare and Medicaid programs which could
potentially affect the Company. With respect to the Medicare program, the new
law required the establishment of a prospective payment system for Medicare
skilled nursing facility services, under which facilities will be paid a federal
per diem rate for virtually all covered services. The prospective payment system
will be phased in over three cost reporting periods, starting with cost
reporting periods beginning on or after July 1, 1998. The Balanced Budget Act
also institutes consolidated billing for skilled nursing facility services,
under which payments for non-physician Part B services for beneficiaries no
longer eligible for Part A skilled nursing facility care will be made to the
facility, regardless of whether the item or service was furnished by the
facility, by others under arrangement or under any other contracting or
consulting arrangement, effective for items or services furnished on or after
July 1, 1998. Likewise, the Balanced Budget Act requires the Secretary of the
United States Health and Human Services ("HHS") to establish a prospective
payment system for home health services, to be implemented beginning October 1,
1999. The legislation also requires home health agencies to submit claims for
all services, and all payments will be made to the home health agencies
regardless of whether the item or service was furnished by the agency, by others
under arrangement or under any other contracting or consulting arrangement. The
law also contains provisions affecting outpatient rehabilitation agencies and
providers, including a 10 percent reduction in operating and capital costs for
1998, a fee schedule for therapy services beginning in 1999, and the application
of per beneficiary therapy caps currently applicable to independent therapists
to all outpatient rehabilitation services beginning in 1999. Other provisions
limit Medicare payments for certain drugs and biologicals, durable medical
equipment and parenteral and enteral nutrients and supplies.
The Balanced Budget Act also contains a number of changes affecting the
Medicaid program. Significantly, the law repeals the so-called Boren Amendment,
which required state Medicaid programs to reimburse nursing facilities for the
costs that are incurred by efficiently and economically operated providers in
order to meet quality and safety standards. Effective for Medicaid services
provided on or after October 1, 1997, states will have considerable flexibility
in establishing payment rates. The Company is not able to predict whether any
states will adopt changes in their Medicaid reimbursement systems, or, if
adopted and implemented, what effect such initiatives would have on the Company.
Nevertheless, there can be no assurance that such changes in Medicaid
reimbursement to nursing facilities will not have an adverse effect on the
Company. Further, the Balanced Budget Act allows states to mandate enrollment in
managed care systems without seeking approval from the Secretary of HHS for
waivers from certain Medicaid requirements as long as certain standards are met.
These managed care programs have historically exempted institutional care.
However, no assurance can be given that these waiver provisions ultimately will
not change the reimbursement system for long-term care facilities from
fee-for-service to managed care negotiated or capitated rates or otherwise
affect the level of payments to the Company.
Prospective Payment System. In August 1997, the Balanced Budget Act was
passed mandating that traditional cost-based Medicare reimbursement for
long-term care transition into a per-diem prospective payment system ("PPS").
This legislation essentially requires providers to prospectively manage the care
of the patient and the resources that are consumed. Under PPS, each patient's
clinical status is evaluated and placed into a payment category. The patient's
payment category dictates the amount that the provider will receive to care for
the patient on a daily basis.
PPS is required to be phased in over four years beginning on July 1, 1998.
The new federal rates that are utilized for Medicare reimbursement will be all
inclusive of routine, capital and ancillary costs. The facility specific rate
will be based upon 1995 allowable costs and will take exceptions into account if
approved for that year. Exemptions will be included, but capped at 150% of the
routine cost limit, and must be accounted for in a closed cost report prior to
October 1, 1995. PPS will be phased in as follows:
Year 1: 25% of the federal rate and 75% of the facility specific rate.
Year 2: 50% of the federal rate and 50% of the facility specific rate.
Year 3: 75% of the federal rate and 25% of the facility specific rate.
Year 4: 100% of the federal specific rate.
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<PAGE> 15
Certificate of Need Requirements. Most states in which the Company
operates or is considering expansion possibilities have statutes which require
that prior to the addition or construction of new beds, the addition of new
services, the acquisition of certain medical equipment, the commencement of
activities and services for new home health agencies or certain capital
expenditures in excess of defined levels, a state agency must determine that a
need exists. These CON programs are designed to avoid duplication in health care
facilities. CONs usually are issued for a specified maximum expenditure and
require implementation of the proposed improvement within a specified period of
time. Some states also require obtaining an exemption from CON review, or a
reclassification of an existing CON, for acquisitions of existing health care
facilities. Several states have instituted moratoria on new CONs, or otherwise
stated their intent not to grant approvals for new beds. Such moratoria may
adversely affect the Company's ability to expand in such states, but may also
provide a barrier to entry to potential competitors.
Where required, appropriate CONs are obtained for the Company's facilities,
managed units and home health agencies. Depending on the licensure of the
facility in which it is located, a managed or leased unit may operate under the
host facility's CON, although Mariner may seek a new CON to enable the unit to
participate in certain Federal and state health-related programs.
Licensing. The inpatient facilities operated or managed by the Company
must be licensed by state authorities. Each of the facilities is so licensed.
Both initial and continuing qualification of a skilled nursing facility to
maintain such licensure and participate in the Medicare and Medicaid programs
depend upon many factors including, among other things, accommodations,
equipment, services, patient care, safety, personnel, physical environment, and
adequate policies, procedures and controls. In addition, the Company's
outpatient rehabilitation clinics, pharmacy services, home health agencies and
other health care services are generally subject to regulation and, in many
instances, licensure or certification requirements.
Medicare and Medicaid Certification. In order to receive Medicare and
Medicaid reimbursement, a skilled nursing facility must meet the applicable
requirements of participation set forth by HHS relating to the type of facility,
its equipment, its personnel and its standards of medical care, as well as
comply with all state and local laws and regulations. The Company must offer
services to Medicare and Medicaid recipients on a non-discriminatory basis and
may not preferentially accept private pay or commercially insured patients. In
addition, the Company's outpatient rehabilitation clinics, pharmacy services and
other health care services are generally subject to applicable Medicare and
Medicaid certification and other applicable requirements.
Medicare Related Party Rule. Subject to certain exceptions, Medicare's
related party rule generally requires that services between related entities be
charged at cost. Mariner provides certain services between subsidiary companies,
some of which are charged at cost and others of which are charged at market
rates. Mariner believes that the services which are charged at market rates
qualify for an exception to Medicare's related party rule. There can be no
assurance, however, that HCFA will endorse Mariner's position and the Medicare
reimbursement received for such services may be subject to audit and recoupment
in future years in which event Mariner's revenues, profitability and financial
condition may be significantly and adversely affected.
Inspections. Federal, state and local agencies inspect all health care
facilities on a regular basis to determine whether such facilities are in
compliance with governmental operating and health standards and conditions for
participation in government medical assistance programs. Such surveys include
reviews of patient utilization of health care facilities and standards for
patient care. If such an agency determines that a facility fails to comply with
certain regulatory requirements, it may, or may be required to, take various
adverse actions, including the imposition of fines, temporary suspension of
admission of new patients to the facility, suspension or decertification from
participation in the Medicare or Medicaid programs and, in extreme
circumstances, revocation of the facility's license.
Fraud and Abuse Laws. Various federal and state laws regulate the
relationship between providers of health care services and physicians or others
able to refer medical services, including employment or service contracts,
leases and investment relationships. These laws include the fraud and abuse
provisions of the Medicare and Medicaid and similar state statutes (the "Fraud
and Abuse Laws"), which prohibit the submission of false claims, the payment,
receipt, solicitation or offering of any direct or indirect remuneration
15
<PAGE> 16
intended to induce the referral of Medicare or Medicaid patients or for the
ordering or providing of Medicare or Medicaid covered services, items, equipment
or other prohibited activities including, fee splitting between healthcare
providers. These laws include the "anti-kickback" provisions of the federal
Medicare and Medicaid programs, which prohibit, among other things, knowingly
and willfully soliciting, receiving, offering or paying any remuneration
(including any kickback, bribe or rebate) directly or indirectly in return for
or to induce the referral of an individual to a person for the furnishing or
arranging for the furnishing of any item or service for which payment may be
made in whole or in part under Medicare or Medicaid. These laws also include the
"Stark legislations" which prohibit, with limited exceptions, the referral of
patients by physicians for certain services, including home health services,
physical therapy and occupational therapy, to an entity in which the physician
has an ownership interest. In addition, some states restrict certain business
relationships between physicians and other providers of healthcare services.
Where referrals to related organizations do occur, disclosures of the
relationship is required, and patient and families are presented patient care
alternatives other than the related organizations. Many states prohibit business
corporations from providing, or holding themselves out as a provider of medical
care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs and civil and criminal penalties. These laws vary from
state to state, are often vague and have seldom been interpreted by the courts
or regulatory agencies. From time to time, the Company has sought guidance as to
the interpretation of these laws; however, there can be no assurance that such
laws will ultimately be interpreted in a manner consistent with the practices of
the Company. Although the Company has contractual arrangements with some
healthcare providers to which the Company pays fees for services rendered or
products provided, the Company believes that its practices are not in violation
of these laws. The Company cannot accurately predict whether enforcement
activities will increase or the effect of any such increase on its business.
There have also been a number of recent federal and state legislative and
regulatory initiatives concerning reimbursement under the Medicare and Medicaid
programs and compliance with applicable laws, rules and regulations, as well as
numerous civil and criminal investigations regarding the operations and business
practices of various healthcare providers. Accordingly, it is anticipated that
these areas will come under closer scrutiny by the government. The Company
cannot accurately predict the impact of any such initiatives. See "Risk
Factors -- Health Care Reform and Prospective Payment System."
Additionally, the Health Insurance Fortability and Accountability Act of
1996 (the "Accountability Act") granted expanded enforcement authority to HHS
and the U.S. Department of Justice ("DOJ"), and provided enhanced resources to
support the activities and responsibilities of the Office of Inspector General
("OIG") and DOJ by authorizing large increases in funding for investigating
fraud and abuse violations relating to healthcare delivery and payment. The
Balanced Budget Act also includes numerous health fraud provisions, including
new civil money penalties for contracting with an excluded provider; new surety
bond and information disclosure requirements for certain providers and
suppliers; and an expansion of the mandatory and permissive exclusions added by
the Health Insurance Fortability and Accountability Act of 1996 to any federal
healthcare program (other than the Federal Employees Health Benefits Program).
Management expects that business practices of providers and financial
relationships between providers will be subject to increased scrutiny as
healthcare reform efforts continue at federal and state levels. Although the
Company has contractual arrangements with some healthcare providers, it believes
that its practices are not in violation of these federal and state prohibitions.
Management cannot reasonably predict whether enforcement activities will
increase at the federal or state level or the effect of any such increase on the
business of the Company.
INSURANCE
Mariner maintains professional liability insurance, comprehensive general
liability insurance and other insurance coverage on all of its facilities.
Mariner believes that its insurance is adequate in amount and coverage for its
current operations. However, in certain states where the Company does business,
insurance regulations do not allow insurance coverage for punitive damages. Such
damages would be borne by the Company and could have a material adverse impact
on its business and results of operations. The award and amount of punitive
damages is difficult to predict and while the Company endeavors to provide
appropriate
16
<PAGE> 17
reserves, there can be no assurance that such reserves are, in fact, adequate.
See Note 16 of the Consolidated Financial Statements appearing in Item 8 of this
Report.
EMPLOYEES
As of December 31, 1997, Mariner employed approximately 17,000 full and
part-time employees. The employees at nine of Mariner's skilled nursing
facilities, representing approximately 5% of Mariner's work force, are
represented by labor unions. Two contracts are currently under negotiation, one
expires in December of 1998, two expire in January of 1999, one expires in March
of 1999 and the remainder after the first quarter of 1999. In addition, the
Company has experienced organizational activities at certain of its facilities.
Management cannot predict the impact of continued or increased union
representation or organizational activities on its future operations. Management
of Mariner considers the relationship between Mariner and its employees to be
good, but cannot predict whether it will face additional union activity.
Mariner competes with general acute care hospitals, nursing homes and other
care facilities for the services of physicians, registered nurses, therapists
and other professional personnel. From time to time, there have been shortages
in the supply of available physicians, registered nurses, and various types of
therapists and other health care personnel. Competition for licensed therapists
is intense and turnover is very high. Mariner places substantial emphasis on
recruiting and retaining therapists, employing a staff of recruiters dedicated
to identifying, interviewing and hiring therapists. In general, therapists
prefer clinic employment over contract services employment, primarily because a
clinic practice generally involves less acutely ill patients. The turnover in a
clinic practice is therefore lower than in a contract practice. Although Mariner
believes that it will be able to attract and retain sufficient physicians,
nursing personnel and therapists to meet its needs, there can be no assurance
that it will be able to do so.
ITEM 2. PROPERTIES
The Company's executive offices are located at 1881 Worcester Road,
Framingham, Massachusetts, 01701. Information regarding other Mariner properties
and facilities appears under the heading "Facilities" in Item 1 of this Report.
ITEM 3. LEGAL PROCEEDINGS
Mariner is subject to claims, investigations and legal actions from time to
time. The Company's Massachusetts pharmacy operations were reviewed for certain
matters with respect to technical requirements. This review, paid and settled in
1997, did not have a material adverse effect on Mariner. Mariner has also
assumed claims and legal actions brought against certain of the companies and/or
assets which it has acquired, some of which claims and legal actions are covered
by indemnification agreements by the companies' former owners. Mariner believes
that all such claims and actions currently pending against it either are
adequately reserved for, covered by insurance or by indemnification or would not
have a material adverse effect on Mariner if decided in a manner unfavorable to
Mariner. Many states, however, do not permit providers to insure against
punitive awards with respect to liability matters. In the event that a
significant punitive claim is awarded against Mariner, a material adverse impact
on Mariner's cash flow, resources, profitability and financial condition could
result. See "Risk Factors -- Uncertainty of Regulation."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of stockholders held on December 17, 1997,
the Company's stockholders elected two Class I Directors to the Company's Board
of Directors and ratified the selection of Coopers & Lybrand, LLP as the
Company's auditors for fiscal year ended December 31, 1997. Mr. Christopher
Grant Jr. and Mr. John F. Robenault were reelected to the Board of Directors and
Messrs. David C. Fries, David N. Hansen, Samuel B. Kellett, Stiles A. Kellett,
Jr. and Dr. Arthur W. Stratton, Jr.'s terms were continued. With respect to the
election of directors, the votes cast as follows, for Mr. Grant, 26,381,682
voted for reelection, 0 voted against and 199,320 abstained. With respect to Mr.
Robenault, 26,382,732 voted for reelection, 0 voted against and 198,271
abstained. With respect to the
17
<PAGE> 18
ratification of the auditors for the fiscal year 1997, the votes cast as
follows: 21,800,413 voted for the proposal, 3,976,588 voted against the proposal
and 804,002 abstained from voting on the proposal.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 23, 1998, who are elected
on an annual basis and serve at the discretion of the Board of Directors, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES SERVED
---- --- -------------------- ------
<S> <C> <C> <C>
Arthur W. Stratton, Jr., M.D. ...... 52 Chairman of the Board, President, Chief 1988-Present
Executive Officer & Director
David N. Hansen..................... 45 Executive Vice President, Chief Financial 1996-Present
Officer and Treasurer
Paul Diaz........................... 36 Executive Vice President and Chief 1997-Present
Operating Officer
</TABLE>
Dr. Stratton has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since founding the Company in 1988. He also
served as President of the Company since inception until May 1994 and from
February 1995 to the present. Prior to founding the Company, Dr. Stratton was a
practicing physician and served in a number of administrative capacities in
acute care hospitals.
Mr. Hansen has served as Executive Vice President, Treasurer and Chief
Financial Officer of the Company since October, 1996. Prior to joining Mariner,
Mr. Hansen was a partner at Coopers & Lybrand L.L.P. from 1988 to 1996.
Mr. Diaz joined Mariner in October, 1996 and has served as Chief Operating
Officer of the Company since November, 1997. Prior to that, he was President of
the Inpatient Division. Mr. Diaz served as Chief Executive Officer of Allegis
Health Services from January, 1995 until the company was purchased by Mariner in
October of 1996. He served as Chief Financial Officer and General Counsel of
Allegis Health Services from January, 1991 through December, 1994.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is quoted on the Nasdaq National Market under the symbol
MRNR. The following table sets forth for the periods indicated, the high and low
sales prices for the Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
1997 ---- ---
<S> <C> <C>
4th Quarter.............................................. $17.125 $13.875
3rd Quarter.............................................. 16.000 12.125
2nd Quarter.............................................. 15.625 7.750
1st Quarter.............................................. 10.250 8.125
</TABLE>
<TABLE>
<CAPTION>
HIGH LOW
1996 ---- ---
<S> <C> <C>
4th Quarter.............................................. $15.250 $ 6.750
3rd Quarter.............................................. 19.750 13.625
2nd Quarter.............................................. 20.125 15.000
1st Quarter.............................................. 20.125 14.875
</TABLE>
On March 23, 1998 the closing sale price of the Common Stock was $15.75 per
share. As of March 23, 1998, there were approximately 965 holders of record of
the Common Stock.
Mariner has not paid any cash dividends on the Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings to fund the development and growth
of its business. In addition, certain provisions of Mariner's revolving credit
facility
18
<PAGE> 19
and the Indenture relating to the Company's 9 1/2% Senior Subordinated Notes due
2006 restrict or prohibit the payment of cash dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in Item 7 of this Report and Note
10 of Notes to Consolidated Financial Statements in Item 8 of this Report.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial information presented below for each of
the five years ended December 31, 1997 has been derived from the Company's
audited consolidated financial statements. The selected consolidated financial
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company and the Notes thereto appearing in Items 7
and 8, respectively, to this Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net patient service revenue(1)..... $209,238 $260,357 $337,635 $578,755 $ 714,623
Other income....................... 1,568 3,787 17,171 12,054 18,853
-------- -------- -------- -------- ----------
Total operating revenue............ 210,806 264,144 354,806 590,809 733,476
Operating expenses:
Facility operating costs(2)...... 167,785 208,691 276,633 465,226 563,646
Corporate general and
administrative expense(3)..... 34,902 30,935 39,830 46,401 62,052
Depreciation and amortization
expense....................... 6,843 8,091 11,397 21,376 27,499
Interest expense, net............ 7,379 1,819 3,598 26,256 39,952
Facility rent expense, net....... 1,079 1,739 1,830 3,727 4,421
Asset Impairment loss............ -- -- -- -- 10,486
-------- -------- -------- -------- ----------
Total operating expenses...... 217,988 251,275 333,288 562,986 708,056
Operating income (loss)............ (7,182) 12,869 21,518 27,823 25,420
Net gain (loss) on sale of
assets........................... 364 932 (6) (826) (2,920)
-------- -------- -------- -------- ----------
Income (loss) before income taxes
and extraordinary items.......... (6,818) 13,801 21,512 26,997 22,500
Net provision for income taxes..... (3,220) (5,848) (7,892) (10,799) (10,913)
-------- -------- -------- -------- ----------
Income (loss) from continuing
operations before extraordinary
items............................ (10,038) 7,953 13,620 16,198 11,587
Extraordinary items.............. (5,882) (86) (1,138) -- --
-------- -------- -------- -------- ----------
Net income (loss)............. $(15,920) $ 7,867 $ 12,482 $ 16,198 $ 11,587
======== ======== ======== ======== ==========
Income (loss) per common and common
equivalent shares:
Income (loss) from operations
before extraordinary items....... $ (0.92) $ 0.41 $ 0.60 $ 0.55 $ 0.39
Extraordinary items.............. (.51) -- (.05) -- --
-------- -------- -------- -------- ----------
Net Income (loss)................ $ (1.43) $ .41 $ .55 $ .55 $ .39
======== ======== ======== ======== ==========
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Income (loss) per share:
diluted.......................... $ (1.43) $ 0.41 $ 0.55 $ 0.55 $ 0.39
basic............................ $ (1.43) $ 0.42 $ 0.55 $ 0.56 $ 0.40
Weighted average number of shares
outstanding:
diluted.......................... 11,106 19,251 22,755 29,210 29,885
basic............................ 11,106 18,911 22,502 28,721 29,226
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 55,348 $ 71,217 $ 74,148 $ 68,154 $ 102,253
Total assets....................... 208,467 296,933 411,526 881,233 1,075,769
Long-term debt and capital lease
obligations, less current
portion.......................... 36,874 24,506 107,910 265,545 420,759
Subordinated debt.................. 2,611 1,694 1,356 149,691 149,724
Convertible redeemable preferred
stock(4)......................... 790 891 1,030 -- --
Total stockholders' equity......... 127,229 228,148 242,392 324,788 340,818
</TABLE>
- ---------------
(1) Includes a charge of $10,000,000 in 1996 related to additional reserves on
Medicare receivables.
(2) Includes $4,333,000 related to a significant change in business focus at the
Company's Baltimore facility in 1995. Includes approximately $7,180,000 in
1997 for office closings, abandonment of certain furniture and equipment and
other expenses related to the consolidation of the Company's rehabilitation
business. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 of this Report.
(3) During 1994 the Company recorded a charge of $9,327,000, of which $7,952,000
relates to the merger with Pinnacle Care Corporation, which was accounted
for as a pooling of interests, and $1,375,000 relates to the accelerated
vesting of certain stock options. Of the merger costs, approximately
$4,627,000 was reserved for employee severance, payroll and relocation,
$2,878,000 was reserved for transaction costs including investment bankers'
legal and accounting fees, $172,000 was reserved for customer relations,
$150,000 for operations relocation, $66,000 for investor relations and
$59,000 was reserved for employee relations.
During 1995, the Company accrued costs totaling $8,073,000 related to the
CSI Merger and the consolidation of various regional and satellite offices
to the New London, Connecticut office. Of this total charge, approximately
$3,691,000 related to severance and related payroll costs and approximately
$4,382,000 related to expenses incurred to close the Company's regional
offices.
During 1996, the Company recorded a charge of $6,511,000 of which $5,661,000
related to the MedRehab Merger which was accounted for as a pooling of
interests and $850,000 was a charge for the warrants granted to the Premier
affiliate.
In 1997, corporate, general and administrative expense includes
approximately $5,713,000 for severance, payroll and relocation, $2,077,000
for office closings and related expenses and $1,534,000 related to bank fees
incurred for a certain transaction.
(4) Converted into shares of Common Stock upon the closing of the Company's
initial public offering in 1993 and the 1996 MedRehab Merger.
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, including statements regarding, among other items, (i) the Company's
growth strategies, including its intention to make acquisitions; (ii)
anticipated trends in the Company's business and demographics; (iii) the
Company's ability to continue to control costs and maintain quality of care;
(iv) the Company's ability to respond to changes in regulations; and (v) the
Company's ability to enter into contracts with managed care organizations and
other payors. These forward-looking statements are based largely on the
Company's expectations and are subject to a number of risks and uncertainties,
certain of which are beyond the Company's current control. Actual results could
differ materially from these forward-looking statements as a result of the
factors described below in "Risk Factors" including, among others (i) changes in
the health care industry as a result of political, economic or regulatory
influences; (ii) changes in regulations governing the health care industry; and
(iii) changes in the competitive marketplace. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this Report will in fact transpire.
OVERVIEW
Mariner's net patient service revenue is derived primarily from providing
inpatient health care services to subacute patients, rehabilitation programs in
skilled nursing facilities, outpatient rehabilitation services in freestanding
clinics and other post-acute medical services. The growth in Mariner's net
patient service revenue and operating profitability depends on two principal
factors: (i) the shift by the Company toward treatment of short-stay,
rehabilitation and medically demanding subacute patients and away from less
medically demanding patients, and (ii) the addition of a variety of alternate
sites and expansion of post-acute health care services. Subacute patients
typically require three to six hours of skilled nursing care per day, in
contrast to the more than six hours of skilled nursing care per day required by
acute care hospital patients and the less than two hours of custodial nursing
care per day required by traditional nursing home residents. These subacute
patients typically are recuperating from a major injury, surgery or illness and,
after a relatively short transition period, generally are discharged to their
homes. The Company's clinical programs, including MarinerCare programs, have
been designed for these patients.
During 1997 the Company added four facilities with a total of 587 beds.
Since these acquisitions, the Company has been focusing these facilities
increasingly on treating medically demanding subacute patients. With the
existing patient populations acquired with these facilities, Mariner currently
expects that a significant length of time may be required before such patient
population changes sufficiently to require a level of care, and to have a length
of stay, comparable to that experienced in the Company's other facilities. See
"Patient Focus" and "Site Expansion."
Patient Focus. Mariner believes that short length of patient stay and high
bed turnover maximize net patient service revenue and operating margins. As
compared to less medically demanding patients, short-stay subacute patients
generally require more intense skilled nursing care and more rehabilitation,
pharmacy and other ancillary medical services. The median length of stay for
patients discharged in the applicable period from facilities owned or leased by
the Company during the applicable period increased from 23 days in 1996 to 25
days in 1997. The bed turnover rate for the inpatient facilities owned or leased
by the Company during the applicable period has decreased from 2.1 times in 1996
to 2.0 times in 1997. The increase in median length of stay and decrease in bed
turnover rate from 1996 to 1997 resulted principally from the acquisition of
four facilities in 1997 as well as inclusion for a full year of the facilities
acquired in connection with the Allegis Transaction, which facilities had a
significantly higher level of Medicaid patients. Newly acquired facilities
generally contain an existing patient population, and consequently a significant
length of time may be required before such patient population changes
sufficiently to require a level of care, and to have a length of stay,
comparable to that experienced in the Company's existing facilities. In the
facilities the Company acquires, the Company intends to focus on treating
subacute patients and implementing appropriate MarinerCare programs or other
clinical programs.
21
<PAGE> 22
The Company's focus on short-stay subacute patients has historically
provided the Company with an attractive payor mix. Short-stay medical care is
covered by a wider range of payors, including indemnity insurers, health
maintenance organizations, employers, Medicare and Medicaid, while long-term
(more than 100 days) medical care typically is covered by Medicaid. Percentage
of revenue generated from Medicare and private payors decreased from 74% in 1996
to 69% in 1997. The decrease in payor mix from 1996 to 1997 resulted principally
from the result of a full year of revenue generated from the facilities acquired
in 1996 which are more heavily dependent on Medicaid reimbursement.
Even among the Company's patients for whom Medicaid is the primary payor,
Mariner has focused increasingly on treating those patients with substantial
medical problems who require three or more hours of skilled nursing care per
day. Typically, Mariner is reimbursed by Medicaid at substantially higher rates
for these patients than for less medically demanding custodial care patients.
The net patient service revenue generated by the Company's Medicaid patients
increased from $34,046 per bed in 1996 to $38,231 per bed in 1997. This increase
was primarily due to the increase in the percentage of revenues derived from
states in the Mid-Atlantic region, which have higher Medicaid rates than the
Florida and Texas regions.
The Company's rehabilitation programs have also focused on subacute
patients in skilled nursing facilities who require intensive rehabilitation
therapy over a short period. The number of rehabilitation programs with skilled
nursing facilities has increased from 429 as of December 31, 1996 to 480 as of
December 31, 1997. This increase was principally the result of the Prism and
other rehabilitation acquisitions in 1997.
In addition, the Company has expanded the range of post-acute health care
services it provides directly in selected local markets in an effort to treat
patients throughout their recovery. As a result, the Company receives revenues
from these services both during a patient's inpatient stay and after discharge.
As a result of these trends, Mariner's average revenue per occupied bed per
year increased from $58,795 in 1996 to $59,396 in 1997. Revenue per
rehabilitation program increased from $412,265 in 1996 to $478,473 in 1997.
These trends are illustrated in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Inpatient Operations
Licensed beds(1)......................................... 4,397 9,962 10,140
Average occupancy rates.................................. 88% 88% 90%
Median length of stay(2)................................. 20 days 23 days 25 days
Bed turnover rate(3)..................................... 2.7x 2.1x 2.0x
Revenue per occupied bed per year(4):
Private payors and Medicare(5)........................ $101,863 $ 93,189 $ 95,913
Medicaid.............................................. $ 36,685 $ 34,046 $ 38,231
Company as a whole.................................... $ 61,495 $ 58,795 $ 59,396
Percentage of average daily census:
Private payors and Medicare(5)........................ 38% 42% 37%
Medicaid.............................................. 62% 58% 63%
Rehabilitation Operations:
Revenue per rehabilitation program per year(6)........... $318,088 $412,265 $478,473
Payor Mix (Company revenue as a whole):
Private payors and Medicare(5)........................... 79% 74% 69%
Medicaid................................................. 21% 26% 31%
</TABLE>
- ---------------
(1) Facilities owned and leased as of the end of the applicable period.
(2) Based on those patients who were discharged during the applicable period
from facilities owned or leased by Mariner.
(3) Represents total discharges divided by average number of licensed beds
during the applicable period.
22
<PAGE> 23
(4) Represents applicable net patient service revenue divided by the average
daily census of patients generating such revenue.
(5) Private payors includes indemnity insurers, health maintenance
organizations, employers, individuals and other non-governmental payors, and
for payor mix, payments from skilled nursing facilities for services
performed under rehabilitation management programs and revenue classified as
"other income."
(6) Represents aggregate revenue from rehabilitation programs with skilled
nursing facilities during the applicable period divided by the average
number of such programs as of the end of the applicable period.
Site Expansion. Mariner has expanded by acquiring, leasing and developing
freestanding inpatient facilities, by entering into arrangements to manage
hospital-based subacute units and to provide rehabilitation programs and by
expanding the other post-acute health care services it provides. The Company's
site expansion is illustrated in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Sites of Service:
Owned and leased freestanding inpatient facilities.......... 33 75(1) 76
Managed freestanding inpatient facilities and hospital-based
units..................................................... 29(1) 8 57
Rehabilitation programs with skilled nursing facilities..... 440 429 480
Outpatient rehabilitation clinics........................... 57 48 42
</TABLE>
- ---------------
(1) Includes 23 skilled nursing facilities and one rehabilitation hospital with
an aggregate of 3,288 beds which became owned or leased by the Company on
January 2, 1996 upon completion of the CSI Merger.
Mariner seeks to acquire established skilled nursing facilities and convert
them into facilities focusing increasingly on treating medically demanding and
rehabilitation subacute patients. Historically, net patient revenue and
operating margins from acquired inpatient facilities have increased gradually
over a period of years as MarinerCare programs are implemented, and, as
intensity of care and ancillary service requirements increase, length of patient
stay decreases and payor mix improves. An acquired facility may contain an
existing patient population, and consequently a significant length of time may
be required before such patient population changes sufficiently to require a
level of care, and to have a length of stay, comparable to that experienced in
the Company's existing facilities. During this conversion period, Mariner would
generally expect to realize lower revenue for these existing patients than could
otherwise be obtained for new patients. Facilities undergoing conversion are
expected to continue to generate increased net patient service revenue and
operating margins as they continue to emphasize short-stay subacute patients.
Mariner also seeks to develop new freestanding inpatient facilities and
renovates acute care hospitals which are dedicated primarily to providing
MarinerCare programs and other services to subacute patients. Net patient
service revenue and operating margins typically increase gradually at newly
opened facilities, which have low initial occupancy rates. Because newly opened
facilities require a basic complement of staff on the day it opens regardless of
patient census, these facilities initially generate significant losses. As
patient census increases at a facility, margins improve, regardless of whether
the patients are subacute or medically less demanding. Margins typically
increase at newly opened facilities as patient and payor mix improve and
ancillary service use increases. These facilities generally have taken six to
nine months before their revenues have been sufficient to cover their operating
costs, and nine to fifteen months before they have contributed positively to the
Company's net earnings. Leased units have substantially the same operating
characteristics as newly opened facilities with less significant financing
costs.
Managed freestanding inpatient facilities and hospital-based managed
subacute care units typically provide significantly higher profit margins with
substantially lower revenue than the Company's owned and leased facilities
because the host facility generally bears the related operating and capital
expenses while paying the Company a management fee. Unlike freestanding
inpatient facilities owned or leased by the Company, managed facilities and
units typically do not require significant start-up costs or capital outlays by
the Company.
23
<PAGE> 24
The Company incurs start-up expenses for new rehabilitation programs as
therapists are hired and necessary equipment is acquired. These programs and
clinics typically become profitable within six months of opening and generate
positive cash flow in 12 to 18 months.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of total operating revenue for the three years ended December 31,
1995, 1996 and 1997, and the percentage changes in the dollar amounts of revenue
and expenses for 1996 as compared to 1995, and 1997 as compared to 1996.
<TABLE>
<CAPTION>
PERCENTAGE
INCREASE
PERCENT OF REVENUE (DECREASE)
----------------------- --------------
YEAR ENDED DECEMBER 31, 1996 1997
----------------------- OVER OVER
1995 1996 1997 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Net patient service revenue(1)..................... 95.2% 98.0% 97.4% 71.4% 23.5%
Other revenue...................................... 4.8 2.0 2.6 (29.8) 56.4
----- ----- -----
Total operating revenue............................ 100.0% 100.0% 100.0% 66.5% 24.1%
===== ===== =====
Operating and administrative expenses:
Facility operating costs(2)........................ 78.0 78.7 76.8 68.2 21.2
Corporate general & administrative(3).............. 11.2 7.9 8.5 16.5 33.7
Interest expense, net.............................. 1.0 4.4 5.4 629.7 52.2
Facility rent expense, net......................... 0.5 0.6 0.6 103.7 18.6
Depreciation and amortization...................... 3.2 3.6 3.7 87.6 28.6
Asset impairment charge............................ -- -- 1.4 -- 100.0
----- ----- -----
Total operating expenses........................... 93.9% 95.2% 96.4% 68.9% 25.8%
===== ===== =====
</TABLE>
- ---------------
(1) Includes a charge of $10,000,000 in 1996 related to additional reserves on
Medicare receivables.
(2) Includes a charge related to a significant change in business focus at the
Company's Baltimore facility of 1.2% for the year ended December 31, 1995.
Includes approximately $7,180,000 in 1997 for office closings, abandonment
of certain furniture and equipment and other expenses related to certain
transactions.
(3) Includes costs related to the CSI Merger and the consolidation of various
regional and satellite offices to the Company's New London, Connecticut
office amounting to 2.3% of total operating revenue for the year ended
December 31, 1995. Includes merger and other non-recurring costs related to
the MedRehab Merger with and issuance of warrants amounting to 1.2% of
revenue for the year ended December 31, 1996. In 1997, Corporate general and
administrative expense includes $5,713,000 for severance, payroll and
relocation, $2,077,000 for office closings and related expenses and
$1,534,000 related to bank fees incurred for a certain transaction.
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Revenue. Total operating revenue increased 67% from $354,806,000 in 1995
to $590,809,000 in 1996 and 24% to $733,476,000 in 1997.
Net patient service revenue increased by $241,120,000, or 71%, from 1995 to
1996 and by $135,868,000, or 24%, from 1996 to 1997. The increase in 1996 was
due primarily to the inclusion of revenue generated from the CSI Facilities that
were acquired on January 2, 1996, the eight facilities acquired or leased in the
1996 Florida Acquisition and eight facilities acquired or leased from Allegis,
as well as inclusion of a full year of revenue from facilities and businesses
acquired in 1995. The increase in revenue in 1997 was primarily due to the
inclusion of revenue generated from additional rehab contracts and inpatient
revenues from four additional
24
<PAGE> 25
facilities added during the year and a full year of revenue from the Allegis
acquisition. The Company also experienced increases in the use of ancillary
medical services at its inpatient facilities. The revenue increases in 1996 and
1997 were partially offset by reductions due to the cancellation or non-renewal
of contracts for certain rehabilitation programs.
Other revenue increased $6,799,000 or 56% from 1996 to 1997. This increase
was due primarily from the Company's management activities related to subacute
care units and facilities and consulting fees generated from services provided
to certain rehabilitation clients. In 1995, this included fees of $11,227,000
relating to the management of certain CSI Facilities. The reduction in other
revenue from 1995 to 1996 resulted primarily from the termination of the
management agreements with certain of the CSI Facilities, which were acquired on
January 2, 1996.
Facility Operating Costs. Facility operating costs consist primarily of
employee salaries, wages and benefits, food, ancillary supplies, pharmacy
supplies, plant operations, and, in 1995, costs related to a significant change
in the business focus at the Company's Baltimore facility. Most clinical staff
and rehabilitation therapists are paid an hourly wage. Salaries, wages and
benefits as a percentage of revenue are higher at newly opened inpatient
facilities, which require a basic compliment of staff on the day the facility
opens regardless of the patient census, than at pre-existing inpatient
facilities. As the patient census increases and patient mix improves at its
inpatient facilities, Mariner has experienced decreases in these costs as a
percentage of revenue at such facilities. Various other types of operating
expenses, including medical supplies, pharmacy supplies, nutritional support
services and expenses associated with the provision of ancillary services, vary
more directly with patient census, as well as with general rates of inflation.
Facility operating costs increased 68% from $276,633,000 in 1995 to
$465,226,000 in 1996 and 21% to $563,646,000 in 1997. These increases were
principally the result of adding new facilities, providing more ancillary
medical services and adding therapists and aides to service new rehabilitation
programs acquired in 1997. In 1997, Facility operating costs included
approximately $7,180,000 in office closings, abandonment of certain furniture
and equipment and other expenses related to consolidation of the Company's
rehabilitation operations. In addition, these costs included $4,333,000 related
to a significant change in business focus at the Company's Baltimore facilities
in 1995. As a percentage of total operating revenue, these costs increased from
78.0% in 1995 to 78.7% in 1996 and decreased to 76.8% in 1997.
Corporate General and Administrative. Corporate general and administration
expenses include the expenses of the Company's corporate office, which provides
marketing, financial and management services. These expenses increased 17% from
$39,830,000 in 1995 to $46,401,000 in 1996 and 34% to $62,052,000 in 1997. The
increases were, in part, a result of additional personnel required to support
the facilities acquired during 1995, 1996 and 1997.
During 1995, the Company accrued costs totaling $8,073,000 related to the
merger with CSI and the consolidation of various regional and satellite offices
to the New London, Connecticut office. Of this total charge, approximately
$3,691,000 related to severance and related payroll costs and approximately
$4,382,000 related to expenses incurred to close the Company's regional offices.
During 1996, the Company recorded a charge of $6,511,000 of which
$5,661,000 related to the merger with MedRehab which was accounted for as a
pooling of interests and $850,000 was a charge for the warrants granted to the
Premier affiliate. Of the charge related to the MedRehab Merger, approximately
$2,825,000 was for employee severance, payroll and relocation, $1,143,000 for
transaction costs, $1,061,000 to write-off abandoned property and software,
$382,000 for relocation of operations, $200,000 for customer relations and
$50,000 for employee relations.
In 1997, corporate general and administrative expense includes
approximately $5,713,000 for severance, payroll and relocation, $2,077,000 for
office closings and related expenses and $1,534,000 related to bank fees
incurred related to the Prism Merger.
As a percentage of total operating revenue, corporate general and
administrative expenses were 11% in 1995, 8% in 1996 and 9% in 1997.
25
<PAGE> 26
Interest Expense, Net. Net interest expense increased 630% from $3,598,000
in 1995 to $26,256,000 in 1996 and 52% to $39,952,000 in 1997. The increases
were the result of the Notes issued in April 1996, debt assumed in businesses
acquired during these periods, increased interest rates on borrowings and
additional borrowings which were primarily used to fund acquisitions.
Facility Rent Expense, Net. Net rent expense increased 104% from
$1,830,000 in 1995 to $3,727,000 in 1996, and 19% to $4,421,000 in 1997. This
expense is related to a facility leased under a sale/leaseback arrangement and
facilities leased in connection with the CSI, 1996 Florida Acquisition and
Allegis transactions. The increases resulted from the lease costs associated
with new leases in connection with acquisitions during 1996 and a full year of
rent expense in 1997 related to the Allegis and 1996 Florida Acquisition
transactions in 1996.
Depreciation and Amortization. Depreciation and amortization expense
increased 88% from $11,397,000 in 1995 to $21,376,000 in 1996, and 29% to
$27,499,000, principally as a result of the increase in the number of facilities
as a result of acquisition activities, the opening of new facilities and
businesses, the completion of facility renovations and increased goodwill
amortization.
Provision for Income Taxes. During 1996, Mariner's tax rate reflects the
reversal of a valuation allowance on certain deferred tax assets. The Company
believes that it will be able to take advantage of these assets before they
expire and reflected this in its tax rate in 1996. In 1997 the Company's
effective tax rate was 48.5%, significantly above the statutory rate primarily
due to non-deductible amortization of goodwill from certain transactions.
Extraordinary Items. In 1995, the Company amended certain significant
terms of its Credit Facility. As a result of the amendment, the Company has
written-off its remaining unamortized deferred financing fees of $1,836,000 with
a resulting tax benefit of $698,000.
LIQUIDITY AND CAPITAL RESOURCES
Mariner has financed its operations, acquisitions and capital expenditures
primarily from cash provided by operations and the proceeds from stock
issuances, sales of debt securities and borrowings under its Credit Facility. As
of December 31, 1997, working capital and cash and cash equivalents were
$102,253,000 and $3,627,000, respectively.
Mariner has a $460,000,000 senior secured revolving credit facility with a
syndicate of banks (the "Credit Facility"). On October 3, 1997, the Company
entered into an amendment to the Credit Facility to increase borrowing capacity
to $325,000,000 from $250,000,000. As of January 2, 1998 the terms were amended
to increase the size of the Credit Facility to $460,000,000, extend the maturity
of the Credit Facility and reduce certain restrictions that the Credit Facility
imposes on the operations of the business of the Company and its subsidiaries.
As of December 31, 1996 and 1997, principal balances outstanding under its
Credit Facility were approximately $132,000,000 and $301,000,000, respectively,
and letters of credit outstanding under this facility were approximately
$5,499,000 and $6,715,000, respectively. As of December 31, 1997 the Letters of
Credit under the Credit Facility included $5,624,000 that related to workers'
compensation insurance and $1,091,000 associated with debt and other agreements.
Mariner has used, and intends to continue to use, borrowings under the Credit
Facility to finance the acquisition and development of additional subacute care
facilities and related businesses, and for general corporate purposes, including
working capital. Mariner's obligations under the Credit Facility are
collateralized by a pledge of the stock of its subsidiaries and are guaranteed
by all of the Company's subsidiaries. In addition, the Credit Facility is
collateralized by mortgages on certain inpatient facilities of the Company's,
leasehold mortgages on certain inpatient facilities leased by the Company, and
security interests in certain other properties and assets of the Company and its
subsidiaries. The Credit Facility matures on January 2, 2003 and provides for
prime or LIBOR-based interest rate options. The borrowing availability and rate
of interest varies depending upon specified financial ratios. The Credit
Facility also contains covenants which, among other things, require the Company
to maintain certain financial ratios and impose certain limitations or
prohibitions on the Company 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;
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investments and acquisitions, including acquisitions of new facilities; the
merger or consolidation of the Company with any person or entity and the
disposition of any of the Company's properties or assets.
On April 4, 1996, the Company sold $150,000,000 aggregate principal amount
of its 9 1/2% Senior Subordinated Notes due 2006 (the "Notes"). The Notes mature
on April 1, 2006. The Notes are unsecured senior subordinated obligations of
Mariner and, as such, are subordinated in right of payment to all existing and
future senior indebtedness of Mariner, including indebtedness under the Credit
Facility. From the net proceeds of approximately $144,456,000 from the sale of
the Notes, $131,000,000 was used to repay all outstanding indebtedness under the
Credit Facility (including interest and certain other fees) and the remainder
was used to pay a portion of the purchase price for the 1996 Florida
Acquisition. The Notes contain certain covenants, including, among other things,
covenants with respect to the following matters: (i) limitation on indebtedness;
(ii) limitation on restricted payments; (iii) limitation on the incurrence of
liens; (iv) restriction on the issuance of preferred stock of subsidiaries; (v)
limitation on transactions with affiliates; (vi) limitation on sale of assets;
(vii) limitation on other senior subordinated indebtedness; (viii) limitation on
guarantees by subsidiaries; (ix) limitation on the creation of any restriction
on the ability of the Company's subsidiaries to make distributions; and (x)
restriction on mergers, consolidations and the transfer of all or substantially
all of the assets of the Company to another person. The Notes were issued under
an Indenture dated as of April 4, 1996 by and among the Company and State Street
Bank and Trust Company, as trustee (the "Indenture").
Accounts receivable (net of allowances) were $126,938,000 and $154,162,000
at December 31, 1996 and 1997, respectively. Estimated settlements due from
third-party payors aggregated $18,912,000 and $34,335,000 at December 31, 1996
and 1997, respectively. The number of days sales in accounts receivable and
estimated settlements due from third-party payors was approximately 78 days at
December 31, 1996 and 82 days at December 31, 1997. The increase was primarily
due to the change in fiscal intermediary during the second quarter of 1997 which
resulted in processing delays related to its estimated settlements and an
increase in accounts receivable at certain facilities acquired during 1997.
In January 1996 Mariner completed the CSI Merger and its acquisition of
certain related assets. In the merger, all of the issued and outstanding shares
of capital stock of CSI were converted into the right to receive an aggregate of
5,853,656 shares of the Company's Common Stock and $7,000,000 in cash. In
connection with the CSI Merger, Mariner acquired certain assets that are related
to CSI's business from affiliates of CSI's stockholders for an aggregate of
approximately $17,694,000 in cash and loaned an aggregate of $1,619,000 to the
partnerships that sold certain assets to the Company. In addition, the Company
acquired options to purchase 12 of the facilities leased by CSI from affiliates
of CSI's stockholders at fair market value and made nonrefundable deposits of an
aggregate of $13,155,000 with the lessors of the facilities subject to such
options. The options are exercisable during specified periods between 1998 and
2010. The aggregate estimated fair market value as of the earliest exercise date
of the options, and the aggregate purchase price for, the 12 facilities subject
to the options is approximately $59,585,000 (which includes a deposit of
$13,155,000 already paid by the Company). Mariner financed the cash
consideration payable in these transactions with borrowings under the Credit
Facility.
On March 1, 1996, the Company completed the MedRehab Merger. Mariner issued
an aggregate of approximately 2,312,500 shares of its Common Stock for all of
MedRehab's outstanding capital stock and options to purchase MedRehab capital
stock in a merger that is being accounted for as a pooling of interests. In
addition, the Company prepaid an aggregate principal amount of approximately
$14,000,000 of MedRehab's outstanding indebtedness at the closing of the
MedRehab Merger. The Company repaid this indebtedness with funds it borrowed
under the Credit Facility. Certain former MedRehab stockholders exercised the
right to require the Company to repurchase their shares of Mariner Common Stock
for approximately $1,326,000.
In March 1996, Mariner acquired a primary care physician organization in
the Orlando, Florida area. In this transaction, Mariner issued an aggregate of
48,722 shares of its Common Stock and paid an $1,500,000 in cash which was
financed under the Credit Facility. This investment was subsequently written off
in 1997.
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In May, 1996 the Company completed the 1996 Florida Acquisition which
involved seven skilled nursing facilities and one assisted living facility with
an aggregate of 960 beds in Florida, Tennessee and Kansas. All of the issued and
outstanding shares of common stock were converted into the right to receive an
aggregate of approximately $28,050,000 in cash. The Company financed the
consideration paid in the 1996 Florida Acquisition with a portion of the net
proceeds from the sale of the Notes and borrowings under its Credit Facility.
On October 1, 1996, the Company acquired a 163-bed facility in
Jacksonville, Florida. The total purchase price was $9,850,000. Mariner funded
the purchase price by assuming two HUD mortgages in the aggregate principal
amount of approximately $4,236,000. The Company borrowed $6,500,000 under its
Credit Facility to fund the remainder of the cash portion of the purchase price
and to replace reserves required by the HUD mortgage agreements.
In a two-part closing consummated on October 1, 1996 and November 1, 1996,
Mariner acquired certain assets of Allegis and certain of its affiliates. Under
the terms of the acquisition agreement, the Company purchased five inpatient
facilities, assumed two operating leases and one capital lease and purchased
Allegis' institutional pharmacy and its rehabilitation program management
subsidiary. The total purchase price of $110,000,000 consisted of the assumption
of $12,000,000 in debt, including the capital lease, and $98,000,000 in cash.
Under the terms of the agreement, $103,000,000 of the purchase price was paid at
the closings during the fourth quarter of 1996. Approximately $98,000,000 of
that amount plus certain closing costs was borrowed under the Credit Facility.
The remaining $2,000,000 was paid upon attaining certain financial performance
conditions for 1996. This amount was borrowed under the Credit Facility.
1997
1997 Facility Acquisitions. During 1997, the Company acquired four skilled
nursing facilities with a total of 587 beds in the Baltimore metropolitan area
for a total purchase price of approximately $37,000,000 (the "1997 Facility
Acquisitions"). The Company borrowed approximately $37,000,000 under its Credit
Facility to finance these acquisitions. Goodwill of $22,000,000 was recorded in
connection with these acquisitions.
Prism and Related Rehabilitation Transaction. In October 1997, the Company
completed its merger with Prism Health Group, Inc. (the "Prism Merger"). All of
the issued and outstanding shares of Prism capital stock were converted into the
right to receive an aggregate of approximately $84,300,000 in cash. In
connection with the Prism Merger the Company also repaid approximately
$9,500,000 in assumed debt and paid expenses of approximately $700,000 prior to
the closing. Goodwill of approximately $91,000,000 was recorded in connection
with this transaction. The Company borrowed approximately $94,500,000 under its
Credit Facility to finance the Prism Merger.
In June, 1997, the Company also acquired another rehabilitation company for
a total purchase price of approximately $15,403,000. The Company made an initial
payment of $2,000,000 and in 1998 paid an additional $3,135,000. These amounts
were funded under the Company's Credit Facility. In addition, the Company
entered into a 3 year, 7% interest bearing note for $5,134,000. The Company also
agreed to pay the remaining $5,134,000 in contingent consideration over the next
three years provided certain financial targets were met. Goodwill of $2,552,000
was recorded in connection with this acquisition.
The assets acquired and liabilities assumed in connection with the
aforementioned mergers and acquisitions have been included in the financial
statements based on preliminary estimates of fair values and may be revised as
additional information becomes available. As a result, the financial information
included in the financial statements is subject to adjustment from subsequent
revisions and estimates of fair value if any are necessary.
Joint Ventures. The Company entered into three joint venture arrangements
in connection with three of its facilities located in Maryland and North
Carolina. The Company retained a 50% interest in two of the facilities and 60%
in the third facility. The Company received a total of $5,349,000 of capital
contributions from its joint venture partners and recognized a gain of
approximately $1,659,000 from these transactions.
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Dispositions. The Company executed agreements to sell two nursing
facilities in non-strategic locations. Total sales proceeds were $4,890,000 and
a net pretax loss of $4,579,000 was recorded. For 1997, these facilities
generated aggregate net revenues of $6,849,000 and income from continuing
operations of $550,000.
From January 1, 1998 through March 25, 1998, the Company also borrowed
approximately $10,500,000 under the Credit Facility primarily to fund capital
expenditures.
The Company intends to expand its clinical programs in strategically
selected metropolitan areas throughout the United States. The Company also
intends to expand its pharmacy, home health care and outpatient rehabilitation
services. In addition to acquiring individual facilities, Mariner may acquire
businesses that operate multiple facilities or ancillary health care services
businesses. The Company continuously identifies and evaluates potential
acquisition candidates and in many cases engages in discussions and negotiations
regarding potential acquisitions. There can be no assurance that any of the
Company's discussions or negotiations will result in an acquisition. Further, if
the Company makes any acquisitions, there can be no assurance that it will be
able to operate any acquired facilities or businesses profitably or otherwise
successfully implement its expansion strategy. Mariner currently has no
agreements with respect to any acquisition.
The Company's capital expenditures for the years ended December 31, 1996
and 1997 were approximately $22,502,000 and $37,173,000, respectively. The
Company's capital expenditures in 1997 included approximately $6,000,000 for
improvements to the Company's information systems. The Company has currently
budgeted approximately $45,000,000 for capital expenditures during 1998. The
Company's currently planned capital expenditures include approximately
$9,000,000 for upgrading the Company's information systems, approximately
$21,000,000 for expansion of existing facilities, as well as the costs of
maintaining the Company's inpatient facilities and offices, and approximately
$12,000,000 for the completion of three new inpatient sites begun in 1997.
Mariner believes that its future capital requirements will depend upon a
number of factors, including cash generated from operations and the rate at
which it acquires additional inpatient facilities or other health care services
businesses and the rate at which it adds rehabilitation programs. Mariner
expects to fund such capital expenditures with borrowings under its Credit
Facility and cash from operations. Mariner currently believes that the cash from
operations and borrowings under the Credit Facility will be sufficient to meet
its needs through at least December 31, 1998.
RECENTLY ISSUED PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," was issued in June 1997. This statement establishes
standards for reporting and displaying comprehensive income and its components
in the financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was also issued in June 1997. This statement requires that public
business enterprises report certain information about operating segments and
related disclosures about products and services, geographic areas and major
customers.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued in February 1998. This statement
standardizes disclosure requirements for pension and other postretirement
benefits, requires additional information on changes in benefit obligations and
fair values of plan assets, and eliminates certain existing disclosure
requirements.
SFAS Nos. 130, 131 and 132 become effective in the Company's fiscal year
ending December 31, 1998. The adoption of these statements are expected to have
no impact on the Company's results of operations, financial position or cash
flows and to produce no major changes in current disclosures.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," in March 1998. This statement provides guidance as to whether
certain internal-use software costs should be capitalized as a long-lived asset
or expensed when incurred. SOP 98-1
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becomes effective in the Company's fiscal year ending December 31, 1998, but may
be adopted earlier. The Company is in the process of evaluating the requirements
of SOP 98-1, but does not expect that it will materially affect its results of
operations, financial position or cash flows. The Company has not yet decided
whether it will adopt this standard in 1998.
IMPACT OF INFLATION
The health care industry is labor intensive. Wages and other labor costs
are especially sensitive to inflation. Increases in wages and other labor costs
as a result of inflation, or increases in federal or state minimum wages without
a corresponding increase in Medicare and Medicaid reimbursement rates, could
adversely impact the Company.
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RISK FACTORS
Except for the historical information contained herein, the matters
contained in this Report include forward-looking statements that involve risks
and uncertainties. The following factors, among others, could cause actual
results to differ materially from those contained in forward-looking statements
made in this Report and presented elsewhere by management from time to time.
Such factors, among others, may have a material adverse effect upon the
Company's business, results of operations and financial condition.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
Mariner derives a significant portion of its revenue from the Medicaid and
Medicare programs. In the years ended December 31, 1995, 1996 and 1997, the
Company derived 21%, 26%, and 31% respectively, of its revenue from Medicaid
programs and 29%, 37%, and 35%, respectively, of its revenues from the Medicare
program. These programs are subject to retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
decrease the level of program reimbursements to the Company. Funds received by
the Company from the Medicare and Medicaid programs are subject to audit which
can result in the Company having to refund overpayments. In addition, there can
be no assurance that facilities owned, leased or managed by Mariner now or in
the future that participate in the Medicare and Medicaid programs will initially
meet or continue to meet the requirements for participation in the Medicare and
Medicaid programs. Legislation and regulations have been proposed on the federal
and state levels that would have the effect of materially limiting or reducing
reimbursement levels for the Company's programs and services. Mariner cannot
predict whether any of these proposals will be adopted or, if adopted, the
effect (if any) such proposals will have on the Company. Furthermore, the
Company has observed a nationwide change in the practices of its Medicare Fiscal
Intermediaries which, on behalf of HCFA, the federal agency responsible for
administering the Medicare program, have begun to aggressively and
retrospectively change their position on previously approved costs. This change
includes the reclassification of costs from reimbursable to non-reimbursable and
the challenging of payment for costs which had traditionally been approved. In
response to these challenges of the payment of Medicare costs on an
industry-wide basis, the Company has provided additional reserve amounts for
potential lower levels of Medicare reimbursement.
In addition, Mariner provides certain services between subsidiary
companies, some of which are charged at cost and others of which are charged at
market rates. Mariner believes that the services which are charged at market
rates qualify for an exception to Medicare's "related party rule" See
"Government Regulation -- Medicare Related Party Rule" as defined in Item 1 of
this Report. There can be no assurance, however, that HCFA will endorse
Mariner's position and the Medicare reimbursement received for such services may
be subject to audit and recoupment in future years.
A majority of Mariner's provider and rehabilitation contracts provide for
indemnification of the facilities for potential liabilities in connection with
rehabilitation services. The Company's gross margins for its physical therapy
services under Medicare's salary equivalency guidelines are significantly less
than for its speech and occupational therapy services which are currently
reimbursed by Medicare under the "prudent buyer" standard. 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. See "Business -- Sources of Revenue" in Item 1
of this Report.
In addition to reducing revenue from federal and state payors, the
imposition of more stringent reimbursement guidelines or a decrease in the level
of Medicare or Medicaid reimbursement for these services could adversely affect
the ability of skilled nursing facilities or other health care providers that
depend on Medicare or Medicaid reimbursement to pay the Company for
rehabilitation program services and may cause such facilities to reduce the
rates that they are willing to pay the Company for such services. Any
significant decrease in Medicare or Medicaid reimbursement levels, or the
imposition of significant restrictions on participation in Medicare or Medicaid
programs, could have a material adverse effect on the Company. Certain states in
which Mariner operates have undertaken a study of acuity levels and are
considering changes in their reimbursement systems to take levels of acuity into
account. Accordingly, there can be no assurance that the rates paid to Mariner
by Medicare, Medicaid, private payors or by skilled nursing facilities under
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rehabilitation programs will continue to be adequate to reimburse the Company
for the costs of providing services to covered beneficiaries. Mariner has also
agreed under certain of its contracts with private payors (and intends to
continue to agree as part of its business strategy) to provide certain health
care services to covered patients on a case rate or capitated basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of this Report and "Business -- Sources of Revenue" in
Item 1 of this Report.
FLUCTUATION OF QUARTERLY RESULTS OF OPERATIONS
The Company's operating revenue and net income generally fluctuate from
quarter to quarter. The fluctuation is related to several factors including: the
timing of Medicaid rate increases, changes in the level of Medicare
reimbursement, the timing of acquisitions in operating results of acquired
facilities, overall census, payor mix, acuity levels, seasonal census cycles and
the number of days in a given quarter. In addition, a significant amount of the
Company's operating expenses are relatively fixed in the short term. As a
result, if projected revenues are not realized in the expected period, the
Company's operating results for that period could be adversely affected. Due to
the foregoing factors, among others, it is possible that the Company's results
of operations could fail to meet the expectations of securities analysts or
investors. In such event, or in the event that adverse conditions prevail or are
perceived to prevail, the price of the Company's Common Stock would likely be
materially adversely affected.
HEALTH CARE REFORM
The recently enacted Balanced Budget Act is intended to reduce Medicare
payments by $115 billion over the next five years and makes extensive changes in
the Medicare and Medicaid programs. In addition, private payors, including
managed care payors, increasingly are demanding discounted fee structures and
the assumption by healthcare providers of all or a portion of the financial risk
of caring for patients. Efforts to impose greater discounts and more stringent
cost controls by private payors are expected to continue. There can be no
assurances that adequate reimbursement levels will continue to be available for
services provided by the Company which are currently being reimbursed by
Medicare, Medicaid or private payors. Significant limits on the scope of
services reimbursed and on reimbursement rates and fees could have a material
adverse effect on the Company's liquidity, financial condition and results of
operations. In January, 1998, the Health Care Finance Administration ("HCFA")
published new salary equivalency guidelines. These guidelines, which are
effective April 1, 1998, will be used by Medicare fiscal intermediaries to
determine the maximum allowable costs for rehabilitation services. Mariner is
currently evaluating the effects of these new guidelines.
Some of the states in which the Company operates are considering or have
adopted various health care reform proposals and are considering reductions in
their state Medicaid budgets. Mariner anticipates that Congress and state
legislatures will continue to review and assess alternative health care delivery
systems and payment methodologies and that public debate of these issues will
likely continue in the future. The final provisions of the Balanced Budget Act
have yet to be published and may be in force before public comment. The details
of the final implementation of regulations may contain provisions which have an
adverse effect on operations and payment. Additionally, provisions of the
Balanced Budget Act may temporarily disrupt cash flow if the government's fiscal
intermediaries fail to react in a timely fashion to the final regulations. In
addition, the cost and service considerations which have generated proposals for
health care reform have also resulted in, and are expected to continue to result
in, strategic realignments and combinations in the health care industry which
may, over time, have a significant impact on the Company's strategic direction
and operating results. There can be no assurance that future legislation, health
care or budgetary, or other changes in the governmental health care programs
will not materially adversely affect the results of operations of Mariner.
Concern about the potential effects of the proposed reform measures have
contributed to the volatility of prices in securities of companies in health
care and related industries, including the Company, and may similarly affect the
price of the Company's Common Stock in the future. See "Business -- Government
Regulation" in Item 1 of this Report.
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PROSPECTIVE PAYMENT SYSTEM
In August 1997, the Balanced Budget Act was passed mandating that
traditional cost-based Medicare reimbursement for long-term care transition into
a per-diem Prospective Payment System ("PPS"). This legislation essentially
requires providers to prospectively manage the care of the patient and the
resources that are consumed. Under PPS, each patient's clinical status is
evaluated and placed into a payment category. The patient's payment category
dictates the amount that the provider will receive to care for the patient on a
daily basis.
PPS is required to be phased in over four years beginning on July 1, 1998.
The new federal rates that are utilized for Medicare reimbursement will be all
inclusive of routine, capital and ancillary costs. The facility specific rate
will be based upon 1995 allowable costs and will take exceptions into account if
approved for that year. Exemptions will be included, but capped at 150% of the
routine cost limit, and must be accounted for in a closed cost report prior to
October 1, 1995. PPS will be phased in as follows:
Year 1: 25% of the federal rate and 75% of the facility specific
rate.
Year 2: 50% of the federal rate and 50% of the facility specific
rate.
Year 3: 75% of the federal rate and 25% of the facility specific
rate.
Year 4: 100% of the federal specific rate.
Aspects of certain of the health care proposals, such as reductions in
funding of the Medicare and Medicaid programs, potential changes in
reimbursement regulations by HCFA for contract therapy services, containment of
health care costs, proposals to reimburse health care providers on a basis not
linked to costs on an interim basis that could include a short-term freeze on
prices charged by health care providers and greater state flexibility in the
administration of Medicaid, could materially adversely affect the Company.
UNCERTAINTY OF REGULATION
The Company and the health care industry generally are subject to extensive
federal, state and local regulation governing licensure and conduct of
operations at existing facilities, construction of new facilities, acquisition
of existing facilities, addition of new services, certain capital expenditures,
reimbursement for services rendered and disposal of medical waste. Changes in
applicable laws and regulations or new interpretations of existing laws and
regulations could have a material adverse effect on licensure, eligibility for
participation, permissible activities, operating costs and the levels of
reimbursement from governmental and other sources. There can be no assurance
that regulatory authorities will not adopt changes or new interpretations of
existing regulations that could adversely affect the Company. The failure to
maintain or renew any required regulatory approvals or licenses could prevent
the Company from offering existing services or from obtaining reimbursement. In
certain circumstances, failure to comply at one facility may affect the ability
of the Company to obtain or maintain licenses or approvals under Medicare and
Medicaid programs at other facilities.
Recently effective provisions of the regulations adopted under the Omnibus
Budget Reconciliation Act of 1987 ("OBRA"), as amended, have expanded remedies
available to HCFA to enforce compliance with the detailed regulations mandating
minimum health care standards and may significantly affect the consequences to
the Company if annual or other HCFA facility surveys identify noncompliance with
these regulations. Remedies include fines, new patient admission moratoriums,
denial of reimbursement, federal or state monitoring of operations, closure of
facilities and termination of provider reimbursement agreements. In the ordinary
course of its business, the Company receives notices from time to time of
deficiencies for failure to comply with various regulatory requirements.
Although the Company reviews such notices and takes appropriate corrective
action, there can be no assurance that the Company's facilities will be able to
remedy the deficiencies in all situations or remain continuously in compliance
with regulatory requirements. Adverse actions against a facility by applicable
regulatory agencies may adversely affect the facility's ability to continue to
operate, the ability of the Company to provide certain services, and the
facility's eligibility to participate in the Medicare or Medicaid programs.
These actions may adversely affect the Company's business and results of
operations.
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The Company is also subject to federal and state laws which govern
financial and other arrangements between health care providers. These laws often
prohibit certain direct and indirect payments or fee-splitting arrangements
between health care providers, including physicians, that are designed to induce
or encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. These laws include the federal
"Stark legislations" which prohibit any remuneration for physician referrals,
and, with limited exceptions, physician ownership of ancillary service providers
and the federal "antikickback law" which prohibits, among other things, the
offer, payment, solicitation, or receipt of any form of remuneration in return
for the referral of Medicare and Medicaid patients. The Office of the Inspector
General of the Department of Health and Human Services, the Department of
Justice and other federal agencies interpret these fraud and abuse provisions
liberally and enforce them aggressively. Recently federal laws and initiatives,
including the Kennedy/Kassebaum Act and Operation Restore Trust, have
significantly expanded the federal government's involvement in curtailing fraud
and abuse and increased the monetary penalties for violation of these
provisions. During 1997 both federal and various state governments and the
federal government initiated numerous probes and investigations regarding the
health care industry's operations and practices with a particular emphasis on
billing practices and cost reporting practices. The federal government has and
continues to marshall significant resources in pursuing and investigating fraud
and abuse and false claim allegations. In addition, the government is actively
soliciting cooperation from knowledgeable current or former employees to report
suspected wrongdoing. State attorneys general and various branches of the
federal government have indicated a desire to continue the aggressive pursuit of
investigations and to impose both criminal and civil penalties and sanctions. In
the event that Mariner becomes a target of such an investigation, it could have
a significant adverse impact on Mariner's operations, profitability, growth
strategy and financial condition. In addition, some states restrict certain
business relationships between physicians and other providers of health care
services. Many states prohibit business corporations from providing, or holding
themselves out as a provider of, medical care. Possible sanctions for violation
of any of these restrictions or prohibitions include loss of licensure or
eligibility to participate in reimbursement programs (including Medicare and
Medicaid), asset forfeitures and civil and criminal penalties (including
monetary penalties). These laws vary from state to state, are often vague and
have seldom been interpreted by the courts or regulatory agencies. From time to
time, the Company has sought guidance as to the interpretation of these laws;
however, there can be no assurance that such laws will ultimately be interpreted
in a manner consistent with the practices of the Company.
Many states have adopted certificate of need or similar laws which
generally require that the appropriate state agency approve certain acquisitions
or capital expenditures in excess of defined levels and determine that a need
exists for certain new bed additions, new services, and the acquisition of such
medical equipment or capital expenditures or other changes prior to beds and/or
services being added. Many states have placed a moratorium on granting
additional certificates of need or otherwise stated their intent not to grant
approval for new beds. To the extent certificates of need or other similar
approvals are required for expansion of Company operations, either through
facility acquisitions or expansion or provision of new services or other
changes, such expansion could be adversely affected by the failure or inability
to obtain the necessary approvals, changes in the standards applicable to such
approvals and possible delays associated with the expenses of obtaining such
approvals.
The Company's pharmacy business is also subject to inspection by state
agencies regarding record keeping, inventory control and other aspects of the
pharmacy business.
The Company is unable to predict the future course of federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework could have a material
adverse effect on the financial results of the Company's operations.
DIFFICULTY OF INTEGRATING RECENT ACQUISITIONS; MANAGEMENT OF GROWTH
The successful integration of the businesses Mariner acquires is important
to the Company's future performance. The anticipated benefits from any of these
acquisitions may not be achieved unless the operations of the acquired
businesses are successfully combined with those of the Company in a timely
manner. The integration of the Company's recent and proposed acquisitions will
require substantial attention
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from management. The diversion of the attention of management, and any
difficulties encountered in the transition process, could have a material
adverse effect on Mariner's revenue and operating results. In addition, the
process of integrating the various businesses could cause the interruption of,
or a loss of momentum in, the activities of some or all of these businesses,
which could have a material adverse effect on the Company's operations and
financial results. There can be no assurance that Mariner will realize any of
the anticipated benefits from these acquisitions.
The Company's growth has placed a significant burden on the Company's
management, operating personnel, financial and operating systems. The Company's
ability to manage its growth effectively and assimilate the operations of
acquired facilities or businesses, or newly expanded or developed facilities,
will require it to continue to attract, train, motivate, manage and retain key
employees and to expand its operational and financial systems. If the Company is
unable to manage its growth effectively, it could be materially adversely
affected.
EXPANSION RISKS AND IMPACT ON FUTURE OPERATING RESULTS
Mariner's strategy includes expanding by establishing or acquiring
additional freestanding subacute care facilities, managing subacute care units
within general acute care hospitals and acquiring ancillary health care services
businesses. As part of its strategy, the Company may acquire businesses that
operate one or more freestanding inpatient facilities or rehabilitation,
pharmacy, home care, medical equipment and other health care businesses. There
is significant competition for acquisition and expansion opportunities in the
Company's businesses. As this competition intensifies due to ongoing
consolidation in the health care industry, the costs of capitalizing on such
opportunities may increase. Mariner competes for acquisition and expansion
opportunities with companies that have significantly greater financial and
management resources. There can be no assurance that the Company will be able to
compete successfully for these opportunities, operate the acquired businesses
profitably or otherwise implement successfully its expansion strategy. Mariner's
expansion will depend on its ability to create demand in new markets for its
clinical programs and to staff new facilities and rehabilitation programs, as
well as on the availability of facilities and businesses for acquisition or
management. Such expansion and growth place significant demands on the Company's
financial and management resources. If Mariner is unable to manage its growth
effectively, the quality of its services, its ability to recruit and retain key
personnel and its results of operations could be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 of this Report.
An acquired facility may contain an existing patient population and,
consequently, a significant length of time may be required before such patient
population changes sufficiently to require a level of care, and to have a length
of stay, comparable to that provided in the Company's existing facilities.
During this conversion period, Mariner would generally expect to realize lower
reimbursement rates for these existing patients than could otherwise be obtained
for new patients. If the Company acquires a business that operates multiple
facilities, the time required to convert the acquired facilities may be longer
than that required to convert individual facilities. As a result, the expected
lower reimbursement rates could persist for a longer period, having a material
adverse effect on the Company's operating results. Further, the effort required
to make such newly acquired facilities more comparable to the Company's existing
facilities may place significant demands on Mariner's financial and management
resources.
The Company may also open new freestanding inpatient facilities, which
typically have low initial occupancy rates. Because newly opened facilities
require a basic complement of staff on the day the facility opens regardless of
the patient census, these facilities initially generate significant operating
losses.
As a result of these factors, as well as expansion into new markets and the
addition of ancillary services, Mariner could experience significant
fluctuations in operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of this Report.
LEVERAGE
As of December 31, 1997, the Company had approximately $584 million of
outstanding indebtedness, which represented 63% of its total capitalization. In
addition, the Company had approximately $17 million of
35
<PAGE> 36
availability under the Credit Facility. In 1997, the Company requested that its
lenders increase the size of the Credit Facility to $460 million, extend the
maturity of the Credit Facility and further reduce the restrictions which the
Credit Facility imposes on the operations of the Company's business. This
request was approved by the lenders on January 2, 1998. Although the Company's
cash flow from operations has been sufficient to meet its debt service
obligations in the past, there can be no assurance that the Company's operating
results will continue to be sufficient for the Company to meet its debt service
obligations. The Company's ability to comply with the terms of the Notes and the
Credit Facility, to make cash payments with respect to the Notes and under the
Credit Facility and to satisfy its other debt or to refinance any of such
obligations will depend on the future performance of the Company, which in turn,
is subject to prevailing economic conditions and financial and other factors
beyond its control.
The degree to which the Company is leveraged could have important
consequences to the holders of the Company's securities, including the
following: (i) the Company's ability to obtain additional financing for
acquisitions, capital expenditures, working capital or general corporate
purposes may be impaired in the future; (ii) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of
principal and interest on the Notes and borrowings under the Credit Facility and
other indebtedness, thereby reducing the funds available to the Company for its
operations and other purposes; (iii) certain of the Company's borrowings are and
will continue to be at variable rates of interest, which exposes the Company to
the risk of increased interest rates; and (iv) the Company may be substantially
more leveraged than certain of its competitors, which may place the Company at a
relative competitive disadvantage and make the Company more vulnerable to
changing market conditions and regulations.
RESTRICTIONS IMPOSED BY INDEBTEDNESS
The Credit Facility contains a number of covenants that, among other
things, restrict the ability of the Company to incur additional indebtedness,
pay dividends, prepay subordinated indebtedness, dispose of certain assets,
enter into sale and leaseback transactions, create liens, make capital
expenditures and make certain investments or acquisitions and otherwise restrict
corporate activities. In addition, under the Credit Facility, the Company is
required to satisfy specified financial covenants, including total indebtedness
to cash flow, total senior indebtedness to cash flow and minimum net worth
tests. The ability of the Company to comply with such provisions may be affected
by events beyond the Company's control. The breach of any of these covenants
could result in a default under the Credit Facility. In the event of any such
default, depending on the actions taken by the lenders under the Credit
Facility, the Company could be prohibited from making any payments on the Notes.
In addition, such lenders could elect to declare all amounts borrowed under the
Credit Facility, together with accrued interest, to be due and payable. The
Credit Facility is collateralized by the capital stock of the Company's
subsidiaries and certain other assets of the Company's subsidiaries, and if the
Company were unable to repay borrowings under the Credit Facility, the lenders
under the Credit Facility (the "Banks") could proceed against their collateral.
If the Banks or the holders of any other secured indebtedness were to foreclose
on the collateral securing the Company's obligations to them, it is possible
that there would be insufficient assets remaining after satisfaction in full of
all such indebtedness to satisfy in full the claims of the holders of the Notes.
The Indenture subjects the Company to certain restrictive covenants, including,
among other things, covenants with respect to the following matters: (i)
limitation on indebtedness; (ii) limitation on restricted payments; (iii)
limitation on the incurrence of liens; (iv) restriction on the issuance of
preferred stock of subsidiaries; (v) limitation on transactions with affiliates;
(vi) limitation on sale of assets; (vii) limitation on other senior subordinated
indebtedness; (viii) limitation on guarantees by subsidiaries; (ix) limitation
on the creation of any restriction on the ability of the Company's subsidiaries
to make distributions; and (x) restriction on mergers, consolidations and the
transfer of all or substantially all of the assets of the Company to another
person. In addition, the loan instruments governing the indebtedness of certain
of the Company's subsidiaries contain certain restrictive covenants which limit
the payment of dividends and distributions, and the transfer of assets to, the
Company and require such subsidiaries to satisfy specific financial covenants.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in Item 7 of this Report.
36
<PAGE> 37
DEPENDENCE ON KEY PERSONNEL; DEMAND FOR PERSONNEL
Mariner believes that it has benefited substantially from the leadership
and experience of its executive officers and members of its management team. If
such executive officers were to leave the Company, the Company's business and
results of operations could be materially adversely affected. Further, the
Company's growth strategy is dependent in large part on its ability to attract
and retain management, marketing and other personnel at its facilities. From
time to time, there have been shortages in the supply of available registered
nurses, nurses aides and various types of therapists. Mariner's ability to
provide rehabilitation services is dependent on its ability to recruit and
retain licensed therapists. The Company competes with general acute care
hospitals, skilled nursing facilities, rehabilitation hospitals, contract
rehabilitation companies and other health care providers for the services of
physicians, registered nurses, therapists and other professional personnel.
There can be no assurance that the Company will be able to attract and retain
the qualified personnel necessary for its business and planned growth. The loss
of a significant number of members of this management team, or the failure to
attract or retain the qualified personnel necessary for its business and planned
growth, could have a material adverse effect on the Company's business and
results of operations. The employees at nine of Mariner's skilled nursing
facilities, representing approximately 5% of Mariner's work force, are
represented by labor unions. Two contracts are currently under negotiation, one
expires in December, 1998, two expire in January of 1999 and the remainder after
the second quarter of 1999. In addition, the Company has experienced
organizational activities at certain of its facilities. Management cannot
predict the impact of continued or increased union representation or
organizational activities on its future operations. Management of Mariner
considers the relationship between Mariner and its employees to be good, but
cannot predict whether it will face additional union activity. See
"Business -- Employees" and "Management" in Item 1 of this Report.
COMPETITION
The health care industry is highly competitive. Mariner competes with
general acute care hospitals, skilled nursing facilities, rehabilitation
hospitals, contract rehabilitation companies and other health care providers.
Many of the Company's competitors have underutilized facilities and are
expanding into subacute care by converting some of their facilities into
subacute units. In particular, a number of nursing care facilities and acute
care hospitals are adding subacute units. The Company's facilities generally
operate in communities that are also served by competing facilities, some of
which may be newer or offer more programs. Many of these competitors have
significantly greater resources than the Company and are affiliated with
institutions or chains that are larger and have greater access to capital than
the Company or operate on a non-profit or charitable basis. Cost containment
efforts, which encourage more efficient utilization of hospital services, have
resulted in decreased hospital occupancy in recent years. These cost containment
efforts, as well as the prospect of health care reform, have also caused many
health care providers to combine with other health care providers to achieve
greater efficiencies and to reduce costs. The Company expects this trend, which
may increase competition in its markets, to continue. See
"Business -- Competition" in Item 1 of this Report.
DEPENDENCE ON CONTRACT RENEWALS
The Company provides rehabilitation program services pursuant to contracts
with skilled nursing facilities and other parties. These contracts are generally
for terms of one year and cancelable on 30 to 90 days' notice by either party.
The number of rehabilitation contracts with skilled nursing facilities has
increased from 429 as of December 31, 1996 to 480 as of December 31, 1997. In
addition, each year a number of contracts have been canceled or not renewed by
the Company or its clients. In October, 1997 the Company completed the Prism
Merger, which added rehabilitation services contracts for approximately 150
sites (including 149 skilled nursing facilities). The decision by a significant
number of Mariner's skilled nursing facility clients to cancel or not renew
these contracts could have a material adverse effect on the Company's results of
operations. See "Business -- Mariner Clinical Programs and Services" in Item 1
of this Report.
37
<PAGE> 38
POTENTIAL VOLATILITY OF STOCK PRICE
There has been significant volatility in the market prices of securities of
health care companies. Mariner believes factors such as legislative and
regulatory developments and quarterly variations in financial results could
cause the market price of the Company's Common Stock to fluctuate substantially.
In addition, the stock market has experienced volatility that has particularly
affected the market prices of many health care service companies' stocks and
that often has been unrelated to the operating performance of such companies.
These market fluctuations may adversely affect the price of the Company's Common
Stock.
CONTROL BY SIGNIFICANT STOCKHOLDERS
As of March 23, 1998 and based on their most recent filings with the
Commission on Schedule 13D, one stockholder group (the former owners of CSI)
reported beneficial ownership representing 20.8% of the Company's Common Stock.
As a result of such holding and two seats on the board of directors, this
stockholder group may have the ability to exert significant influence over the
outcome of all matters submitted to the Company's stockholders for approval,
including the election of directors.
ANTI-TAKEOVER PROVISIONS; STOCKHOLDER RIGHTS PLAN; POSSIBLE ISSUANCE OF
PREFERRED STOCK
The Company's Stockholders Rights Plan and certain provisions of the
Company's certificate of incorporation and by-laws may make it more difficult
for a third party to acquire, or discourage acquisition bids for, the Company.
In addition, in the event of a change of control, the Credit Facility also
contains an event of default upon a "change of control" as defined therein which
obligates the Company to repay amounts outstanding under the Credit Facility
upon an acceleration of the indebtedness issued thereunder. Further, if a
"change in control" (as defined in the Indenture) should occur, each holder of
the Notes has the right to require that the Company purchase such holder's Notes
at a purchase price in cash equal to 101% of the principal amount of such Notes,
plus accrued and unpaid interest thereon through the date of purchase. These
provisions could limit the price that certain investors might be willing to pay
in the future for shares of the Company's Common Stock. In addition, shares of
Mariner's preferred stock may be issued in the future without further
stockholder approval and upon such terms and conditions, having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of the holders of the Company's Common Stock will be subject to, and may be
adversely affected by, the rights of any holders of preferred stock that may be
issued in the future. Mariner has no present plans to issue any shares of
preferred stock. The Company may also issue additional shares of its Common
Stock in the future without further stockholder approval. The issuance of
preferred stock or additional shares of the Company's Common Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes could have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from acquiring, a majority
of the outstanding voting stock of the Company.
SUBORDINATION
The Notes are senior subordinated obligations of the Company and, as such,
are subordinated in right of payment to all existing and future senior
indebtedness of the Company, including indebtedness under the Credit Facility.
The Notes rank pari passu with all senior subordinated indebtedness of the
Company and will rank senior to all other subordinated indebtedness of the
Company. The Notes will also be effectively subordinated to all existing and
future liabilities of the Company's subsidiaries. As of March 25, 1998, the
aggregate amount of senior indebtedness of the Company and indebtedness of the
Company's subsidiaries (excluding intercompany indebtedness) that would have
effectively ranked senior to the Notes would have been approximately $449.6
million. In addition, under the Indenture, the Company would have been permitted
to borrow up to an additional $148.5 million under the Credit Facility and,
provided certain tests are met, will be able to borrow additional senior
indebtedness. In the event of a bankruptcy, liquidation or reorganization of the
Company or in the event that any default in payment of, or the acceleration of,
any debt occurs, holders of senior indebtedness of the Company will be entitled
to payment in full from the proceeds of all assets of the Company prior to any
payment of such proceeds to holders of the Notes. In addition, the Company may
not make any principal or interest payments in respect of the Notes if any
payment default
38
<PAGE> 39
exists with respect to senior indebtedness or any other default on Designated
Senior Indebtedness (as defined in the Indenture) occurs and the maturity of
such indebtedness is accelerated, or in certain circumstances prior to such
acceleration for a specified period of time, unless, in any case, such default
has been cured or waived, any such acceleration has been rescinded or such
indebtedness has been repaid in full. Consequently, there can be no assurance
that the Company will have sufficient funds remaining after such payments to
make payments to the holders of the Notes.
HOLDING COMPANY STRUCTURE
Substantially all of the Company's assets are held by its subsidiaries. As
a result, the Company's rights and the rights of its creditors (including
holders of the Notes) to participate in the distribution of assets of any
subsidiary upon such subsidiary's liquidation or reorganization will be subject
to the prior claims of such subsidiary's creditors, except to the extent that
the Company is itself reorganized as a creditor of such subsidiary, in which
case the claims of the Company would still be subject to the claims of any
secured creditor of such subsidiary and of any holder of indebtedness of such
subsidiary senior to that held by the Company. As of March 25, 1998 the
Company's subsidiaries would have had approximately $138.1 million of
indebtedness (excluding intercompany indebtedness and indebtedness outstanding
under the Credit Facility which is guaranteed by the Company's subsidiaries)
outstanding.
The Notes are obligations exclusively of the Company. The Notes are not
guaranteed by any of the Company's subsidiaries. Since the operations of the
Company are currently conducted through subsidiaries, the Company's cash flow
and its ability to service its debt, including the Notes, is dependent upon the
earnings of its subsidiaries and distributions to the Company. The subsidiaries
are separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay amounts due pursuant to the Notes or to make any funds
available therefore. In addition, all of the Company's subsidiaries have
guaranteed the obligations of the Company under the Credit Facility. Moreover,
the payment of dividends and the making of loan advances to the Company by its
subsidiaries are contingent upon the earnings of those subsidiaries and are
subject to various business considerations and, for certain subsidiaries,
restrictive loan covenants contained in the instruments governing the
indebtedness of such subsidiaries, including covenants which restrict in certain
circumstances the payment of dividends and distributions and the transfer of
assets to the Company.
IMPACT OF THE YEAR 2000 ISSUE
The Company has made an initial review of issues related to the Year 2000
and does not expect that it will have a material impact on the Company's
business, operations or financial condition. However, the Company could be
adversely impacted by the Year 2000 issue if its key suppliers and other third
parties do not address the issue successfully. The Company is addressing these
risks in order to reduce the impact on the Company.
39
<PAGE> 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
MARINER HEALTH GROUP, INC.
We have audited the consolidated financial statements and the financial
statement schedule of Mariner Health Group, Inc. and subsidiaries (the
"Company") listed in Item 14(a) of this Form 10-K. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mariner Health
Group, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 10, 1998
40
<PAGE> 41
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 4,616 $ 3,627
Accounts receivable, less allowance for doubtful accounts
of $11,872 and $16,046 respectively.................... 126,938 154,162
Estimated settlements due from third-party payors......... 18,912 34,335
Prepaid expenses and other current assets................. 8,880 19,268
Deferred income tax benefit............................... 11,008 8,560
-------- ----------
Total current assets................................... 170,354 219,952
Property, plant and equipment, net.......................... 386,425 415,948
Goodwill, net of accumulated amortization of $10,561 and
$18,170, respectively..................................... 280,803 382,459
Intangible and other assets, net of accumulated amortization
of $5,813 and $7,315, respectively........................ 20,991 24,670
Restricted cash and cash equivalents........................ 2,885 2,888
Deferred income tax benefit................................. 19,775 29,852
-------- ----------
Total assets...................................... $881,233 $1,075,769
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease
obligations............................................ $ 8,030 $ 13,911
Accounts payable.......................................... 31,024 26,943
Accrued payroll........................................... 9,944 17,454
Accrued vacation.......................................... 8,235 10,955
Other accrued expenses.................................... 41,141 44,874
Deferred income taxes..................................... 25 43
Other liabilities......................................... 3,801 3,519
-------- ----------
Total current liabilities.............................. 102,200 117,699
Long-term debt and capital lease obligations................ 415,236 570,483
Deferred income taxes....................................... 18,073 17,307
Deferred gain............................................... 1,955 1,789
Other long-term liabilities................................. 18,981 27,673
-------- ----------
Total liabilities...................................... 556,445 734,951
Commitments and contingencies (Note 16)
Stockholders' equity
Common stock, $.01 par value; 50,000,000 shares authorized;
28,978,225 and 29,447,614 issued and outstanding at
December 31, 1996 and 1997, respectively.................. 290 295
Additional paid-in capital.................................. 312,786 317,216
Unearned compensation....................................... (8) --
Retained earnings........................................... 11,720 23,307
-------- ----------
Total stockholders' equity............................. 324,788 340,818
-------- ----------
Total liabilities and stockholders' equity........ $881,233 $1,075,769
======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
41
<PAGE> 42
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net patient service revenue................................ $337,635 $578,755 $714,623
Other revenue.............................................. 17,171 12,054 18,853
-------- -------- --------
Total operating revenue.................................... 354,806 590,809 733,476
-------- -------- --------
Operating expenses:
Facility operating costs................................. 276,633 465,226 563,646
Corporate general and administrative expense............. 39,830 46,401 62,052
-------- -------- --------
316,463 511,627 625,698
Interest expense......................................... 4,440 26,853 40,327
Interest income.......................................... (842) (597) (375)
Facility rent expense, net............................... 1,830 3,727 4,421
Depreciation and amortization expense.................... 11,397 21,376 27,499
Asset impairment loss.................................... -- -- 10,486
-------- -------- --------
Total operating expenses.............................. 333,288 562,986 708,056
Operating income........................................... 21,518 27,823 25,420
Net loss on sale of assets................................. (6) (826) (2,920)
-------- -------- --------
Income before income taxes and extraordinary items......... 21,512 26,997 22,500
Net provision for income taxes............................. (7,892) (10,799) (10,913)
-------- -------- --------
Income before extraordinary items.......................... 13,620 16,198 11,587
Extraordinary items........................................ (1,138) -- --
-------- -------- --------
Net income................................................. $ 12,482 $ 16,198 $ 11,587
======== ======== ========
Net income per diluted share:
Income from continuing operations before extraordinary
items................................................. $0.60 $0.55 $0.39
Extraordinary items...................................... (0.05) -- --
-------- -------- --------
Net income per diluted share............................. $0.55 $0.55 $0.39
======== ======== ========
Income per share
diluted.................................................. $0.55 $0.55 $0.39
basic.................................................... $0.55 $0.56 $0.40
Shares used in per share computation:
diluted.................................................. 22,755 29,210 29,885
basic.................................................... 22,502 28,721 29,226
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
42
<PAGE> 43
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income................................................ $ 12,482 $ 16,198 $ 11,587
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization............................. 11,418 22,274 28,781
Amortization of deferred gain............................. (1,468) (167) (156)
Amortization of stock plan................................ -- -- 8
Loss on facility closure.................................. 1,801 826 --
Extraordinary item-loss due to early retirement of debt... 1,138 -- --
Non-recurring charges..................................... -- 850 --
Net loss on disposal of assets............................ 20 1,061 4,420
Asset impairment loss..................................... -- -- 10,486
Earnings from partnerships................................ (14) -- --
Provisions for bad debt................................... 3,698 2,738 4,448
Deferred income taxes..................................... (824) 6,313 2,881
Changes in operating assets and liabilities:
Increase in accounts receivable........................... (40,787) (24,848) (19,080)
(Increase) decrease in estimated settlements from third
party payors............................................ (7,156) 235 (13,621)
(Increase) decrease in prepaid expenses and other current
assets.................................................. (3,397) 1,059 (9,741)
Increase (decrease) in accounts payable................... 3,778 10,968 (4,845)
Increase (decrease) in accrued liabilities................ 6,884 (4,779) (3,773)
Decrease in other current liabilities..................... (166) (6,921) 298
-------- --------- ---------
Net cash provided by (used in) operating activities..... (12,593) 25,807 11,693
-------- --------- ---------
Cash flows used in investing activities:
Purchase of property, plant and equipment................. (11,943) (22,502) (37,173)
Proceeds from sale of plant, property and equipment....... -- 3,080 4,890
Increase in other assets.................................. (3,210) (35,500) (9,732)
Payments related to prior acquisitions.................... 1,055 -- (2,062)
(Increase) decrease in restricted cash.................... 756 4 (3)
Cash paid for acquisitions, net of cash acquired.......... (52,389) (168,697) (138,789)
Purchase deposits......................................... (19,500) -- --
-------- --------- ---------
Net cash used in investing activities................... (85,231) (223,615) (182,869)
-------- --------- ---------
Cash flows from financing activities:
Drawings on line of credit................................ 80,775 217,481 319,000
Proceeds from debt offering, net.......................... -- 149,666 --
Repayments of debt........................................ (17,921) (173,063) (158,232)
Exercise of stock options................................. 1,008 3,887 3,595
Shares issued under employee stock purchase plan.......... 400 310 475
Investments from joint venture partners................... -- -- 5,349
Other increases from financing activities................. 439 57 --
-------- --------- ---------
Net cash provided by financing activities............... 64,701 198,338 170,187
-------- --------- ---------
Increase (decrease) in cash and cash equivalents............ (33,123) 530 (989)
Cash and cash equivalents at beginning of year.............. 37,209 4,086 4,616
-------- --------- ---------
Cash and cash equivalents at end of year.................... $ 4,086 $ 4,616 $ 3,627
======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
43
<PAGE> 44
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
PAR PAID-IN UNEARNED (ACCUMULATED
SHARES VALUE CAPITAL COMPENSATION DEFICIT) TOTAL
----------- ----- ---------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994... 22,365,818 $224 $244,985 $(101) $(16,960) $228,148
Net income................... 12,482 12,482
Exercise of options.......... 140,201 1 1,013 1,014
Shares purchase under
Employee Stock Purchase
Plan...................... 32,365 400 400
Issuance of Common Stock..... 1,624 3 3
Tax benefit arising from
exercise of employee stock
options................... 326 326
Cancellation of options...... (67) 67 --
Amortization of stock plan
expense................... 19 19
----------- ---- -------- ----- -------- --------
Balance at December 31, 1995... 22,540,008 225 246,660 (15) (4,478) 242,392
Net income................... 16,198 16,198
Exercise of options.......... 491,702 5 3,882 3,887
Issuance of warrants......... 850 850
Warrants exercised........... 17,177 55 55
Shares purchased under
Employee Stock Purchase
Plan...................... 26,958 310 310
Issuance of Common Stock..... 5,902,380 60 59,576 59,636
Tax benefit arising from
exercise of employee stock
options................... 1,453 1,453
Amortization of stock plan
expense................... 7 7
----------- ---- -------- ----- -------- --------
Balance at December 31, 1996... 28,978,225 290 312,786 (8) 11,720 324,788
Net income................... 11,587 11,587
Exercise of options.......... 402,753 5 3,590 3,595
Shares purchased under
Employee Stock Purchase
Plan...................... 66,636 475 475
Issuance of Common Stock Tax
benefit arising from
exercise of employee stock
options................... 365 365
Amortization of stock plan
expense................... 8 8
----------- ---- -------- ----- -------- --------
Balance at December 31, 1997... 29,447,614 $295 $317,216 -- $ 23,307 $340,818
=========== ==== ======== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
44
<PAGE> 45
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Mariner Health Group, Inc. and subsidiaries ("Mariner" or the "Company")
provides post-acute health care services in selected markets with a particular
clinical expertise in the treatment of short-stay subacute patients in
cost-effective alternate sites. Subacute patients are medically stable and
generally require between three to six hours of skilled nursing care per day.
These patients typically can benefit from standardized clinical programs,
require extensive ancillary medical services and are discharged directly to
their homes.
Mariner owns, operates and manages freestanding inpatient facilities,
provides rehabilitation program management services to other skilled nursing
facilities and operates outpatient rehabilitation clinics, pharmacies and home
health agencies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of Mariner have been prepared to give
retroactive effect to the merger of MedRehab, Inc. ("MedRehab" or "MRI") on
March 1, 1996, of which was accounted for as a pooling of interests.
Accordingly, the accompanying consolidated financial statements have been
restated to include the accounts and operations of MedRehab for all periods
presented.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and any investments in which the Company has a controlling financial interest.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation.
Estimates Used in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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. Actual results could differ from those estimates. Estimates
are used when accounting for the collectibility of receivables and third party
settlements, depreciation and amortization, employee benefit plans, taxes and
contingencies.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
original maturities of three months or less.
Net Patient Service Revenue
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
45
<PAGE> 46
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Medicare and Medicaid are generally based on reimbursement of the reasonable
direct and indirect costs of providing services to program participants or 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 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.
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. The Company believes it will be successful in collecting
these receivables, however, the failure to recover these costs in the future
could materially and adversely affect the Company.
The Company's rehabilitation management contracts typically have a term of
one year but frequently include automatic renewals and in general are terminable
on notice of 30 to 90 days by either party. Under certain contracts, Mariner
bills Medicare or another third-party payor directly. Under other contracts, the
Company is compensated on a fee for service basis and in general directly bills
the skilled nursing facility, which in turn receives reimbursement from
Medicare, Medicaid, private insurance or the patient. Mariner recognizes
payments under these latter contracts as payments from private payors. Under
these latter contracts, Mariner also generally indemnifies its customers against
reimbursement denials by third-party payors for services determined not to be
medically necessary. Mariner has 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 bills a skilled nursing facility
for its rehabilitation services on a fee for service basis, Medicare reimburses
the facility based on a reasonable cost standard. Specific guidelines exist for
evaluating the reasonable cost of physical, occupational and speech therapy
services. Medicare applies salary-equivalency guidelines in determining the
reasonable cost of physical therapy services, which is 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 pays 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 are
significantly less than for its speech and occupational therapy services under
the "prudent buyer" rule. In addition, Mariner provides certain services between
subsidiary companies, some of which are charged at cost and others of which are
charged at market rates. Mariner believes that the services which are charged at
market rates qualify for an exception to Medicare's related party rule. There
can be no assurance, however, that the Health Care Finance Administration
("HCFA") will endorse Mariner'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
46
<PAGE> 47
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which will update current physical therapy and respiratory therapy rates and
establish new guidelines for occupational therapy and speech therapy. Mariner is
in the process of determining whether these new proposals will have a material
effect on its rehabilitation operations. 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 Mariner's provider and rehabilitation contracts provide 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.
During 1996, the Company observed a change in the practices of its Medicare
fiscal intermediaries which, on behalf of HCFA, the federal agency responsible
for administering the Medicare program, had begun to aggressively and
retrospectively change their position on previously approved costs. This change
includes the reclassification of costs from reimbursable to non-reimbursable and
the challenging of payment for costs which had traditionally been approved. In
response to these challenges of the payment of Medicare costs, in the third
quarter of 1996, the Company changed its estimate of required reserves and
provided an additional $10,000,000 reserve for potential lower levels of
Medicare reimbursement.
Other Revenue
Other revenue consists primarily of fees earned from contracts to manage
inpatient sub-acute care units of non-affiliated health care facilities and, in
1995, includes fees of $11,227,000 relating to the management of certain
Convalescent Services, Inc. ("CSI") facilities, many of which were subsequently
acquired. A director, officer and stockholder of CSI during 1995 was also a
director of the Company during the period in which these fees were earned (see
Note 3).
Facility Operating Costs
Facility operating costs include nursing expenses for the years ended
December 31, 1995, 1996 and 1997 of $50,738,000, $69,950,000 and $132,862,000
respectively. All other expenses included in facility operating costs, such as
rehabilitation and ancillary services, administration, dietary and plant
operations, for the years ended December 31, 1995, 1996 and 1997, were
$225,895,000, $395,276,000 and $430,784,000 respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Betterments and major
renewals are capitalized and included in property and equipment, while repairs
and maintenance are charged to expense as incurred. Upon retirement or sale of
assets, the cost of the assets disposed of and the related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
reflected in the statement of operations. Interest associated with construction
projects is capitalized and included in the basis of the property.
The provision for depreciation is computed using the straight-line method.
Depreciation provisions are based on estimated useful lives as follows:
Building and improvements -- 15-40 years
Furniture and equipment -- 3-8 years
Leasehold rights and improvements -- Over the shorter of the remaining
term of the lease or life of the asset
Software -- 3-7 years
47
<PAGE> 48
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of Long-Lived Assets
The Company periodically reviews the carrying value of its long-lived
assets (primarily property, plant and equipment and intangible assets) to assess
the recoverability of these assets; any impairments would be recognized in
operating results if a permanent diminution in value were to occur. As part of
this assessment, the Company reviews the expected future net operating cash
flows from its facilities, as well as the values determined in connection with
various refinancings.
During 1997, the Company recorded losses on long-lived assets where those
events or circumstances indicated that the assets were impaired. The impairment
charge was the difference between the carrying value and the estimated fair
value of the assets. The Company estimated fair values based on sales prices for
comparable assets. The total impairment of long-lived assets was $10,486,000,
$5,400,000 after income taxes, of which $2,886,000 related to various physician
practices and $2,514,000 related to skilled nursing facilities.
Goodwill, Intangibles and Other Assets
Goodwill, intangibles and other assets primarily consist of amounts
identified in connection with certain acquisitions accounted for under the
purchase method, and certain deferred costs which were incurred in connection
with various financings.
In connection with each of its acquisitions, the Company reviews the assets
acquired and assesses their relative fair value in comparison to the purchase
price. Goodwill results from the acquisition of certain facilities for which the
negotiated purchase prices exceed the allocations of the fair market value of
identifiable assets. The Company's policy is to evaluate each acquisition
separately and identify an appropriate amortization period for goodwill based on
the acquired property's characteristics. Goodwill is being amortized using the
straight-line method generally over a 40 year period. Costs incurred in
obtaining financing are amortized using the straight-line method, over the term
of the related financial obligation.
During 1996, the Company wrote-off approximately $14,007,000 of fully
amortized goodwill and approximately $2,585,000 of fully amortized other
intangible assets. Amortization expense related to goodwill and intangible
assets for the years ended December 31, 1995, 1996 and 1997 was $3,112,000,
$6,158,000 and $8,911,000 respectively.
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires the use
of the liability method of accounting for deferred income taxes. The Company's
policies regarding depreciation and amortization for financial reporting
purposes differ from those used for tax purposes, thereby giving rise to
deferred income taxes. For Federal income tax purposes, Mariner Health Group,
Inc. and its subsidiaries file a consolidated income tax return.
Net Income Per Common and Common Equivalent Share
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share." This
standard is designed to improve the earnings per share ("EPS") information
provided in financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements, and increasing the
comparability of EPS data on an international basis. See Note 18.
Recently Issued Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," was issued in June 1997. This statement establishes
standards for reporting and displaying comprehensive income and its components
in the financial statements.
48
<PAGE> 49
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was also issued in June 1997. This statement requires that public
business enterprises report certain information about operating segments and
related disclosures about products and services, geographic areas and major
customers.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued in February 1998. This statement
standardizes disclosure requirements for pension and other postretirement
benefits, requires additional information on changes in benefit obligations and
fair values of plan assets, and eliminates certain existing disclosure
requirements.
SFAS Nos. 130, 131 and 132 become effective in the Company's fiscal year
ending December 31, 1998. The adoption of these statements are expected to have
no impact on the Company's results of operations, financial position or cash
flows and to produce no major changes in current disclosures.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," in March 1998. This statement provides guidance as to whether
certain internal-use software costs should be capitalized as a long-lived asset
or expensed when incurred. SOP 98-1 becomes effective in the Company's fiscal
year ending December 31, 1998, but may be adopted earlier. The Company is in the
process of evaluating the requirements of SOP 98-1, but does not expect that it
will materially affect its results of operations, financial position or cash
flows. The Company has not yet decided whether it will adopt this standard in
1998.
3. MERGERS AND ACQUISITIONS
On January 9, 1995, the Company, Convalescent Services, Inc. ("CSI"), CSI's
stockholders (the "CSI Stockholders") and certain of their affiliates entered
into certain agreements governing the merger (the "CSI Merger") of Blue
Corporation, a Georgia corporation and wholly owned subsidiary of the Company,
with and into CSI and the acquisition of certain related assets. CSI operated
subacute-oriented skilled nursing facilities that provided restorative nursing
care and specialty medical services, including rehabilitation programs,
respiratory therapy, infusion therapy, wound care treatment and Alzheimer
disease management. The Company acquired 25 skilled nursing facilities, one
rehabilitation hospital and one continuing care retirement community, with an
aggregate of 3,801 beds in connection with this transaction. On January 2, 1996
the CSI Merger was consummated.
On March 1, 1996, the Company consummated a merger with MedRehab, a company
whose primary business was contract rehabilitation therapy. Mariner issued an
aggregate of approximately 2,312,500 shares of its Common Stock for all of
MedRehab's outstanding capital stock and options to purchase MedRehab capital
stock in a merger that was accounted for as a pooling of interests.
Operating results for the separate companies for the period immediately
preceding the acquisition are as follows:
<TABLE>
<CAPTION>
MARINER MEDREHAB COMBINED
-------- -------- --------
<S> <C> <C> <C>
Twelve months ended December 31, 1995:
Total revenue............................ $298,049 $56,757 $354,806
Extraordinary items...................... (1,138) -- (1,138)
Net income............................... 11,535 947 12,482
</TABLE>
The combined financial results presented above include adjustments made to
conform accounting policies of the two companies. There were no intercompany
transactions between the two companies for the period presented. As of December
31, 1996 and 1997, other accrued expenses includes $2,009,000 and $377,000,
49
<PAGE> 50
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, which has been accrued primarily to pay remaining scheduled
severance amounts to certain employees.
In March 1996, Mariner acquired a primary care physician organization in
the Orlando, Florida area. In this transaction, Mariner issued an aggregate of
48,722 shares of its Common Stock and paid an aggregate of $1,500,000 in cash
which was financed under the senior secured revolving credit facility with a
syndicate of banks ("Credit Facility"). The Company has recorded a total of
$2,400,000 in goodwill related to this transaction. This investment was
subsequently written off in 1997.
In May 1996, the Company acquired seven skilled nursing facilities and one
assisted living facility with an aggregate of 960 beds in Florida, Tennessee and
Kansas (the "1996 Florida Acquisition"). All of the issued and outstanding
shares of common stock were converted into the right to receive an aggregate of
approximately $28,050,000 in cash. The Company financed the consideration paid
in the 1996 Florida Acquisition with a portion of the net proceeds from the sale
of the Notes and borrowings under the Credit Facility. Goodwill totaling
approximately $38,000,000 was recorded in connection with this transaction.
In the fourth quarter of 1996, Mariner consummated its acquisition of
certain assets of Allegis Health Services, Inc. ("Allegis") and certain of its
affiliates. Under the terms of the acquisition agreement, the Company purchased
five inpatient facilities, assumed two operating leases and one capital lease
and purchased Allegis' institutional pharmacy and its rehabilitation program
management subsidiary. The total purchase price of $110,000,000 consisted of the
assumption of $12,000,000 in debt, including the capital lease of approximately
$5,000,000, and $98,000,000 in cash. Under the terms of the agreement,
$103,000,000 of the purchase price was paid at the closings during the fourth
quarter of 1996. Approximately $98,500,000 of that amount plus certain closing
costs was borrowed under the Credit Facility. The remaining $2,000,000 was paid
in 1997 once certain financial performance conditions for 1996 were confirmed.
Goodwill was adjusted to a total of $73,400,000 for this transaction.
On October 1, 1996, the Company acquired a 163-bed facility in
Jacksonville, Florida. The total purchase price was $9,850,000. Mariner funded
the purchase price by assuming two HUD mortgages in the aggregate principal
amount of approximately $4,236,000. The Company borrowed $6,500,000 under its
Credit Facility to fund the remainder of the cash portion of the purchase price
and to replace reserves required by the HUD mortgage agreements. Of the total
purchase price, approximately $4,100,000 million was accounted for as goodwill.
During 1996, all acquisitions were accounted for as purchases except for
the merger with MedRehab Inc. which was accounted for as a pooling of interests.
In connection with the CSI and 1996 Florida Acquisitions, the Company posted
additional purchase accounting reserves in the fourth quarter of 1996 of
$9,000,000, consisting of $7,000,000 for third party settlements and $2,000,000
for litigation.
1997 Facility Acquisitions. During 1997, the Company acquired four skilled
nursing facilities with a total of 587 beds in the Baltimore metropolitan area
for a total purchase price of approximately $37,000,000 (the "1997 Facility
Acquisitions"). The Company borrowed approximately $37,000,000 under its Credit
Facility to finance these acquisitions. Goodwill of $22,000,000 was recorded in
connection with these acquisitions.
Prism and Related Rehabilitation Transaction. In October 1997, the Company
completed its merger with Prism Health Group, Inc. (the "Prism Merger"). All of
the issued and outstanding shares of Prism capital stock were converted into the
right to receive an aggregate of approximately $84,300,000 in cash. In
connection with the Prism Merger the Company also repaid approximately
$9,500,000 in assumed debt and paid expenses of approximately $700,000 prior to
the closing. Goodwill of approximately $91,000,000 was recorded in connection
with this transaction. The Company borrowed approximately $94,500,000 under its
Credit Facility to finance the Prism Merger.
50
<PAGE> 51
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June, 1997, the Company also acquired another rehabilitation company for
a total purchase price of approximately $15,403,000. The Company made an initial
payment of $2,000,000 and in 1998 paid an additional $3,135,000. These amounts
were funded under the Company's Credit Facility. In addition, the Company
entered into a 3 year, 7% interest bearing note for $5,134,000. The Company also
agreed to pay an additional $5,134,000 in contingent consideration over the next
three years provided certain financial targets were met. Goodwill of $2,552,000
was recorded in connection with this acquisition.
The assets acquired and liabilities assumed in connection with the
aforementioned mergers and acquisitions have been included in the financial
statements based on preliminary estimates of fair values and may be revised as
additional information becomes available. As a result, the financial information
included in the financial statements is subject to adjustment from subsequent
revisions and estimates of fair value if any are necessary.
In the fourth quarter of 1997 the Company incurred $7,180,000 of costs
related to office closings, abandonment of certain furniture and equipment and
other expenses related to consolidation of the Company's rehabilitation
operations. Additional expenses of $9,324,000, including $5,713,000 for
severance, payroll, and relocation costs, $2,077,000 for office closings and
related expenses and $1,534,000 related to bank fees were recorded in connection
with the Prism merger.
Joint Ventures. The Company entered into three joint venture arrangements
at three of its facilities located in Maryland and North Carolina. The Company
retained a 50% interest in two of the facilities and 60% of the third facility.
The Company received a total of $5,349,000 of capital contributions from its
joint venture partners and recognized a gain of approximately $1,659,000 from
these transactions.
All 1997 acquisitions were accounted for as Purchases.
4. DISPOSITION OF FACILITIES
The Company executed agreements to sell two nursing facilities in
non-strategic locations. Total sales proceeds were $4,890,000 and a net pretax
loss of $4,579,000 was recorded. For 1997, these facilities generated aggregate
net revenues of $6,849,000 and income from continuing operations of $550,000.
5. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments in money market
funds and repurchase agreements with a financial institution and trade
receivables. Of the Company's accounts receivable and estimated settlements due
from third party payors are 24% and 20% from Medicaid and 31% from Medicare at
December 31, 1996 and 1997, respectively. 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. Should the related
government agencies suspend or significantly reduce contributions to these
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.
Federal law limits the degree to which states are permitted to alter Medicaid
programs.
6. SALES LEASEBACK TRANSACTIONS
The Company constructed two facilities which were purchased in 1993, at the
completion of the construction phase, by the real estate investment trust
providing the financing. The Company entered into operating lease arrangements
for these facilities which provided for minimum lease terms through July 1999
and January 2004, respectively, with extension rights available through 2019.
51
<PAGE> 52
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1993, one of the facilities was sold and leased back A gain on the
sale totaling $1,815,000 was deferred and was being amortized over 7 years, the
term of the lease. The Company initiated a significant change in business focus
at this facility during 1995. The facility was purchased on November 1, 1995.
Effective January 1, 1996 a portion of the building was leased to an unrelated
long-term care company. The remaining portion of the building is leased as
office space. Upon effecting these transactions, the Company recognized the
remaining deferred gain of $1,135,000 which was offset by the write-off of
certain capitalized costs of $2,887,000 for a net loss of $1,752,000 which is
included in facility operating expenses.
In November 1993, the second facility was sold and leased back. A gain on
the sale totaling $1,783,000 has been deferred and is being amortized over 10
years, the term of the lease. The unamortized amount of this deferred gain
totaled $1,244,000 and $1,078,000 at December 31, 1996 and 1997, respectively.
Additional deferred gains of $711,000 relate to transactions with Pinnacle Care
in 1994.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
-------- --------
<S> <C> <C>
Land and improvements.............................. $ 32,433 $ 33,822
Building and improvements.......................... 329,141 340,273
Furniture and equipment............................ 63,361 68,826
Leasehold rights and improvements.................. 2,841 8,791
Software........................................... 2,348 8,691
Construction in progress........................... 3,850 17,654
-------- --------
433,974 478,057
Less: accumulated depreciation..................... (47,549) (62,109)
-------- --------
$386,425 $415,948
======== ========
</TABLE>
Depreciation expense related to property, plant and equipment for the years
ended December 31, 1995, 1996 and 1997 was $8,285,000, $15,218,000 and
$18,588,000, respectively.
Interest costs associated with construction or renovations are capitalized
in the period in which they are incurred. No interest was capitalized during
1995 or 1996. Capitalized interest in 1997 amounted to approximately $878,000.
Included in property, plant and equipment is equipment, furniture, land and
buildings under capital leases with cost bases totaling $94,582,000 and
$94,763,000 at December 31, 1996 and 1997, respectively. Accumulated
amortization on equipment under capital leases is approximately $2,479,000 and
$4,424,000 at December 31, 1996 and 1997, respectively.
8. RESTRICTED CASH AND CASH EQUIVALENTS
Approximately $2,885,000 and $2,888,000 of the Company's cash is restricted
for capital improvements and collateral under the terms of various financing
arrangements at December 31, 1996 and 1997, respectively. This includes amounts
related to debt assumed in connection with certain acquisitions.
52
<PAGE> 53
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCRUED EXPENSES
At December 31, 1997, accrued expenses include approximately $10,890,000
for employee benefits and withholdings, $7,342,000 for interest, $5,497,000 for
income and property related taxes, and $7,050,000 for asset impairments.
10. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior Subordinated Notes.......................... $149,691 $149,724
Revolving credit and term loan agreement........... 132,000 301,000
Capital lease obligations.......................... 76,502 73,225
Mortgage loans..................................... 51,232 50,704
Tax exempt low floater with annual maturities of
$395,000 through October 2010.................... 5,480 5,085
Term loans and other............................... 8,361 4,656
-------- --------
423,266 584,394
Current maturities of long-term debt............... (4,802) (6,171)
Current portion of capital lease obligations....... (3,228) (7,740)
-------- --------
$415,236 $570,483
======== ========
</TABLE>
On April 4, 1996, the Company sold $150,000,000 aggregate principal amount
of its 9 1/2% Senior Subordinated Notes due 2006 (the "Notes"). The Notes mature
on April 1, 2006. The Notes are unsecured senior subordinated obligations of
Mariner and, as such, are subordinated in right of payment to all existing and
future senior indebtedness of Mariner, including indebtedness under the Credit
Facility. The Notes contain certain covenants, including, among other things,
covenants with respect to the following matters: (i) limitation on indebtedness;
(ii) limitation on restricted payments; (iii) limitation on the incurrence of
liens; (iv) restriction on the issuance of preferred stock of subsidiaries; (v)
limitation on transactions with affiliates; (vi) limitation on the sale of
assets; (vii) limitation on other senior subordinated indebtedness; (viii)
limitation on guarantees by subsidiaries; (ix) limitation on the creation of any
restriction on the ability of the Company's subsidiaries to make distributions;
and (x) restriction on mergers, consolidations and the transfer of all or
substantially all of the assets of the Company to another person. The Notes were
issued under an Indenture dated as of April 4, 1996 by and among the Company and
State Street Bank and Trust Company, as trustee (the "Indenture").
Mariner has a $460,000,000 senior secured revolving credit facility with a
syndicate of banks (the "Credit Facility"). As of October 3, 1997, the Company
entered into an amendment to the Credit Facility to increase borrowing capacity
to $325,000,000 from $250,000,000, As of January 2, 1998 the terms were amended
to increase the size of the Credit Facility to $460,000,000, extend the maturity
of the Credit Facility and reduce certain restrictions that the Credit Facility
imposes on the operations of the business of the Company and its subsidiaries.
As of December 31, 1996 and 1997, principal balances outstanding under the
Credit Facility were approximately $132,000,000 and $301,000,000 respectively,
and letters of credit outstanding under this facility were approximately
$5,499,000 and $6,715,000. As of December 31, 1997 the letters of credit under
the Credit Facility were $5,624,000 that related to workers compensation
insurance and $1,091,000 associated with debt and other agreements. Mariner has
used, and intends to continue to use, borrowings under the Credit Facility to
finance the acquisition and development of additional subacute care facilities
and related businesses, and for
53
<PAGE> 54
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
general corporate purposes, including working capital. Mariner's obligations
under the Credit Facility are collateralized by a pledge of the stock of its
subsidiaries and are guaranteed by all of the Company's subsidiaries. In
addition, the Credit Facility is collateralized by mortgages on certain of the
Company's inpatient facilities, leasehold mortgages on certain inpatient
facilities leased by the Company, and security interests in certain other
properties and assets of the Company and its subsidiaries. The Credit Facility
matures on January 2, 2003 and provides for prime or LIBOR-based interest rate
options. The borrowing availability and rate of interest varies depending upon
specified financial ratios. The Credit Facility also contains covenants which,
among other things, require the Company to maintain a minimum fixed charge
coverage ratio, maximum leverage ratio, minimum net worth, senior indebtedness
to cash flow from operations, total indebtedness to consolidated cash flows from
operations and ratio of total indebtedness to consolidated cash flow. Additional
covenants include limitations or prohibitions on the Company with respect to the
incurrence of indebtedness, senior 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 the Company with any person or entity; and the
disposition of any of the Company's properties or assets. The weighted average
interest rate on the outstanding balances at December 31, 1996 and 1997 was
7.13% and 8.00% per annum, respectively.
Term loans at December 31, 1996 and 1997 consist primarily of the notes
payable in connection with the January 1993 purchase of the contract therapy
business, the 1994 purchase of a pharmacy and home health care business, the
MedRehab merger, an airplane, notes payable in connection with the purchase of
three physicians practices and a non-interest bearing term note in connection
with the Prism acquisition. A total of $1,210,000 of term loans are unsecured.
An airplane is pledged as collateral on the note given at the purchase date.
Interest accrues at rates ranging from 8% to 12% per annum.
At December 31, 1997, mortgage loans collateralized by the properties
included $8,494,000 on one facility related to the purchase of a previously
leased facility, $8,419,000 in mortgages guaranteed by HUD, $17,035,000 for
facilities acquired in the 1996 Florida Acquisition, $9,259,000 for former CSI
facilities, and $7,497,000 related to Allegis facilities. These notes bear
interest rates ranging from 8.0% to 11.5% per annum, with terms expiring from
August, 1998 to April, 2011.
In November 1993, the Company refinanced the certain debt instruments
replacing them with a Tax-Exempt Low Floater instrument collateralized by a
first mortgage on a nursing facility and a five-year letter of credit of
$5,480,000 issued by a bank and guaranteed by the Company. The interest rate is
set weekly by the bank. At December 31, 1997, the rate was 3.75% per annum.
In addition, the Company leases certain equipment, land and buildings under
capital leases. Assets under capital leases are capitalized using interest rates
appropriate at the inception of each lease. (See Note 3).
Aggregate maturities of long-term debt and capital lease obligations for
the years ending after December 31, 1997 are as follows:
<TABLE>
<CAPTION>
TOTAL DEBT CAPITAL LEASES
-------- -------- --------------
<S> <C> <C> <C>
1998..................................... $ 13,911 $ 6,171 $ 7,740
1999..................................... 12,275 9,705 2,570
2000..................................... 9,718 7,027 2,691
2001..................................... 11,239 1,127 10,112
2002..................................... 5,288 3,123 2,165
Thereafter............................... 531,963 484,016 47,947
-------- -------- -------
$584,394 $511,169 $73,225
======== ======== =======
</TABLE>
54
<PAGE> 55
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1997 interest expense includes $1,282,000 in amortization related to
deferred finance costs. Interest paid for the years ended December 31, 1995,
1996 and 1997 amounted to approximately $3,599,000, $22,939,000 and $35,966,000
respectively.
11. INCOME TAXES
The provision for income taxes consists of the following at December 31,
1995, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred Federal income tax benefit
(provision)............................... $ 704 $ 963 $ (2,459)
Deferred state income tax benefit
(provision)............................... 120 280 (422)
Current Federal income tax provision........ (6,398) (9,340) (6,171)
Current state income tax provision.......... (2,318) (2,702) (1,861)
------- -------- --------
Total provision for income taxes............ $(7,892) $(10,799) $(10,913)
======= ======== ========
</TABLE>
The provision for income taxes is reconciled to the tax provision computed
at the Federal statutory rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory rate....................................... 35% 35% 35%
State taxes, net of Federal effect................... 7% 7% 6%
Reversal of deferred taxes at higher statutory
rate............................................... (2%) -- --
Amortization of goodwill............................. -- 5.5% 7.3%
Other permanent differences.......................... -- 0.5% 0.2%
Net operating loss carryforward utilization.......... (1%) -- --
Change in valuation allowance........................ -- (5%) --
Other................................................ (2%) (3%) --
---- ---- ----
37.0% 40.0% 48.5%
==== ==== ====
</TABLE>
55
<PAGE> 56
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities are comprised of the following at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred Tax Assets
Current
Reserve for receivables............................. $ 4,439 $ 8,227
Accrued expenses.................................... 6,569 --
Other............................................... -- 333
------- -------
11,008 8,560
------- -------
Long-Term
Deferred revenue.................................... 500 442
Merger costs........................................ 657 205
Accrued expenses.................................... 16,192 27,574
Net Operating Loss.................................. 1,631 1,631
Other............................................... 795 --
------- -------
19,775 29,852
------- -------
Total Deferred Tax Assets................................ 30,783 38,412
------- -------
Deferred Tax Liabilities
Current
Other............................................... 25 43
------- -------
25 43
------- -------
Long-Term
Fixed assets........................................ 13,539 12,655
Write off of deferred costs......................... 601 65
Goodwill............................................ 3,128 2,776
Tax Lease........................................... 805 1,811
------- -------
18,073 17,307
------- -------
Total Deferred Tax Liabilities........................... 18,098 17,350
------- -------
Net Deferred Tax Asset................................... $12,685 $21,062
======= =======
</TABLE>
In connection with the merger with MedRehab, Inc., the Company acquired
significant deferred income tax assets associated with MRI's net operating loss
("NOL") carryforwards. Because of the limitations imposed by the Internal
Revenue Code, these NOLs can only be used to offset income generated by the
former MRI. Since MRI was expected to be in a tax loss position and has had
losses in recent years, a valuation reserve in the full amount of the net
deferred income tax assets was established at December 31, 1995 in accordance
with the Statement of Financial Accounting Standard No. 109, "Accounting for
Income Taxes." The NOLs expire at various times through 2010. In 1996, it was
determined, based on MRI's estimated profitability that it was more likely than
not that the NOLs could be utilized in 1996 and future years. Accordingly, the
valuation allowance was reversed at December 31, 1996.
The Prism Merger resulted in the addition of $2,194,000 of additional
deferred tax assets. The establishment of reserves in conjunction with the Prism
Merger and other acquisitions resulted in an increase of $9,064,000 to long term
deferred tax assets.
56
<PAGE> 57
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, 1996 and 1997, the Company paid Federal, state and local
income taxes in the amounts of approximately $7,333,000, $10,922,000 and
$21,133,000 respectively. As of December 31, 1997, other accrued expenses
includes approximately $1,800,000 which represents the liability for Federal,
state and local income taxes.
12. STOCK OPTION PLANS
The Company has five stock-based compensation plans. In October 1995, the
FASB issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 is
effective for periods beginning after December 15, 1995. SFAS 123 requires that
companies either recognize compensation expense for grants of stock, stock
options, and other equity instruments based on fair value, or provide pro forma
disclosure of net income and earnings per share in the notes to the financial
statements. The Company adopted the disclosure provisions of SFAS 123 in 1996
and has applied APB Opinion 25 and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its stock
option plans. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates as calculated
in accordance with SFAS 123, the Company's net income and earnings per share for
the years ended December 31, 1997, 1996 and 1995 would have been reduced to the
pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
EARNINGS EARNINGS EARNINGS
NET INCOME PER SHARE NET INCOME PER SHARE NET INCOME PER SHARE
-------------- --------- -------------- --------- -------------- ---------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As Reported.......... $11,587 $.039 $16,198 $0.55 $12,482 $0.55
Pro forma............ $ 8,449 $0.28 $13,337 $0.46 $ 9,707 $0.43
</TABLE>
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of 5.5 years, expected volatility of 55%, and a
risk-free interest rate of 6.17%.
Under the Company's plans, the exercise prices of options equal the market
price of the Company's stock on the date of grant and their maximum terms are
generally ten years. Options vest generally over a five-year period or upon
achievement of certain earnings targets. As of December 31, 1997, 550,094 shares
were authorized for grants of options under the Company's plans.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
STOCK OPTION EXERCISE PRICES
AMOUNTS PER SHARE
------------ ----------------
<S> <C> <C>
Outstanding at December 31, 1994................ 1,485,707 $10.90
Granted....................................... 2,266,046 $13.78
Exercised..................................... (140,111) $ 7.20
Canceled...................................... (191,694) $15.04
---------
Outstanding at December 31, 1995................ 3,419,948 $11.37
Granted....................................... 1,214,073 $11.12
Exercised..................................... (491,702) $ 7.91
Canceled...................................... (472,745) $12.68
---------
Outstanding at December 31, 1996................ 3,669,574 $11.55
Granted....................................... 1,364,973 $11.72
Exercised..................................... (402,753) $ 8.93
Canceled...................................... (785,604) $11.73
---------
Outstanding at December 31, 1997................ 3,846,190 $ 9.73
=========
</TABLE>
57
<PAGE> 58
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the Company had approximately 3,846,190 options
outstanding of which approximately 911,873 were exercisable at a weighted
average exercise price of $8.51 per share.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------- -------------------------------------------------
WEIGHTED-AVERAGE REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ----------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 2.00-$10.00 3,089,292 8.1 Years $ 8.54 797,069 $ 7.80
$10.32-$20.00 754,944 9.4 Years $14.58 112,850 $13.16
Over $20.00 1,954 3.7 Years $30.07 1,954 $30.07
--------- ---------
3,846,190 911,873
========= =========
</TABLE>
During the third quarter of 1995, the exercise price of certain options was
reduced to reflect the decreased market value of the Company's stock. All of the
options repriced had been issued originally at prices significantly in excess of
$12.63 per share, the market value on the day of the adjustment. No charge was
required for this transaction.
During January 1997, the Company canceled and reissued 1,612,393 of vested
and unvested incentive stock options at an exercise price of $9.12 per share,
the market price on the day of the issuance.
13. PREFERRED STOCK
In conjunction with the Company's initial public offering in 1993, the
Company authorized 1,000,000 shares of Preferred Stock with a par value of $.01
per share. No shares of this Preferred Stock have been issued.
14. WARRANTS
During 1996, the Company issued warrants to purchase 210,000 shares of its
Common Stock at $11.38 in exchange for an appointment as the preferred subacute
care provider for a national hospital alliance with 1,700 member hospitals. The
Company may receive management fees under the agreement. The Company recorded a
charge of approximately $850,000 related to the issuance of the warrants. Under
this arrangement, the Company will issue up to 1,890,000 additional warrants if
the relationship results in specified gains to the Company. No additional
warrants were earned by the hospital alliance in 1996 or 1997.
15. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan which covers
substantially all nonunion employees who have attained 21 years of age and
completed both one year of service and worked 1,000 hours. Employees who
participate in the plan may contribute up to $9,500 of their salaries or wages
and the Company contributes 5% of the employees' contributions. Defined
contribution expense for the Company for the years ended December 31, 1995,
1996, and 1997 was $76,000, $54,000 and $294,964, respectively.
The Company also has a defined benefit pension plan which covers certain
full-time employees. Assets held by the plan include money market funds,
government bonds, convertible bonds, common and preferred stock, and real estate
related investments. The Company incurred a pension curtailment effective July
1, 1991 as a result of freezing pension benefits. There was no service cost
charge in 1995, 1996 or 1997 as a result of this curtailment. Pension benefits
are based primarily on years of service and age. The Company's funding policy
for the defined benefit plan is to fund the minimum annual contribution required
by applicable regulations. The following table sets forth the defined benefit
plan's funded status and amounts recognized in
58
<PAGE> 59
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's consolidated balance sheets and statements of operations at
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested.................................................... $ 438 $ 495 $ 559
Nonvested................................................. 116 64 0
----- ----- -----
Accumulated benefit obligation.............................. 554 559 559
----- ----- -----
Projected benefit obligation................................ 554 559 559
Less: plan assets at fair value............................. 439 630 816
----- ----- -----
Projected benefit obligation in excess of (less than) plan
assets.................................................... 115 (71) (257)
Adjustment required to recognize minimum liability.......... 208 -- --
Unrecognized transition asset............................... 10 9 8
Unrecognized net gain (loss)................................ (218) (146) 11
----- ----- -----
Accrued (prepaid) pension cost.............................. $ 115 $(208) $(238)
===== ===== =====
Interest cost on projected benefit obligation............... $ 36 $ 36 $ 37
Actual return on plan assets................................ (73) (103) (198)
Net amortization............................................ 59 78 153
----- ----- -----
$ 22 $ 11 (8)
===== ===== =====
Key Assumptions:
Weighted average discount rate of obligations............. 7.5% 7.0% 7.0%
Long-term rate of return on assets........................ 7.5% 7.5% 7.5%
</TABLE>
Subsequent to the curtailment date, no increases in compensation were
assumed.
16. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases a facility under a sale-leaseback agreement. The term of
the lease is 10 years. The Company has the option to renew the lease for
additional terms of up to 18 years.
The Company also leases certain office space and equipment under cancelable
and non-cancelable operating leases most of which may be renewed by the Company.
At December 31, 1997, long-term operating lease commitments are as follows:
<TABLE>
<CAPTION>
PROPERTY EQUIPMENT TOTAL
--------- --------- -------
<S> <C> <C> <C>
1998................................. 9,097 4,033 13,130
1999................................. 7,738 2,484 10,222
2000................................. 6,419 603 7,022
2001................................. 5,222 41 5,263
2002................................. 3,671 -- 3,671
Thereafter........................... 5,184 -- 5,184
------- ------ -------
$37,331 $7,161 $44,492
======= ====== =======
</TABLE>
59
<PAGE> 60
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total rental expense under operating leases for 1995, 1996 and 1997 was
$5,516,000, $10,071,000 and $8,777,000, respectively.
Impact of the Year 2000 Issue
The Company has made an initial review of issues related to the Year 2000
and does not expect that it will have a material impact on the Company's
business, operations or financial condition. However, the Company could be
adversely impacted by the Year 2000 issue if its key suppliers and other third
parties do not address the issue successfully. The Company is addressing these
risks in order to reduce the impact on the Company.
Insurance
In 1997 approximately 18% of employees enrolled in Company sponsored health
plans are covered under a self-insured plan. The Company's liability for losses
under this plan is capped at $200,000 per claim and $1,000,000 per person
through a contract with an insurance company. The Company is also insured for
Workers' Compensation. The Company's liability for losses is capped at $500,000
per claim through a contract with an insurance company. The Company has an
outstanding letter of credit of $5,624,000, which is held as collateral by this
insurance company.
Litigation
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are adequately reserved, covered by insurance or indemnification
or, if not so covered, are without merit or are of such kind, or involve such
amounts, that unfavorable disposition would not have a material effect on the
financial position of the Company.
Regulatory Environment
The health care industry is subject to numerous laws and regulations of
federal, state, and local governments. Compliance with these laws and
regulations can be subject to future government review and interpretation as
well as regulatory actions unknown or unasserted at this time. Recently,
government activity has increased with respect to investigations and allegations
concerning possible violations by health care providers which creates a
possibility of significant repayments for reimbursement of patient services
previously billed.
17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class
of financial instruments, for those instruments for which it is practicable to
estimate that value, and the estimated fair values of the financial instruments
are as follows:
Cash And Cash Equivalents
The carrying amount approximates fair value because of the short effective
maturity of these instruments.
Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for similar debt. The carrying value of the
Company's long-term debt approximates its fair value as of December 31, 1996 and
1997.
60
<PAGE> 61
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. RELATED PARTY TRANSACTIONS
The Company leases 14 facilities under operating and capital leases from
affiliates of the former CSI, in which entity two board members of the Company
have a significant interest. During 1997, the Company made cash payments on such
lease obligations of approximately $7,546,000. Capital lease obligations include
approximately $43,470,000 of minimum lease payments due over the remaining lease
terms. In addition, the Company manages three facilities for affiliates of the
former CSI. In 1997, the Company recognized $955,772 of management fee revenue
related to this arrangement. In addition, the Company made interest-free loans
to partnerships that owned two facilities purchased by the Company. The loans
have principal balances of $955,521 and $663,256 respectively and mature on May
24, 1999 and 2000, respectively. These loans are guaranteed by Directors of the
Company.
19. EARNINGS PER SHARE DISCLOSURE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for "income available to common stockholders"
and other related disclosures required by SFAS 128:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996
(THOUSANDS) (THOUSANDS)
------------------------------------ ------------------------------------
PER- PER-
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to
common shareholders... $11,587 29,226 $0.40 $16,198 28,721 $0.56
===== =====
Effect of Dilutive
Securities:
Common stock
equivalents........... 659 489
------ ------
Diluted EPS:
Income available to
common stockholders
and assumed
conversions........... $11,587 29,885 $0.39 $16,198 29,210 $0.55
======= ====== ===== ======= ====== =====
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995
(THOUSANDS)
------------------------------------
PER-
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS:
Income available to
common shareholders... $12,482 22,502 $0.55
=====
Effect of Dilutive
Securities:
Common stock
equivalents........... 253
------
Diluted EPS:
Income available to
common stockholders
and assumed
conversions........... $12,482 22,755 $0.55
======= ====== =====
</TABLE>
Options to purchase 495,054, 2,649,585 and 12,000 shares of common stock at
a weighted average exercise price of $16.33, $13.30, and $15.75 per share were
outstanding during 1997, 1996, and 1995, respectively, but were not included in
the computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares.
20. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma condensed statements of operations for
the years ended December 31, 1996 and 1997 give effect to certain acquisitions
as if they had occurred at the beginning of these years. The 1996 pro forma
amounts give effect to acquisitions consummated in 1996 (CSI, the 1996 Florida
Acquisition and Allegis) and the Prism Merger. The 1997 pro forma amounts give
effect only to the 1997 transactions as the 1996 acquisitions are included in
the results of the Company for the year ended December 31, 1997. The 1997 pro
forma condensed information presented includes the impact of certain adjustments
related to the acquisitions such as additional depreciation and amortization on
the purchase of property, plant and equipment, interest expense based on
additional debt and rental expense reductions.
61
<PAGE> 62
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma condensed statements of operations do not purport to be
indicative of the results that actually would have been achieved if the
Acquisitions had occurred at the beginning of the period.
<TABLE>
<CAPTION>
PRO FORMA COMBINED PRO FORMA COMBINED
MARINER, HERITAGE, MARINER, 1996
CSI, 1996 FLORIDA FLORIDA
ACQUISITION, ALLEGIS ACQUISITION, ALLEGIS
1997 PRISM 1997 PRISM
1996 1997
-------------------- --------------------
UNAUDITED
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Total operating revenue................................. $710,949 $795,931
Net income before extraordinary items................... $ 12,728 $ 7,952
Net income per diluted share before extraordinary
items................................................. $ .44 $ .27
Net income.............................................. $ 12,728 $ 7,952
Net income per diluted share............................ $ .44 $ .27
</TABLE>
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table represents summarized results:
<TABLE>
<CAPTION>
1996 1997
----------------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net patient service revenue...... $132,629 $143,061 $134,699 $168,366 $170,824 $170,243 $170,199 $203,357
Other revenue.................... 2,550 2,543 3,052 3,909 3,589 4,259 3,979 7,026
-------- -------- -------- -------- -------- -------- -------- --------
Total operating revenue.......... 135,179 145,604 137,751 172,275 174,413 174,502 174,178 210,383
Operating expenses:
Facility operating costs....... 106,149 111,359 114,035 133,683 133,698 132,867 129,889 167,192
Corporate general and other.... 15,669 9,258 9,853 11,621 11,808 12,682 13,209 24,353
Interest expense, net.......... 4,392 6,578 6,763 8,523 9,190 8,711 9,684 12,367
Facility rent expense, net..... 474 738 1,106 1,409 1,112 1,064 1,098 1,147
Depreciation and
amortization................. 5,196 5,132 5,349 5,699 6,546 6,561 6,662 7,730
Asset impairment loss.......... -- -- -- -- -- -- -- 10,486
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses......... 131,880 133,065 137,106 160,935 162,354 161,885 160,542 223,275
Operating income (loss).......... 3,299 12,539 645 11,340 12,059 12,617 13,636 (12,892)
Loss on sale of facilities....... -- -- -- (826) -- -- -- (2,920)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes
and extraordinary items........ 3,299 12,539 645 10,514 12,059 12,617 13,636 (15,812)
Provision for (benefit) income
tax............................ 1,254 5,015 324 4,206 5,306 5,551 6,001 (5,945)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)................ $ 2,045 $ 7,524 $ 321 $ 6,308 $ 6,753 $ 7,066 $ 7,635 $ (9,867)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share
diluted........................ $0.07 $0.26 $0.01 $0.22 $0.23 $0.24 $0.25 $(0.34)
basic.......................... $0.07 $0.26 $0.01 $0.22 $0.23 $0.24 $0.26 $(0.34)
======== ======== ======== ======== ======== ======== ======== ========
Weighted average number of shares
outstanding
diluted........................ 29,235 29,403 29,573 29,084 29,174 29,523 30,214 29,424
basic.......................... 28,397 28,681 28,858 28,975 29,018 29,061 29,357 29,424
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
62
<PAGE> 63
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and compliance by the
Company's directors and executive officers with Section 16(a) of the Securities
Exchange Act of 1934 will be set forth under the captions "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance,"
respectively, in the Company's definitive proxy statement for its annual meeting
of stockholders which is currently expected to be filed with the Securities and
Exchange Commission within 120 days of December 31, 1997, and is incorporated
herein by reference.
Information regarding the Company's executive officers is contained in Part
I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will appear under the caption "Executive
Compensation" in the Company's definitive proxy statement for its annual meeting
of stockholders which is currently expected to be filed with the Securities and
Exchange Commission within 120 days of December 31, 1997, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will appear under the caption "Principal
Stockholders of Mariner" in the Company's definitive proxy statement for its
annual meeting of stockholders which is currently expected to be filed with the
Securities and Exchange Commission within 120 days of December 31, 1997, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will appear under the caption
"Certain Transactions" in the Company's definitive proxy statement for its
annual meeting of stockholders which is currently expected to be filed with the
Securities and Exchange Commission within 120 days of December 31, 1997, and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) List of Financial Statements
The following audited consolidated financial statements of Mariner Health
Group, Inc. and its subsidiaries, and the accountant's report relating
thereto, are filed as a part of this Report:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
63
<PAGE> 64
(a)(2) List of Schedules
Included at the end of this Report is the following:
Schedule II. Valuation and Qualifying Accounts
All other schedules to the consolidated financial statements are omitted
as the required information is either inapplicable or presented in the
financial statements or related notes.
(a)(3) List of Exhibits
The Exhibits which are filed with this Report or which are incorporated
by reference herein are set forth in the Exhibit Index which appears at
page 65 hereof.
(b) Reports on Form 8-K
None.
64
<PAGE> 65
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, this 30th day of
March, 1998.
MARINER HEALTH GROUP, INC.
By: /s/ DAVID N. HANSEN
------------------------------------
David N. Hansen
Executive Vice President, Chief
Financial Officer and Treasurer
We, the undersigned officers and directors of Mariner Health Group, Inc.,
hereby severally constitute and appoint Arthur W. Stratton, Jr. and David N.
Hansen, and each of them singly, our true and lawful attorneys, with full power
to them and each of them singly, to sign for us in our names in the capacities
indicated below, amendments to this Report on Form 10-K and to file same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ ARTHUR W. STRATTON, JR. Chairman of the Board of March 30, 1998
- --------------------------------------------------- Directors, Chief Executive
Arthur W. Stratton, Jr. Officer, President and Director
(principal executive officer)
/s/ DAVID N. HANSEN Executive Vice President, Chief March 30, 1998
- --------------------------------------------------- Financial Officer, Treasurer
David N. Hansen and Director (principal
financial and accounting
officer)
/s/ DAVID C. FRIES Director March 30, 1998
- ---------------------------------------------------
David C. Fries
/s/ CHRISTOPHER GRANT, JR. Director March 30, 1998
- ---------------------------------------------------
Christopher Grant, Jr.
/s/ STILES A. KELLETT, JR. Director March 30, 1998
- ---------------------------------------------------
Stiles A. Kellett, Jr.
/s/ SAMUEL B. KELLETT Director March 30, 1998
- ---------------------------------------------------
Samuel B. Kellett
/s/ JOHN F. ROBENALT Director March 30, 1998
- ---------------------------------------------------
John F. Robenalt
</TABLE>
65
<PAGE> 66
SCHEDULE II
MARINER HEALTH GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT PROVISION UNCOLLECTIBLE BALANCE AT
BEGINNING FOR ACCOUNTS OTHER END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF PERIOD BAD DEBT WRITTEN OFF CHANGES(1) PERIOD
------------------------------- ----------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997....... $11,872,000 $4,448,000 $4,666,000 $4,392,000 $16,046,000
Year ended December 31, 1996....... $10,078,000 $2,738,000 $6,349,000 $5,405,000 $11,872,000
Year ended December 31, 1995....... $ 6,379,000 $3,698,000 $ 634,000 $ 635,000 $10,078,000
</TABLE>
- ---------------
(1) Principally represents reserves acquired in purchases of businesses and
facilities.
66
<PAGE> 67
EXHIBIT INDEX
The following designated exhibits are, as indicated below, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission and are referred to and incorporated by reference to such filings.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1, 10.1 Amendment and Restated Stockholders Agreement dated as of
May 24, 1995 by and among Mariner and the Stockholders
(Incorporated by reference to Exhibit 2.6, 10.6 to the
Company's Form 10-Q for the quarter ended June 30, 1995, as
amended).
2.2, 10.2 Agreement and Plan of Merger dated as of February 27, 1996
by and among the Company, Mariner Health of Florida, Inc.,
Regency Health Care Centers, Inc., MedTx Corporation, Dennis
J. Ferguson, J. Steven Garthe, Joseph V. Lennartz, Deborah
B. Wilson and Ronald E. Hayes, as trustee of the Ronald E.
Hayes Revocable Trust of 1994 (Incorporated by reference to
Exhibit 2.15, 10.15 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
2.3, 10.3 Agreement and Plan of Merger dated as of February 9, 1996 by
and among the Company, MRI Acquisition Corp. and MedRehab,
Inc. (Incorporated by reference to Exhibit 2.16, 10.16 to
the Company's Annual Report on Form 10-K for the year ended
December 1995).
2.4, 10.4 Registration Rights Agreement dated as of February 9, 1996
by and among the Company and certain former stockholders of
MedRehab, Inc. (Incorporated by reference to Exhibit 2.17,
10.17 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
2.5, 10.5 Asset Purchase Agreement dated July 31, 1996 between and
among Mariner Health Group, Inc.; Mariner Health of
Maryland, Inc.; Allegis Health Services, Inc.; Technicare,
L.L.C.; Rehab Solutions, L.L.C.; Bay Meadow Nursing and
Rehabilitation Center, L.L.C.; Camden Yards Nursing and
Rehabilitation Center, L.L.C.; Kensington Gardens Nursing
and Rehabilitation Center, L.L.C.; Global Healthcare
Center-Overlea, L.L.C.; Allegis Health and Rehabilitation
Center -- Southern Maryland, L.L.C.; Global Healthcare
Center -- Bethesda, L.L.C.; Circle Manor Nursing Home, Inc.;
Arcola Nursing and Rehabilitation Center, Inc.; Technicare
Pharmacy, Inc.; Global Health Investment Associates, L.L.C.;
Paul J. Diaz; Marvin H. Rabovsky; Harvey W. Wertlieb; Roger
C. Lipitz; Gary M. Sudhalter and Jay Mutchnik (Incorporated
by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K dated October 3, 1996)
2.6, 10.6 Amendment Number 1 to Asset Purchase Agreement dated October
2, 1996 between and among Mariner Health Group, Inc.;
Mariner Health of Maryland, Inc.; Allegis Health Services,
Inc.; Technicare, L.L.C.; Rehab Solutions, L.L.C.; Bay
Meadow Nursing and Rehabilitation Center, L.L.C.; Camden
Yards Nursing and Rehabilitation Center, L.L.C.; Kensington
Gardens Nursing and Rehabilitation Center, L.L.C.; Global
Healthcare Center-Overlea, L.L.C.; Allegis Health and
Rehabilitation Center -- Southern Maryland, L.L.C.; Global
Healthcare Center -- Bethesda, L.L.C.; Circle Manor Nursing
Home, Inc.; Arcola Nursing and Rehabilitation Center, Inc.;
Technicare Pharmacy, Inc.; Global Health Investment
Associates, L.L.C.; Paul J. Diaz; Marvin H. Rabovsky; Harvey
W. Wertlieb; Roger C. Lipitz; Gary M. Sudhalter and Jay
Mutchnik (Incorporated by reference to Exhibit 2.2, 10.2 to
the Company's Current Report on Form 8-K dated October 3,
1996)
3.1, 4.1 Restated Certificate of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.2, 4.2 to the
Company's Registration Statement No. 33-60736 ("Registration
Statement No. 33-60736")).
3.2, 4.2 Certificate of Amendment to the Company's Restated
Certificate of Incorporation (Incorporated by reference to
Exhibit 4.2 to the Company's Form 10-Q for the quarter ended
March 31, 1994, as amended).
</TABLE>
67
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.3, 4.3 By-laws, as amended and restated, of the Company
(Incorporated by reference to Exhibit 3.2, 4.2 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
4.4 Specimen certificate representing the Common Stock
(Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement No. 33-60736).
4.5 Rights Agreement, dated as of October 31, 1995, between
Mariner Health Group, Inc. and State Street Bank & Trust
Company, which includes as Exhibit A the Form of Certificate
of Designations, as Exhibit B the Form of Rights
Certificate, and as Exhibit C the Summary of Rights to
Purchase Preferred Stock (Incorporated by reference to
Exhibit 4 to the Company's Current Report on Form 8-K dated
October 31, 1995).
4.6, 10.7 Indenture dated as of April 4, 1996 between Mariner Health
Group, Inc. and State Street Bank and Trust Company, as
trustee, including (i) the form of 9 1/2% Senior
Subordinated Note due 2006, Series A and (ii) the form of
9 1/2% Senior Subordinated Note due 2006, Series B
(Incorporated by reference to Exhibit 4.1, 10.1 to the
Company's Current Report on Form 8-K dated April 4, 1996).
4.7 Form of 9 1/2% Senior Subordinated Note due 2006, Series B
(Incorporated by reference to Exhibit 4.2 of the Company's
Form S-4 Registration Statement No. 333-4266).
10.8 Credit Agreement dated as of May 18, 1994 by and among
Mariner Health Group, Inc., PNC Bank, National Association
and the other banks party thereto. (Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q/A for the quarter ended June 30, 1994, as
amended).
10.9 Modification Agreement dated as of March 1, 1995 among
Seventeenth Street Associates Limited Partnership,
NationsBank of Tennessee, N.A., NationsBank of Georgia,
N.A., TRI-State Health Corp., Inc. and Pinnacle Care
Corporation of Huntington (Incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.10 Pledge Agreement dated as of March 1, 1995 among Pinnacle
Care Corporation, Pinnacle Care Corporation of Huntington,
NationsBank of Tennessee, N.A., and NationsBank of Georgia,
N.A. (Incorporated by reference to Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.11 Guaranty Agreement dated as of March 1, 1995 among Mariner
Health Group Inc., NationsBank of Tennessee, N.A., and
NationsBank of Georgia, N.A. (Incorporated by reference to
Exhibit 10.30 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.12* 1992 Stock Option Plan (Incorporated by reference to Exhibit
10.1 to the Company's Registration Statement No. 33-60736).
10.13* 1993 Employee Stock Purchase Plan, as amended. (Incorporated
by reference to Exhibit 10.2 to the Company's Form S-1
Registration Statement No. 33-71710).
10.14* 1994 Stock Plan, as amended (Incorporated by reference to
Exhibit 4.5 to the Company's Form S-8, filed November 21,
1995).
10.15* 1995 Non-Employee Director Stock Option Plan (Incorporated
by reference to Exhibit 4.4 to the Company's Form S-8, filed
November 21, 1995).
10.16+ Defined Care Partner Agreement, dated as of January 5, 1996,
by and among AmHS Purchasing Partners, L.P. ("AmHSPP"),
Mariner Health Care, Inc. and the Company, including:
Exhibit A, Warrant to Purchase 210,000 Shares of the
Company's Common Stock by and among AmHSPP and the Company;
and Exhibit B, Warrant to Purchase 1,890,000 Shares of the
Company's Common Stock by and among AmHSPP and the Company
(Incorporated by reference to Exhibit 10.36 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995).
</TABLE>
68
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.17 Purchase Agreement dated March 29, 1996 among Mariner Health
Group, Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Alex. Brown & Sons Incorporated, CS First
Boston Corporation, Hambrecht & Quist LLC and Salomon
Brothers Inc. (Incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K dated April 4,
1996).
10.18 Registration Rights Agreement dated as of April 4, 1996
among Mariner Health Group, Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Alex. Brown & Sons
Incorporated, CS First Boston Corporation, Hambrecht & Quist
LLC and Salomon Brothers Inc. (Incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K
dated April 4, 1996).
10.19* Form of Employment Agreement between the Company and each of
Jeffrey W. Kinell, Lawrence R. Deering, Jennifer Gallagher,
Phyllis Madigan and certain other employees of the Company
(Incorporated by reference to Exhibit 10 to the Company's
Report on Form 10-Q for the fiscal quarter ended March 31,
1996).
10.20* Employment Agreement dated as of August 16, 1996 by and
between the Company and David N. Hansen (Incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
fiscal quarter ended September 30, 1996).
10.21* Amended and Restated Employment Agreement dated as of
October 20, 1997 by and between the Company and Arthur W.
Strattan, Jr.
10.22* Employment Agreement dated as of November 17, 1997 by and
between the Company and Paul Diaz.
10.23 Amendment No. 16 to the Credit Agreement dated as of January
2, 1998 by and among Mariner Health Group, Inc., PNC Bank,
National Association and other banks party thereto.
10.24 Amended and Restated Revolving Credit Agreement dated as of
May 18, 1994, as amended, by and among Mariner Health Group,
Inc., PNC Bank, National Association and other banks party
thereto.
10.25 Lease by and between Mariner Health Group, Inc. and
Framingham-1881 Associates dated as of August 26, 1997.
21 Subsidiaries of the Company.
23 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney.
27.1 Financial Data Schedule for fiscal year ended 1997.
27.2 Restated Financial Data Schedule for the fiscal quarter
ended September 30, 1997.
27.3 Restated Financial Data Schedule for the fiscal quarter
ended June 30, 1997.
27.4 Restated Financial Data Schedule for the fiscal quarter
ended March 31, 1997.
27.5 Restated Financial Data Schedule for the fiscal year ended
1996.
27.6 Restated Financial Data Schedule for the fiscal quarter
ended September 30, 1996.
27.7 Restated Financial Data Schedule for the fiscal quarter
ended June 30, 1996.
27.8 Restated Financial Data Schedule for the fiscal quarter
ended March 31, 1996.
27.9 Restated Financial Data Schedule for the fiscal year ended
1995.
</TABLE>
- ---------------
* Indicates a management contract or any compensatory plan, contract or
arrangement.
+ Confidential Treatment Requested.
69
<PAGE> 1
Exhibit 10.21
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement dated as of October 20,
1997 (the "AGREEMENT") by and between Mariner Health Group, Inc., a Delaware
corporation (the "COMPANY"), and Arthur W. Stratton, Jr., M.D.
(the "EXECUTIVE"):
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company and has made
and is expected to continue to make major contributions to the profitability,
growth and financial strength of the Company;
WHEREAS, the Company desires to continue to employ the Executive, and the
Executive desires to continue to be employed by the Company, to render services
to the Company on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, the Company and the Executive previously entered into an
Employment Agreement dated as of January 1, 1995, and now desire to amend and
restate such Employment Agreement on the terms and subject to the conditions set
forth in this Agreement;
NOW, THEREFORE, in consideration of these premises and of the covenants
and agreements set forth in this Agreement, the parties hereto hereby agree as
follows:
1. EMPLOYMENT. The Company shall continue to employ the Executive, and the
Executive agrees to continue to serve the Company, as its Chief Executive
Officer upon the terms and conditions set forth in this Agreement.
2. TERM. Unless earlier terminated in accordance with this Agreement, the
term of the Executive's employment under this Agreement (the "TERM") shall
commence on the date hereof and shall expire on December 31, 2002; PROVIDED,
HOWEVER, that upon expiration of such term, this Agreement shall be extended
from year to year without further action on the part of the parties hereto,
unless either party hereto gives written notice of termination to the other
party at least 90 days prior to the expiration of the then current term.
3. DUTIES AND RESPONSIBILITIES. (a) During the Term, the Executive shall
serve as the Chief Executive Officer of the Company. In the performance of his
responsibilities as the Chief Executive Officer, the Executive shall be subject
to all of the Company's policies, rules and regulations applicable to its
executives of comparable status and shall report directly to, and shall be
subject to the direction and control of, the Board of Directors of the Company
(the "BOARD"), and shall perform such duties as shall be assigned to him by the
Board. In performing such duties, the Executive will be subject to and will
substantially abide by, and will use reasonable efforts to cause employees of
the Company to be subject to and substantially abide by, all policies and
procedures developed by the Company. Each year when the Company's budget for the
following fiscal year is presented to the Board, the Executive shall also
present to the Board a written description, in reasonable detail, of the goals
the Executive then intends to accomplish during the following fiscal year.
(b) During the Term, the Executive shall devote all of his
business time, energies, skills and attention to the affairs and activities of
the Company and any corporation, partnership or other entity
<PAGE> 2
Amended and Restated Employment Agreement -- Page 2
controlled by the Company (each, a "SUBSIDIARY"). The Executive shall provide
these services to the Company and its Subsidiaries described in this Agreement
in a professional and diligent manner and in a manner consistent with the
highest standards of performance in the health care field. During the Term, the
Executive shall not devote any of his business time, energies, skills or
attention to the affairs or activities of any other business or organization,
without the prior approval of the Board (which approval shall not be
unreasonably withheld).
(c) To induce the Company to enter into this Agreement, the
Executive represents and warrants to the Company that: (i) the Executive is not
a party or subject to any employment agreement or arrangement with any other
person, firm, company, corporation or other business entity and the Executive is
subject to no restraint, limitation or restriction by virtue of any agreement or
arrangement, or by virtue of any law or rule of law or otherwise which would
impair the Executive's right or ability (A) to enter the employ of the Company,
or (B) to perform fully his duties and obligations pursuant to this Agreement,
and (ii) to the Executive's knowledge, no material litigation is pending or
threatened against any business or business entity owned or controlled or
formerly owned or controlled by the Executive.
4. COMPENSATION. (a) For all services rendered by the Executive under this
Agreement, the Company shall pay or cause to be paid to the Executive, and the
Executive shall accept, the Base Salary and Bonus, if any (as such terms are
hereinafter defined in this Section 4), all in accordance with and subject to
the terms of this Agreement. For the purposes of this Agreement, the term
"COMPENSATION" shall mean the Base Salary and Bonus, if any. The Executive shall
have the right to elect to defer in accordance with applicable Internal Revenue
Service requirements for a reasonable time the Compensation payable to him, such
deferral to be evidenced by appropriate documentation at the time of such
deferral. In addition, to the Base Salary and Bonus, the Executive shall be
entitled to receive such other bonuses, options and other remuneration as the
Board may from time to time approve, in its sole discretion.
(b) During the Term, the Company shall pay the Executive a base
salary (the "BASE SALARY") at an annual rate of $750,000 from the date of this
Agreement through December 31, 1997 and $850,000 thereafter. The Executive's
Base Salary shall be reviewed at least annually by the Compensation Committee of
the Board (the "COMPENSATION COMMITTEE") and may be increased (but not
decreased) by the Compensation Committee in its sole discretion. The Base Salary
shall be payable in installments in accordance with the Company's regular
practices, as such practices may be modified from time to time, but in no event
less often than monthly.
(c) During the Term, the Executive shall be eligible to earn an
annual performance bonus (the "BONUS") of up to 100% of his Base Salary if the
Company meets the performance objectives established by the Compensation
Committee for purposes of this Agreement for the applicable period during the
Term. The Bonus shall be reviewed at least annually by the Compensation
Committee and shall be payable as determined by the Compensation Committee in
its sole discretion.
(d) The Executive shall be entitled to reasonable periods of paid
vacation, personal and sick leave during the Term in accordance with the
Company's policies regarding such vacation and leaves; PROVIDED, HOWEVER, that
in no event shall the Executive be entitled to less than four weeks of vacation
per year. The Executive shall be entitled to carry over or be compensated for
accrued but unused vacation from any year in accordance with the Company's
regular practices, as such practices may be modified from time to time;
PROVIDED, HOWEVER, that the Executive shall be entitled to carry over up to two
weeks of accrued but unused vacation from one year to the next.
<PAGE> 3
Amended and Restated Employment Agreement -- Page 3
(e) The Executive is authorized to incur reasonable expenses in
the performance of his duties hereunder during the Term. The Company shall
reimburse the Executive for all such expenses upon the presentation by the
Executive, not less frequently than monthly, of signed, itemized accounts of
such expenditures and vouchers, all in accordance with the Company's procedures
and policies as adopted and in effect from time to time and applicable to its
executives of comparable status.
(f) The Executive shall be eligible to participate in qualified
retirement, deferred compensation, group medical, accident, disability and
health benefit plans of the Company as may be provided by the Company from time
to time to Company executives of comparable status, subject to, and to the
extent that, the Executive is eligible under such benefit plans in accordance
with their respective terms; PROVIDED, HOWEVER, that the Company shall continue
to provide the coverage for the Executive and his dependents under its group
medical and health benefit plans or arrangements (which shall be of the type and
at a level of coverage at least as beneficial to the Executive and his
dependents as the coverage in effect on the date hereof). The Company shall pay
the expenses associated with the Executive's participation in such benefit plans
to the same extent the Company pays the expenses associated with participation
by other employees; PROVIDED, HOWEVER, that the Company shall reimburse the
Executive for all out-of-pocket costs incurred and paid by the Executive
relating to the health care of the Executive and his dependents that are not
covered by the Company's health benefit plans or arrangements. In addition, the
Executive shall be entitled to use the Company's airplane in accordance with the
Company's policies regarding use of such airplane by the Company's employees.
(g) During the Term, the Company shall maintain (i) life insurance
on the life of the Executive with death benefits in the amount of $2,000,000,
which shall be payable in accordance with the Executive's written instructions,
and (ii) disability insurance with disability benefits payable to the Executive
in the amount of 70% of the average Compensation that the Executive received
over the three years immediately preceding his disability. During the Term, the
Company shall pay the reasonable fees and expenses for the Executive's
participation in an appropriate flight safety training program.
(h) During the Term, the Company shall, at the Company's expense,
provide the Executive with a suitable automobile, which automobile shall be
consistent with the automobile the Company currently leases for the Executive to
use.
(i) The Company has previously granted to the Executive options to
purchase an aggregate of 600,000 shares of Common Stock, of which options to
purchase 300,000 shares were granted in each of 1995 and 1996 (collectively, the
"OPTIONS"). Each of the Options was granted pursuant to a stock plan maintained
by the Company in compliance with Rule 16b-3 under the Securities Exchange Act
of 1934. The Options have a ten-year term and become exercisable in such
installments as the Compensation Committee specified. Each of the Options is
intended to qualify as an "incentive stock option" under Section 422(b) of the
Internal Revenue Code of 1986, as amended (the "CODE"), to the maximum extent
eligible under the Company's stock plans and applicable law.
(j) During the Term, the Company shall pay the reasonable fees and
expenses of an accountant acceptable to the Company to prepare the Executive's
federal and state tax returns.
5. TERMINATION. (a) During the Term (regardless of whether or not the
Company experiences a Change in Control (as defined below)), the Company may
terminate the employment of the Executive for "Cause." For purposes of this
Agreement, "CAUSE" means: (a) the Executive's conviction of any crime (whether
or not involving the Company) which constitutes a felony in the jurisdiction
involved (other
<PAGE> 4
Amended and Restated Employment Agreement -- Page 4
than unintentional motor vehicle felonies); (b) any intentional act of theft,
fraud or embezzlement by the Executive in connection with his work with the
Company; (c) the Executive's continuing, repeated and willful failure or refusal
to perform his duties and services under this Agreement (other than due to his
incapacity due to illness or injury), provided that such failure or refusal
continues uncorrected for a period of 30 days after the Executive shall have
received written notice from the Board stating with specificity the nature of
such failure or refusal; or (d) the Executive's violation of Section 7.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the entire Board at a meeting of the Board called and held for (but
not necessarily exclusively for) that purpose (after reasonable notice to
Executive and an opportunity for Executive, together with counsel of his choice,
to be heard by the Board) finding that Executive has, in the good faith opinion
of the Board, engaged in conduct constituting Cause and specifying the
particulars thereof in reasonable detail.
(b)(i) During the Term (regardless of whether or not the Company
experiences a Change in Control), the Company may terminate the Executive's
employment at any time without Cause. For purposes of this Agreement, if the
Company gives written notice of termination to the Executive at least 90 days
prior to the expiration of the then current Term, such action shall be
considered termination of the Executive's employment without Cause pursuant to
this Section 5(b)(i).
(ii) The Company may terminate the Executive's employment
following a determination by the Board that the Executive has a Permanent
Disability (as hereinafter defined); PROVIDED, HOWEVER, that no such termination
shall be effective (A) prior to the expiration of the 180-day period following
the date the Executive first incurred the condition which is the basis for the
Permanent Disability or (B) if the Executive begins to substantially perform the
significant aspects of his regular duties prior to the proposed effective date
of such termination. For purposes of this Agreement, "PERMANENT DISABILITY"
shall mean the Executive's inability, by reason of any physical or mental
impairment, to substantially perform the significant aspects of his regular
duties, as contemplated by this Agreement, which inability is reasonably
contemplated to continue for at least one (1) year from its incurrence and at
least 90 days from the date of such determination. Any question as to the
existence, extent, or potentiality of the Executive's Permanent Disability shall
be determined by a qualified independent physician selected by the Executive
(or, if the Executive is unable to make such selection, by an adult member of
the Executive's immediate family) and reasonably acceptable to the Board.
(c) The Executive may voluntarily terminate his employment at any
time by giving the Board at least six months' prior written notice; PROVIDED,
HOWEVER, that, at any time after receiving such written notice, the Board may
terminate the Executive's employment on shorter notice or with no prior notice
(which termination shall not be deemed a termination without Cause under this
Agreement); and PROVIDED FURTHER that if the Executive's termination of his
employment pursuant to the provisions of this Section 5(c) is because of a
breach by the Company of its obligations under Sections 3(a), 4(a), 4(b), 4(c),
4(g), 4(i) or 6 (a "MATERIAL BREACH"), such termination shall be effective upon
receipt of written notice thereof to the Company.
(d) Following a Change in Control of the Company, the Executive
may voluntarily terminate his employment at any time prior to the first
anniversary of such Change in Control for Good Reason (as defined below).
(e)(i) If the Company terminates the Executive's employment
pursuant to the provisions of Section 5(a) (for Cause) at any time (regardless
of whether or not the Company experiences a Change of
<PAGE> 5
Amended and Restated Employment Agreement -- Page 5
Control), the Executive shall not be entitled to any Compensation or benefits
following the date of such termination, other than Compensation and benefits
required to be paid or provided by law and payment of the Executive's normal
post-termination benefits in accordance with the Company's retirement, insurance
and other benefit plans and arrangements.
(ii) If either (x) the Company terminates the Executive's
employment at any time either prior to a Change in Control or from and after the
first anniversary of a Change in Control pursuant to the provisions of Section
5(b)(i) (without Cause), or (y) the Executive terminates his employment at any
time either prior to a Change in Control or from and after the first anniversary
of a Change in Control pursuant to the provisions of Section 5(c) because of a
Material Breach, (A) the Executive shall receive an aggregate amount equal to
five times the Base Severance Amount (as hereinafter defined), which amount
shall be payable in equal installments over the five-year period following such
termination in the manner in which the Executive's Base Salary is paid at the
time of such termination (collectively, the "SEVERANCE BENEFIT"); and (B) the
Company shall pay the Executive's normal post-termination benefits in accordance
with the Company's retirement, insurance and other benefit plans and
arrangements and as contemplated by this Agreement; PROVIDED, HOWEVER, that the
Company shall continue to provide the coverage for the Executive and his
dependents under its health benefit plans or arrangements (which shall be of the
type and at a level of coverage at least as beneficial to the Executive and his
dependents as the coverage in effect under this Agreement or in effect at the
time of such termination, whichever is more favorable to the Executive and his
dependents) until the fifth anniversary of such termination. The "BASE SEVERANCE
AMOUNT" shall mean an amount equal to (x) the greater of (1) $1,000,000 or (2)
the Base Salary being paid to the Executive immediately prior to such
termination, plus (y) the greater of (1) the Bonus paid to the Executive by the
Company with respect to the most recently completed fiscal year, (2) the
aggregate amount of all Bonuses paid to the Executive by the Company during the
12 months prior to such termination or (3) 100% of the Base Salary being paid to
the Executive immediately prior to such termination.
(iii) If either (x) the Company terminates the Executive's
employment at any time during a period commencing with a Change in Control and
ending one year from such Change in Control pursuant to the provisions of
Section 5(b)(i) (without Cause), or (y) the Executive terminates his employment
at any time during a period commencing with a Change in Control and ending one
year from such Change in Control pursuant to the provisions of Section 5(c)
because of a Material Breach or Section 5(d) (for Good Reason), (A) the
Executive shall receive an amount equal to seven times the Base Severance
Amount, which amount shall be payable in equal installments over a seven-year
period in the manner in which the Executive's Base Salary is paid at the time of
such termination (collectively, the "EXTENDED SEVERANCE BENEFIT"); and (B) the
Company shall pay the Executive's normal post-termination benefits in accordance
with the Company's retirement, insurance and other benefit plans and
arrangements and as contemplated by this Agreement; PROVIDED, HOWEVER, that the
Company shall continue to provide the coverage for the Executive and his
dependents under its health benefit plans or arrangements (which shall be of the
type and at a level of coverage at least as beneficial to the Executive and his
dependents as the coverage in effect under this Agreement or in effect at the
time of such termination, whichever is more favorable to the Executive and his
dependents) until the seventh anniversary of such termination.
(iv) If the Executive voluntarily terminates his employment with
the Company pursuant to the provisions of Section 5(c) for any reason other than
a Material Breach, or dies, the Executive shall not be entitled to receive any
Compensation or benefits following the date of such termination or death.
<PAGE> 6
Amended and Restated Employment Agreement -- Page 6
(v) If the Company terminates the Executive's employment pursuant
to the provisions of Section 5(b)(ii) because of his Permanent Disability, the
Company shall (A) for a period of 54 months following the effective date of such
termination (the "DISABILITY PERIOD"), pay the Executive compensation at an
annual rate equal to the Base Severance Amount, offset by the amount, if any,
paid to the Executive under the salary replacement portion of disability
benefits paid under a disability plan or policy paid for by the Company; and (B)
pay the Executive's normal post-termination benefits in accordance with the
Company's retirement, insurance and other benefit plans and arrangements and as
contemplated by this Agreement; PROVIDED, HOWEVER, that the Company shall
continue to provide the coverage for the Executive and his dependents under its
health benefit plans or arrangements (which shall be of the type and at a level
of coverage at least as beneficial to the Executive and his dependents as the
coverage in effect under this Agreement or in effect at the time of such
termination, whichever is more favorable to the Executive and his dependents)
during the entire Disability Period.
(vi) If the Executive dies, or if the Company terminates the
Executive's employment pursuant to the provisions of Section 5(b)(ii) because of
his Permanent Disability, before receipt of any or all payments to which the
Executive is entitled to under Section 5(e) (or in the case of the Executive's
death following his termination on account of Permanent Disability, before
receipt of all payments under Section 5(e)(v)), the balance of the payments to
which the Executive is entitled under Section 5(e) shall continue to paid to the
Executive (in the case of his disability) or to the executors or administrators
of the Executive's estate (in the event of the Executive's death); PROVIDED,
HOWEVER, that the Company may, at any time within its discretion, accelerate any
payments and pay the Executive or his estate the present value of such payments
(using the prime rate used by the Company's primary bank or, if none, Citibank,
N.A.) in a lump sum cash payment.
(f) If the Company terminates the Executive's employment pursuant
to the provisions of Section 5(b)(i) (without Cause) at any time (regardless of
whether or not the Company experiences a Change of Control) or pursuant to the
provisions of Section 5(b)(ii) because of his Permanent Disability, if the
Executive dies, or if the Executive terminates his employment pursuant to the
provisions of Section 5(c) because of a Material Breach or Section 5(d) (for
Good Reason), (x) all outstanding stock options (including the Options),
warrants and the like held by the Executive at the time of such termination
which have not yet vested at the time of such termination shall immediately be
fully vested and (y) the Executive shall have the option to require that the
Company pay an amount equal to the then present value of the Severance Benefit,
the Extended Severance Benefit or any other amounts then payable under this
Agreement, as the case may be, to which he would be entitled (using the prime
rate used by the Company's primary bank or, if none, Citibank, N.A.) within 30
days of a request therefor. The option referred to in clause (y) of the
preceding sentence shall be exercised, if at all, within 60 days after such
termination.
(g) For purposes of this Agreement, the following terms shall have
the meanings set forth below:
"CHANGE IN CONTROL" means the occurrence of any of the following
events during the Term:
(i) The Company is merged or consolidated or reorganized into or
with another corporation or other legal person, and as a result of such
merger, consolidation or reorganization less than a majority of the
combined voting power of the then-outstanding securities of such
surviving, resulting or reorganized corporation or person immediately
after such transaction is held in the aggregate by the holders of the
then-outstanding securities entitled to vote generally in the election of
directors of the Company ("VOTING STOCK") immediately prior to such
transaction;
<PAGE> 7
Amended and Restated Employment Agreement -- Page 7
(ii) The Company sells or otherwise transfers all or substantially
all of its assets to any other corporation or other legal person, and as a
result of such sale or transfer less than a majority of the combined
voting power of the then-outstanding securities of such corporation or
person immediately after such sale or transfer is held in the aggregate by
the holders of Voting Stock of the Company immediately prior to such sale
or transfer;
(iii) There is a report filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as promulgated pursuant
to the 1934 Act, disclosing that any "person" (as such term is used in
Section 13(d)(3) or Section 14(d)(2) of the 1934 Act) has become the
"beneficial owner" (as such term is used in Rule 13d-3 under the 1934 Act)
of securities representing 35% or more of the Voting Stock of the Company;
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the 1934 Act disclosing in
response to Form 8-K or Schedule 14A (or any successor schedule, form or
report or item therein) that a change in control of the Company has
occurred; or
(v) If during any period of two consecutive years, individuals who
at the beginning of any such period constitute the Board cease for any
reason to constitute at least a majority thereof, unless the election, or
the nomination for election by the Company's stockholders, of each
director of the Company first elected during such period was approved by a
vote of at least a majority of the directors then still in office who were
directors of the Company at the beginning of any such period;
PROVIDED, HOWEVER, that a "CHANGE IN CONTROL" shall not be deemed to have
occurred for purposes of this Agreement solely because (i) the Company, (ii) an
entity in which the Company directly or indirectly beneficially owns 50% or more
of the voting securities, or (iii) any Company-sponsored employee stock
ownership plan or any other employee benefit plan of the Company, either files
or becomes obligated to file a report or a proxy statement under or in response
to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor
schedule, form or report) under the Securities Exchange Act of 1934, disclosing
beneficial ownership by it of shares of Voting Stock or because the Company
reports that a change in control of the Company has occurred by reason of such
beneficial ownership.
"GOOD REASON" means the occurrence of one or more of the following
events following a Change in Control:
(A) Failure to elect, reelect or otherwise maintain the Executive
in the office or position in the Company which the Executive held
immediately prior to a Change in Control, or the removal of the Executive
as a director of the Company (or any successor thereto) if the Executive
shall have been a director of the Company immediately prior to the Change
in Control;
(B) A significant adverse change in the nature or scope of the
authorities, powers, functions, responsibilities or duties attached to the
position with the Company which the Executive held immediately prior to
the Change in Control, a reduction in the aggregate of the Executive's
Compensation received from the Company, or the termination of the
Executive's rights to any benefits to which he was entitled immediately
prior to the Change in Control or a reduction in scope or value thereof
without the prior written consent of the Executive, any of which is not
<PAGE> 8
Amended and Restated Employment Agreement -- Page 8
remedied within 10 calendar days after receipt by the Company of written
notice from the Executive of such change, reduction or termination, as the
case may be;
(C) A determination by the Executive made in good faith that as a
result of a Change in Control and a change in circumstances thereafter
significantly affecting his position, including a change in the scope of
the business or other activities for which he was responsible immediately
prior to the Change in Control, he has been rendered substantially unable
to carry out, has been substantially hindered in the performance of, or
has suffered a substantial reduction in, any of the authorities, powers,
functions, responsibilities or duties attached to the position held by the
Executive immediately prior to the Change in Control, which situation is
not remedied within 10 calendar days after written notice to the Company
from the Executive of such determination;
(D) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or a significant portion
of its business or assets, unless the successor or successors (by
liquidation, merger, consolidation, reorganization or otherwise) to which
all or a significant portion of its business or assets have been
transferred (directly or by operation of law) shall have assumed all
duties and obligations of the Company under this Agreement pursuant to
Section 10(c);
(E) The Company shall relocate its principal executive offices, or
require the Executive to have his principal location of work changed, to
any location which is in excess of 25 miles from the location thereof
immediately prior to the Change in Control or the Company shall require
the Executive to travel away from his office in the course of discharging
his responsibilities or duties thereunder significantly more (in terms of
either consecutive days or aggregate days in any calendar year) than was
required of him prior to the Change in Control without, in either case,
his prior written consent; or
(F) Without limiting the generality or effect of the foregoing,
any Material Breach of this Agreement by the Company or any successor
thereto.
(h) Notwithstanding anything to the contrary in this Agreement and
in addition to any other Compensation, Severance Benefits, Extended Severance
Benefits or other amounts payable by the Company to the Executive pursuant to
this Agreement or otherwise, if (i) the Company terminates the Executive's
employment pursuant to the provisions of Section 5(b)(i) (without Cause) or
pursuant to the provisions of Section 5(b)(ii) because of his Permanent
Disability, if the Executive dies, or if the Executive terminates his employment
pursuant to the provisions of Section 5(c) because of a Material Breach or
Section 5(d) (for Good Reason), after a Change in Control of the Company and
(ii) it shall be determined that any payment or distribution (actual or deemed)
by the Company to or for the benefit of the Executive, whether paid or payable
or distributed or distributable pursuant to the terms of this Agreement or
otherwise or resulting from the accelerated vesting of then outstanding options
to purchase shares of Common Stock (including the Options) (a "PAYMENT"), would
be subject to the excise tax imposed by Section 4999 of the Code, or any
interest or penalties with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter collectively referred to
as the "EXCISE TAX"), the Executive shall be entitled to receive an additional
payment (a "GROSS-UP PAYMENT") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. If the Excise Tax is subsequently determined to be
less than the amount taken into account hereunder at the time of termination of
the Executive's employment, the Executive shall repay to the Company, at the
time that the amount of such reduction in Excise Tax is finally determined, the
portion
<PAGE> 9
Amended and Restated Employment Agreement -- Page 9
of the Gross-Up Payment attributable to such reduction (plus that portion of the
Gross-Up Payment attributable to the Excise Tax and federal, state and local
income tax imposed on the Gross-Up Payment being repaid by the Executive to the
extent that such repayment results in a reduction in Excise Tax and/or a
federal, state or local income tax deduction) plus interest on the amount of
such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. If the
Excise Tax is determined to exceed the amount taken into account hereunder at
the time of the termination of the Executive's employment (including by reason
of any payment the existence or amount of which cannot be determined at the time
of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment
in respect of such excess (plus any interest, penalties or additions payable by
the Executive with respect to such excess) at the time that the amount of such
excess is finally determined. The Executive and the Company shall each
reasonably cooperate with the other in connection with any administrative or
judicial proceedings concerning the existence or amount of liability for Excise
Tax with respect to the Payments. All determinations required to be made under
this Section 5(h), including whether a Gross-Up Payment is required and the
amount of such Gross-Up Payment, shall be made by the Company's independent
accountants.
6. NOMINATION TO BOARD OF DIRECTORS. During the Term, the Company shall
use all reasonable efforts to cause the Executive to be reelected as a director
of the Company for so long as the Executive shall be an employee of the Company.
7. RESTRICTIVE COVENANTS. (a) Executive acknowledges that (i) he has a
major responsibility for the operation, administration, development and growth
of the Company's business, (ii) the Company's business is or may become national
or international in scope, (iii) his work for the Company has brought him and
will continue to bring him into close contact with confidential information of
the Company and its customers, and (iv) the agreements and covenants contained
in this Section 7 are essential to protect the business interests of the Company
and that the Company will not enter into this Agreement but for such agreements
and covenants.
(b) (i) During the Term and until three years following the date
of termination of Executive's employment with the Company for any reason (the
"TERMINATION PERIOD"), the Executive shall not, directly or indirectly, perform
any services in the United States for any person or entity other than the
Company that is in the business, directly or indirectly, of providing health
care services of the type the Company is providing, or is contemplating
providing, at the time of the Executive's termination (the "BUSINESS"); or,
without limiting the generality of the foregoing, be or become or agree to be or
become, interested in or associated with, in any capacity (whether as a partner,
shareholder, owner, officer, director, employee, principal, agent, creditor,
trustee, consultant, co-venturer or otherwise) any individual, corporation,
firm, association, partnership, joint venture or other business entity that
competes in the Business; PROVIDED, HOWEVER, that the Executive may own, solely
as an investment, not more than one percent (1%) of any class of securities of
any corporation that is publicly traded on any national securities exchange in
the United States of America or reported on the National Association of
Securities Dealers, Inc.'s Automated Quotation System.
(ii) During the Term and during the Termination Period, the
Executive shall not, directly or indirectly, (i) induce or attempt to influence
any employee of the Company or its Subsidiaries to leave its employ, (ii) aid or
agree to aid any competitor, customer or supplier of the Company or its
Subsidiaries in any attempt to hire any person who shall have been employed by
the Company or its Subsidiaries within the one-year period preceding such
requested aid, or (iii) induce or attempt to influence any person or business
entity who was a customer of the Company or its Subsidiaries during
<PAGE> 10
Amended and Restated Employment Agrement -- Page 10
any portion of the Term or the Termination Period to transact business with a
competitor of the Company in the Company's business.
(iii) During the Term, the Termination Period and
thereafter, the Executive shall not disclose to anyone any material information
about the affairs of the Company or its Subsidiaries, including trade secrets,
trade "know-how," inventions, customer lists, business plans, operational
methods, pricing policies, marketing plans, sales plans, identity of customers,
sales, profits or other financial information which is confidential to the
Company or is not generally known in the relevant trade.
(c) If the Executive breaches, or threatens to commit a breach of
Section 7(b) (the "RESTRICTIVE COVENANTS"), the Company shall have the following
rights and remedies, each of which shall be in addition to any other rights and
remedies available to the Company at law or in equity:
(i) The Executive shall account for and pay over to the
Company all compensation, profits, and other benefits, after taxes, which
inure to the Executive's benefit which are derived or received by the
Executive or any person or business entity controlled by the Executive
resulting from any actions or transactions constituting a breach of any of
the Restrictive Covenants.
(ii) Notwithstanding the provisions of Section 7(c)(i), the
Executive acknowledges and agrees that in the event of a violation or
threatened violation of any of the provisions of Sections 7(b) , the
Company shall have no adequate remedy at law and shall therefore be
entitled to enforce each such provision by temporary or permanent
injunctive or mandatory relief obtained in any court of competent
jurisdiction without the necessity of proving damages, posting any bond or
other security, and without prejudice to any other rights and remedies
which may be available at law or in equity.
(d) If any of the Restrictive Covenants, or any part thereof, is
held to be invalid or unenforceable, the same shall not affect the remainder of
the covenant or covenants, which shall be given full effect, without regard to
the invalid or unenforceable portions. Without limiting the generality of the
foregoing, if any of the Restrictive Covenants, or any part thereof, is held to
be unenforceable because of the duration of such provision or the area covered
thereby, the parties hereto agree that the court making such determination shall
have the power to reduce the duration and/or area of such provision and, in its
reduced form, such provision shall then be enforceable.
(e) The parties hereto intend to and hereby confer jurisdiction to
enforce the Restrictive Covenants upon the courts of any jurisdiction within the
geographical scope of such Restrictive Covenants. In the event that the courts
of any one or more of such jurisdictions shall hold such Restrictive Covenants
wholly unenforceable by reason of the breadth of such scope or otherwise, it is
the intention of the parties hereto that such determination not bar or in any
way affect the Company's right to the relief provided above in the courts of any
other jurisdictions within the geographical scope of such Restrictive Covenants,
as to breaches of such covenants as they relate to each jurisdiction being, for
this purpose, severable into diverse and independent covenants.
8. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will
be difficult, and may be impossible, for the Executive to find reasonably
comparable employment in the event of his termination pursuant to the provisions
of Section 5(b)(i) (without Cause) or Section 5(c) hereof because of a Material
Breach or Section 5(d), and that the noncompetition covenant contained in
Section 7 will further limit the employment opportunities for the Executive.
Accordingly, the parties hereto expressly
<PAGE> 11
Amended and Restated Employment Agreement -- Page 11
agree that the payment of the Severance Benefit or Extended Severance Benefits,
as the case may be, by the Company to the Executive in accordance with the terms
of this Agreement will be liquidated damages, and that the Executive shall not
be required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor shall any profits, income,
earnings or other benefits from any source whatsoever create any mitigation,
offset, reduction or any other obligation on the part of the Executive hereunder
or otherwise.
9. LEGAL FEES AND EXPENSES. (a) Except as provided in Section 9(b), each
party shall pay or cause to be paid and shall be solely responsible for any and
all attorneys' and related fees and expenses incurred by it in connection with
any dispute arising with respect to this Agreement; PROVIDED, HOWEVER, that if
the Executive prevails in any such dispute, the Company shall reimburse the
Executive for any and all such fees and expenses incurred by the Executive in
connection with such dispute.
(b) Except in the event that the Executive is terminated for
Cause, it is the intent of the Company that, if a Change in Control has
occurred, the Executive not be required to incur the expenses associated with
the enforcement of his rights under this Agreement by litigation or other legal
action because the cost and expense thereof would substantially detract from the
benefits intended to be extended to the Executive hereunder. Accordingly, if it
should appear to the Executive that, after a Change in Control, the Company has
failed to comply with any of its obligations under this Agreement or if the
Company or any other person takes any action to declare this Agreement void or
unenforceable, or institutes any litigation designed to deny, or to recover
from, the Executive the benefits intended to be provided to the Executive
hereunder, the Company irrevocably authorizes the Executive from time to time to
retain counsel of his choice, at the expense of the Company as hereinafter
provided, to represent the Executive in connection with the initiation or
defense of any litigation or other legal action, whether by or against the
Company or any director, officer, stockholder or other person affiliated with
the Company, in any jurisdiction. If a Change in Control has occurred, the
Company shall pay or cause to be paid and shall be solely responsible for any
and all attorneys' and related fees and expenses incurred by the Executive as a
result of the Company's failure to perform this Agreement or any provision
hereof or as a result of the Company or any person contesting the validity or
enforceability of this Agreement or any provision hereof as aforesaid.
10. MISCELLANEOUS. (a) The Company may, from time to time apply for and
take out, in its own name and at its own expense, life, health, accident,
disability or other insurance upon the Executive in any sum or sums that it may
deem necessary to protect its interests, and the Executive agrees to aid and
cooperate in all reasonable respects with the Company in procuring any and all
such insurance, including without limitation, submitting to the usual and
customary medical examinations, and by filling out, executing and delivering
such applications and other instruments in writing as may be reasonably required
by an insurance company or companies to which an application or applications for
such insurance may be made by or for the Company.
(b) This Agreement is a personal contract, and the rights and
interests of the Executive hereunder may not be sold, transferred, assigned,
pledged or hypothecated, except as otherwise expressly permitted by the
provisions of this Agreement. Except as otherwise expressly provided herein, the
Executive shall not have any power of anticipation, alienation or assignment of
payments contemplated hereunder, and all rights and benefits of the Executive
shall be for the sole personal benefit of the Executive, and no other person
shall acquire any right, title or interest hereunder by reason of any sale,
assignment, transfer, claim or judgment or bankruptcy proceedings against the
Executive; PROVIDED, HOWEVER, that in the event of the Executive's death, the
Executive's estate, legal representative or beneficiaries (as the case may be)
shall have the right to receive all of the benefits that accrued to the
<PAGE> 12
Amended and Restated Employment Agreement -- Page 12
Executive pursuant to, and in accordance with, the terms of this Agreement prior
to the date of the Executive's death.
(c) The Company shall have the right to assign this Agreement to
any successor of substantially all of its business or assets, and any such
successor shall be bound by all of the provisions hereof; PROVIDED, HOWEVER,
that such assignment shall not preclude the exercise of the Executive's rights,
if any, pursuant to Section 5(d).
(d) Any notice required or permitted to be given pursuant to this
Agreement shall be in writing, and sent to the party for whom or which it is
intended, at the address of such party set forth below, by registered or
certified mail, return receipt requested, or at such other address as either
party shall designate by notice to the other in the manner provided herein for
giving notice.
If to the Company: Mariner Health Group, Inc.
125 Eugene O'Neill Drive
New London, CT 06320
Attention: Chairman of the Compensation Committee
of the Board of Directors
with copies to: Mariner Health Group, Inc.
125 Eugene O'Neill Drive
New London, CT 06320
Attention: Chief Financial Officer
and
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Attention: Mark H. Burnett
If to the Executive: Arthur W. Stratton, Jr., M.D.
136 Rockport Road
Weston, MA 02193
(e) This Agreement may not be changed, amended, terminated or
superseded orally, but only by an agreement in writing, nor may any of the
provisions hereof be waived orally, but only by an instrument in writing, in any
such case signed by the party against whom enforcement of any change, amendment,
termination, waiver, modification, extension or discharge is sought.
(f) Except as otherwise provided herein, this Agreement shall
be governed by and construed and enforced in accordance with the laws of the
State of Connecticut, without giving effect to the principles of conflict of
laws thereof.
(g) All descriptive headings of the several Sections of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
<PAGE> 13
Amended and Restated Employment Agreement -- Page 13
(h) If any provision of this Agreement, or part thereof, is
held to be unenforceable, the remainder of this Agreement and provision, as the
case may be, shall nevertheless remain in full force and effect.
(i) Each of the parties hereto shall, at any time and from time
to time hereafter, upon the reasonable request of the other, take such further
action and execute, acknowledge and deliver all such instruments of further
assurance as necessary to carry out the provisions of this Agreement.
(j) This Agreement contains the entire agreement and
understanding between the Company and the Executive with respect to the subject
matter hereof. No representations or warranties of any kind or nature relating
to the Company or its affiliates or their respective businesses, assets,
liabilities, operations, future plans or prospects have been made by or on
behalf of the Company to the Executive; nor have any representations or
warranties of any kind or nature been made by the Executive to the Company,
expect as expressly set forth in this Agreement.
<PAGE> 14
Amended and Restated Employment Agreement -- Page 14
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
MARINER HEALTH GROUP, INC.
By:
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Arthur W. Stratton, Jr., M.D.
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Exhibit 10.22
EMPLOYMENT AGREEMENT
This Employment Agreement dated as of November 17, 1997 (the "AGREEMENT")
by and between Mariner Health Group, Inc., a Delaware corporation (the
"COMPANY"), and Paul J. Diaz (the "EXECUTIVE"):
WITNESSETH:
WHEREAS, the Company desires to employ the Executive, and the Executive
desires to be employed by the Company, to render services to the Company on the
terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of these premises and of the covenants
and agreements set forth in this Agreement, the parties hereto hereby agree as
follows:
1. EMPLOYMENT. During the Term, the Company shall employ the Executive,
and the Executive agrees to serve the Company, as its Executive Vice President
and Chief Operating Officer upon the terms and conditions set forth in this
Agreement.
2. TERM. Unless earlier terminated in accordance with this Agreement, the
term of the Executive's employment under this Agreement (the "TERM") shall
commence as of November 17, 1997 (or such other date as the Company and the
Executive may agree) and shall expire on December 31, 1998; PROVIDED, HOWEVER,
that upon expiration of the Term, this Agreement shall be extended from year to
year without further action on the part of the parties hereto, unless either
party hereto gives written notice of termination to the other party at least 90
days prior to the expiration of the then current term.
3. DUTIES AND RESPONSIBILITIES. (a) During the Term, the Executive shall
serve as Executive Vice President and Chief Operating Officer of the Company. In
the performance of his responsibilities as Executive Vice President and Chief
Operating Officer, the Executive shall be subject to all of the Company's
policies, rules and regulations applicable to its executives of comparable
status and shall report directly to, and shall be subject to the direction and
control of, the Chief Executive Officer of the Company (the "CEO") or, if the
CEO so determines, the President of the Company, and shall perform such duties
commensurate with his position as shall be assigned to him by the CEO or the
President, as the case may be. In performing such duties, the Executive will be
subject to and will substantially abide by, and will use reasonable efforts to
cause employees of the Company to be subject to and substantially abide by, all
policies and procedures developed by the Company.
(b) During the Term, the Executive shall devote all of his
business time, energies, skills and attention to the affairs and activities of
the Company and any corporation, partnership or other entity controlled by the
Company (each, a "SUBSIDIARY"). The Executive shall provide the services
described in this Agreement to the Company and its Subsidiaries in a
professional
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Employment Agreement -- Page 2
and diligent manner. During the Term, the Executive shall not devote any of his
business time, energies, skills or attention to the affairs or activities of any
other business or organization, without the prior approval of the CEO.
(c) To induce the Company to enter into this Agreement, the
Executive represents and warrants to the Company that: (i) the Executive is not
a party or subject to any employment agreement or arrangement with any other
person, firm, company, corporation or other business entity and the Executive is
subject to no restraint, limitation or restriction by virtue of any agreement or
arrangement, or by virtue of any law or rule of law or otherwise which would
impair the Executive's right or ability (A) to enter the employ of the Company,
or (B) to perform fully his duties and obligations pursuant to this Agreement,
and (ii) to the Executive's knowledge, no material litigation is pending or
threatened against any business or business entity owned or controlled or
formerly owned or controlled by the Executive.
4. COMPENSATION. (a) For all services rendered by the Executive under this
Agreement, the Company shall pay or cause to be paid to the Executive, and the
Executive shall accept, the Base Salary, and Bonus if any, (as such terms are
hereinafter defined in this Section 4) all in accordance with and subject to the
terms of this Agreement. For the purposes of this Agreement, the term
"COMPENSATION" shall mean the Base Salary, and Bonus if any. The Executive shall
have the right to elect to defer in accordance with applicable Internal Revenue
Service requirements for a reasonable time the Compensation payable to him, such
deferral to be evidenced by appropriate documentation at the time of such
deferral. In addition, to the Base Salary and Bonus, the Executive shall be
entitled to receive such other bonuses, options and other remuneration as the
Board may from time to time approve, in its sole discretion.
(b) During the Term, the Company shall pay the Executive a base
salary (the "BASE SALARY") at an annual rate of $350,000. The Executive's Base
Salary shall be reviewed at least annually based upon a recommendation to the
Compensation Committee of the Board (the "COMPENSATION COMMITTEE") by the CEO
and may be increased (but not decreased) by the Compensation Committee in its
sole discretion. The Base Salary shall be payable in installments in accordance
with the Company's regular practices, as such practices may be modified from
time to time, but in no event less often than monthly.
(c) During the Term and subject to the provisions of Section 9(j)
hereof, the Executive shall be eligible to earn an annual performance bonus (the
"BONUS") if the Company meets the performance objectives established by the
Compensation Committee for purposes of this Agreement for the applicable period
during the Term. The Bonus (including the amount thereof) shall be reviewed at
least annually by the Compensation Committee and shall be payable as determined
by the Compensation Committee in its sole discretion.
(d) The Executive shall be entitled to reasonable periods of paid
vacation, personal and sick leave during the Term in accordance with the
Company's policies regarding such vacation and leaves; PROVIDED, HOWEVER, that
in no event shall the Executive be entitled to less than four weeks of vacation
per year. The Executive shall be entitled to carry over or be compensated for
accrued but unused vacation from any year in accordance with the Company's
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Employment Agreement -- Page 3
regular practices, as such practices may be modified from time to time;
PROVIDED, HOWEVER, that the Executive shall be entitled to carry over up to two
weeks of accrued but unused vacation from one year to the next.
(e) The Executive is authorized to incur reasonable expenses in
the performance of his duties hereunder during the Term. The Company shall
reimburse the Executive for all such expenses upon the presentation by the
Executive, not less frequently than monthly, of signed, itemized accounts of
such expenditures and vouchers, all in accordance with the Company's procedures
and policies as adopted and in effect from time to time and applicable to its
executives of comparable status. In addition, the Company shall reimburse the
Executive for expenses incurred by the Executive in connection with the
Executive's relocation to the Boston area in accordance with the Company's
procedures and policies as adopted and in effect on the date hereof and
applicable to its executives of comparable status.
(f) The Executive shall be eligible to participate in qualified
retirement, deferred compensation, group medical, accident, disability, life and
health benefit plans of the Company as may be provided by the Company from time
to time to Company executives of comparable status, subject to, and to the
extent that, the Executive is eligible under such benefit plans in accordance
with their respective terms. The Company shall pay the expenses associated with
the Executive's participation in such benefit plans to the same extent the
Company pays the expenses associated with participation by other employees.
(g) During the Term, the Company shall, at the Company's expense,
provide the Executive with a suitable automobile of Executive's choice and with
an allowance for the operating expenses associated with his use of such
automobile in accordance with the Company's regular practices, as such practices
may be modified from time to time.
(h) As of the date hereof, the Company has granted to the
Executive options to purchase an aggregate of 155,000 shares of Common Stock
(collectively, the "ISSUED OPTIONS"). In addition, the Company will grant to the
Executive, on or prior to January 31, 1998, options to purchase an aggregate of
345,000 shares of Common Stock (the "NEW OPTIONS") (the Issued Options and New
Options being referred to herein together as the "OPTIONS"). Each of the Issued
Options was, and each of the New Options will be, granted pursuant to a stock
plan maintained by the Company in compliance with Rule 16b-3 under the
Securities Exchange Act of 1934 (the "1934 Act"). The Issued Options are
evidenced by those certain incentive stock option agreements between the
Executive and the Company. On the date hereof, the Company and the Executive
will provide for certain additional terms with respect to the Issued Options by
executing and delivering to the other the Agreement Regarding Options in
substantially the form of EXHIBIT A hereto, which Agreement Regarding Options
will implement certain provisions of this Agreement with respect to the Issued
Options. The New Options shall be evidenced by the Company's standard form of
option agreement (including the Notice of Grant of Stock Options and Option
Agreement attached thereto), except that the following provisions shall apply to
the New Options: Of the New Options, (i) options to purchase 200,000 shares of
Common Stock will be subject to and modified by the provisions contained in
EXHIBIT B HERETO, including the time-vesting provisions described therein and
(ii) options to purchase the remaining 145,000
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Employment Agreement -- Page 4
shares of Common Stock will be subject to and modified by the provisions
contained in EXHIBIT C HERETO, including the performance-vesting provisions
described therein. The exercise price of each New Option shall be equal to the
fair market value per share of Common Stock on the date such New Option is
granted. Unless otherwise indicated in the option agreement with respect to such
Option, each of the Options is intended to qualify as an "incentive stock
option" under Section 422(b) of the Internal Revenue Code of 1986, as amended
(the "CODE"), to the maximum extent eligible under the Company's stock plans and
applicable law.
5. TERMINATION. (a) During the Term (regardless of whether or not the
Company experiences a Change in Control (as defined below)), the Company may
terminate the employment of the Executive for "Cause." For purposes of this
Agreement, "CAUSE" means: (a) the Executive's conviction of any crime (whether
or not involving the Company) which constitutes a felony in the jurisdiction
involved (other than unintentional motor vehicle felonies); (b) any intentional
act of theft, fraud or embezzlement by the Executive in connection with his work
with the Company; (c) the Executive's continuing, repeated and willful failure
or refusal to perform his duties and services under this Agreement (other than
due to his incapacity due to illness or injury), provided that such failure or
refusal continues uncorrected for a period of 30 days after the Executive shall
have received written notice from the Board stating with specificity the nature
of such failure or refusal; or (d) the Executive's violation of Section 6,
provided that such violation is not cured within 30 days after the Executive
shall have received written notice from the Company of such violation.
(b) During the Term (regardless of whether or not the Company
experiences a Change in Control), the Company may terminate the Executive's
employment at any time without Cause. For purposes of this Agreement, if the
Company gives written notice of termination to the Executive at least 90 days
prior to the expiration of the then current Term, such action shall be
considered termination of the Executive's employment without Cause pursuant to
this Section 5(b).
(c) The Executive may voluntarily terminate his employment at any
time by giving the Company at least 90 days' prior written notice; PROVIDED,
HOWEVER, that, at any time after receiving such written notice, the Company may
terminate the Executive's employment on shorter notice or with no prior notice
(which termination shall not be deemed a termination without Cause under this
Agreement); and PROVIDED, FURTHER that if the Executive's termination of his
employment pursuant to the provisions of this Section 5(c) is because of a
breach by the Company of its obligations under Sections 3(a), 4(a), 4(b), 4(c),
4(f) and 4(h) (a "MATERIAL BREACH"), such termination shall be effective upon
receipt of written notice thereof by the Company.
(d) Following a Change in Control of the Company, the Executive
may voluntarily terminate his employment at any time prior to the first
anniversary of such Change in Control for Good Reason (as defined below).
(e)(i) If the Company terminates the Executive's employment
pursuant to the provisions of Section 5(a) (for Cause) at any time (regardless
of whether or not the Company
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Employment Agreement -- Page 5
experiences a Change of Control), the Executive shall not be entitled to any
Compensation or benefits for the periods following the date of such termination,
other than Compensation and benefits required to be paid or provided by law and
payment of the Executive's normal post-termination benefits in accordance with
the Company's retirement, insurance and other benefit plans and arrangements.
(ii) If either (x) the Company terminates the Executive's
employment at any time either prior to a Change in Control or from and after the
first anniversary of a Change in Control pursuant to the provisions of Section
5(b) (without Cause), or (y) the Executive terminates his employment at any time
either prior to a Change in Control or from and after the first anniversary of a
Change in Control pursuant to the provisions of Section 5(c) because of a
Material Breach, (A) the Company shall pay the Executive an aggregate amount
equal to twice the Base Severance Amount (as hereinafter defined), which amount
shall be payable in equal installments over the two-year period following such
termination in the manner in which the Executive's Base Salary is being paid at
the time of such termination (collectively, the "SEVERANCE BENEFIT"); and (B)
the Company shall pay the Executive's normal post-termination benefits in
accordance with the Company's retirement, insurance and other benefit plans and
arrangements; PROVIDED, HOWEVER, that the Company shall continue to provide the
Executive coverage under its health benefit plans or arrangements until the
second anniversary of such termination. The "BASE SEVERANCE AMOUNT" means an
amount equal to the sum of the Base Salary being paid to the Executive
immediately prior to such termination plus the Bonus paid to the Executive by
the Company with respect to the fiscal year most recently completed prior to
such termination.
(iii) If either (x) the Company terminates the Executive's
employment at any time during a period commencing with a Change in Control and
ending one year from such Change in Control pursuant to the provisions of
Section 5(b) (without Cause), or (y) the Executive terminates his employment at
any time during a period commencing with a Change in Control and ending one year
from such Change in Control pursuant to the provisions of Section 5(c) because
of a Material Breach or Section 5(d) (for Good Reason), (A) the Company shall
pay the Executive an aggregate amount equal to three times the Base Severance
Amount, which amount shall be payable in equal installments over the three-year
period following such termination in the manner in which the Executive's Base
Salary is being paid at the time of such termination (collectively, the
"EXTENDED SEVERANCE BENEFIT"); and (B) the Company shall pay the Executive's
normal post-termination benefits in accordance with the Company's retirement,
insurance and other benefit plans and arrangements; PROVIDED, HOWEVER, that the
Company shall continue to provide the Executive coverage under its health
benefit plans or arrangements until the third anniversary of such termination.
(iv) If the Executive voluntarily terminates his employment
with the Company pursuant to the provisions of Section 5(c) for any reason other
than a Material Breach, or dies or becomes disabled, the Executive shall not be
entitled to receive any Compensation or benefits following the date of such
termination, death or disability; PROVIDED, HOWEVER, that, if the Executive
shall become disabled, the Company shall continue to pay the Executive's Base
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Employment Agreement -- Page 6
Salary, and shall continue the Executive's coverage under its health benefit
plans or arrangements, for a period of up to 180 continuous days during any such
period of disability.
(f) If either (x) the Company terminates the Executive's
employment at any time either prior to a Change in Control or from and after the
first anniversary of a Change in Control pursuant to the provisions of Section
5(b) (without Cause), or (y) the Executive terminates his employment at any time
either prior to a Change in Control or from and after the first anniversary of a
Change in Control pursuant to the provisions of Section 5(c) because of a
Material Breach, fifty percent (50%) of all outstanding stock options (including
the Options), warrants and the like held by the Executive at the time of such
termination which have not yet vested at the time of such termination shall
immediately be fully vested. If either (x) the Company terminates the
Executive's employment at any time during a period commencing with a Change in
Control and ending one year from such Change in Control pursuant to the
provisions of Section 5(b) (without Cause), or (y) the Executive terminates his
employment at any time during a period commencing with a Change in Control and
ending one year from such Change in Control pursuant to the provisions of
Section 5(c) because of a Material Breach or Section 5(d) (for Good Reason), (i)
all outstanding stock options (including the Options), warrants and the like
held by the Executive at the time of such termination which have not yet vested
at the time of such termination shall immediately be fully vested and (ii) the
Executive shall have the option to require that the Company pay an amount equal
to the then present value of the Extended Severance Benefit to which he would be
entitled (using the prime rate used by the Company's primary bank or, if none,
Citibank, N.A.) within 30 days of a request therefor. The option referred to in
clause (ii) of the preceding sentence shall be exercised, if at all, within 60
days after such termination. In addition, after a Change in Control, if the
Company terminates the Executive's employment pursuant to the provisions of
Section 5(b) (without Cause) or if the Executive terminates his employment
pursuant to the provisions of Section 5(c) because of a Material Breach or
Section 5(d) (for Good Reason) prior to the date on which the New Options have
been granted, the Company shall grant to the Executive such New Options as soon
as possible after such termination of the Executive's employment, subject to the
availability at such time of shares of Common Stock for grant pursuant to a
stock plan maintained by the Company in compliance with Rule 16b-3 under the
1934 Act. Except as provided in this Section 5(f), if the Executive ceases to be
employed by the Company for any reason (including death or disability), no
further installments of any then outstanding stock options (including the
Options) shall become exercisable after the date of termination of the
Executive's employment by the Company.
(g) For purposes of this Agreement, the following terms shall have
the meanings set forth below:
"CHANGE IN CONTROL" means the occurrence of any of the following
events during the Term:
(i) The Company is merged or consolidated or reorganized into or
with another corporation or other legal person, and as a result of such
merger, consolidation or reorganization less than a majority of the
combined voting power of the then-outstanding
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Employment Agreement -- Page 7
securities of such surviving, resulting or reorganized corporation or
person immediately after such transaction is held in the aggregate by the
holders of the then-outstanding securities entitled to vote generally in
the election of directors of the Company ("VOTING STOCK") immediately
prior to such transaction;
(ii) The Company sells or otherwise transfers all or substantially
all of its assets to any other corporation or other legal person, and as a
result of such sale or transfer less than a majority of the combined
voting power of the then-outstanding securities of such corporation or
person immediately after such sale or transfer is held in the aggregate by
the holders of Voting Stock of the Company immediately prior to such sale
or transfer;
(iii) There is a report filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as promulgated pursuant
to the 1934 Act, disclosing that any "person" (as such term is used in
Section 13(d)(3) or Section 14(d)(2) of the 1934 Act) has become the
"beneficial owner" (as such term is used in Rule 13d-3 under the 1934 Act)
of securities representing 35% or more of the Voting Stock of the Company;
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the 1934 Act disclosing in
response to Form 8-K or Schedule 14A (or any successor schedule, form or
report or item therein) that a change in control of the Company has
occurred; or
(v) If during any period of two consecutive years, individuals who
at the beginning of any such period constitute the Board cease for any
reason to constitute at least a majority thereof, unless the election, or
the nomination for election by the Company's stockholders, of each
director of the Company first elected during such period was approved by a
vote of at least a majority of the directors then still in office who were
directors of the Company at the beginning of any such period;
PROVIDED, HOWEVER, that a "CHANGE IN CONTROL" shall not be deemed to have
occurred for purposes of this Agreement solely because (i) the Company, (ii) an
entity in which the Company directly or indirectly beneficially owns 50% or more
of the voting securities, or (iii) any Company-sponsored employee stock
ownership plan or any other employee benefit plan of the Company, either files
or becomes obligated to file a report or a proxy statement under or in response
to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor
schedule, form or report) under the 1934 Act, disclosing beneficial ownership by
it of shares of Voting Stock or because the Company reports that a change in
control of the Company has occurred by reason of such beneficial ownership.
"GOOD REASON" means the occurrence of one or more of the following
events following a Change in Control:
(A) Failure to elect, reelect or otherwise maintain the Executive
in the office or position in the Company which the Executive held
immediately prior to a Change in Control, or the removal of the Executive
as a director of the Company (or any successor
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Employment Agreement -- Page 8
thereto) if the Executive shall have been a director of the Company
immediately prior to the Change in Control;
(B) A significant adverse change in the nature or scope of the
authorities, powers, functions, responsibilities or duties attached to the
position with the Company which the Executive held immediately prior to
the Change in Control, a reduction in the aggregate of the Executive's
Compensation received from the Company, or the termination of the
Executive's rights to any benefits to which he was entitled immediately
prior to the Change in Control or a reduction in scope or value thereof
without the prior written consent of the Executive, any of which is not
remedied within 10 calendar days after receipt by the Company of written
notice from the Executive of such change, reduction or termination, as the
case may be;
(C) A determination by the Executive made in good faith that as a
result of a Change in Control and a change in circumstances thereafter
significantly affecting his position, including a change in the scope of
the business or other activities for which he was responsible immediately
prior to the Change in Control, he has been rendered substantially unable
to carry out, has been substantially hindered in the performance of, or
has suffered a substantial reduction in, any of the authorities, powers,
functions, responsibilities or duties attached to the position held by the
Executive immediately prior to the Change in Control, which situation is
not remedied within 10 calendar days after written notice to the Company
from the Executive of such determination;
(D) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or a significant portion
of its business or assets, unless the successor or successors (by
liquidation, merger, consolidation, reorganization or otherwise) to which
all or a significant portion of its business or assets have been
transferred (directly or by operation of law) shall have assumed all
duties and obligations of the Company under this Agreement pursuant to
Section 9(c);
(E) The Company shall relocate its principal executive offices, or
require the Executive to have his principal location of work changed, to
any location which is in excess of 25 miles from the location thereof
immediately prior to the Change in Control or the Company shall require
the Executive to travel away from his office in the course of discharging
his responsibilities or duties thereunder significantly more (in terms of
either consecutive days or aggregate days in any calendar year) than was
required of him prior to the Change in Control without, in either case,
his prior written consent; or
(F) Without limiting the generality or effect of the foregoing,
any Material Breach of this Agreement by the Company or any successor
thereto.
(h) Notwithstanding anything to the contrary in this Agreement and
in addition to any other Compensation, Severance Benefits or other amounts
payable by the Company to the Executive pursuant to this Agreement or otherwise,
if (i) the Company terminates the Executive's employment pursuant to the
provisions of Section 5(b) (without Cause), or the
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Employment Agreement -- Page 9
Executive terminates his employment pursuant to the provisions of Section 5(d)
(for Good Reason), after a Change in Control of the Company and (ii) it shall be
determined that any payment or distribution (actual or deemed) by the Company to
or for the benefit of the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise or resulting
from the accelerated vesting of then outstanding options to purchase shares of
Common Stock (including the Options) (a "PAYMENT"), would be subject to the
excise tax imposed by Section 4999 of the Code, or any interest or penalties
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to as the "EXCISE
TAX"), the Executive shall be entitled to receive an additional payment (a
"GROSS-UP PAYMENT") in an amount such that after payment by the Executive of all
taxes (including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Payments. If the Excise Tax is subsequently determined to be less than the
amount taken into account hereunder at the time of termination of the
Executive's employment, the Executive shall repay to the Company, at the time
that the amount of such reduction in Excise Tax is finally determined, the
portion of the Gross-Up Payment attributable to such reduction (plus that
portion of the Gross-Up Payment attributable to the Excise Tax and federal,
state and local income tax imposed on the Gross-Up Payment being repaid by the
Executive to the extent that such repayment results in a reduction in Excise Tax
and/or a federal, state or local income tax deduction) plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the
Code. If the Excise Tax is determined to exceed the amount taken into account
hereunder at the time of the termination of the Executive's employment
(including by reason of any payment the existence or amount of which cannot be
determined at the time of the Gross-Up Payment), the Company shall make an
additional Gross-Up Payment in respect of such excess (plus any interest,
penalties or additions payable by the Executive with respect to such excess) at
the time that the amount of such excess is finally determined. The Executive and
the Company shall each reasonably cooperate with the other in connection with
any administrative or judicial proceedings concerning the existence or amount of
liability for Excise Tax with respect to the Payments. All determinations
required to be made under this Section 5(h), including whether a Gross-Up
Payment is required and the amount of such Gross-Up Payment, shall be made by
the Company's independent accountants.
6. RESTRICTIVE COVENANTS. (a) Executive acknowledges that (i) he has a
major responsibility for the operation, administration, development and growth
of the Company's business, (ii) the Company's business is or may become national
or international in scope, (iii) his work for the Company has brought him and
will continue to bring him into close contact with confidential information of
the Company and its customers, and (iv) the agreements and covenants contained
in this Section 6 are essential to protect the business interests of the Company
and that the Company will not enter into this Agreement but for such agreements
and covenants. For purposes of this Section 6, references to the Company shall
mean the Company and its Subsidiaries.
(b)(i) During the Term and until the later of (x) two years
following the date of termination of Executive's employment with the Company for
any reason and (y) the end of the period during which the Executive is entitled
to receive the Extended Severance Benefit pursuant
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Employment Agreement -- Page 10
to Section 5(e)(iii) (disregarding any exercise of rights to have the then
present value of the Extended Severance Benefit paid in advance under Section
5(f)) (the "TERMINATION PERIOD"), the Executive shall not, directly or
indirectly, perform any services in the United States for any person or entity
other than the Company that is in the business, directly or indirectly, of
providing health care services of the type the Company is providing, or of the
type the Executive is aware the Company is contemplating providing, at the time
of the Executive's termination (the "BUSINESS"); or, without limiting the
generality of the foregoing, be or become or agree to be or become, interested
in or associated with, in any capacity (whether as a partner, shareholder,
owner, officer, director, employee, principal, agent, creditor, trustee,
consultant, co-venturer or otherwise) any individual, corporation, firm,
association, partnership, joint venture or other business entity that competes
in the Business; PROVIDED, HOWEVER, that the Executive may own, solely as an
investment, not more than one percent (1%) of any class of securities of any
corporation that is publicly traded on any national securities exchange in the
United States of America or reported on the National Association of Securities
Dealers, Inc.'s Automated Quotation System.
(ii) During the Term and during the Termination Period, the
Executive shall not, directly or indirectly, (i) induce or attempt to influence
any employee of the Company or its Subsidiaries to leave its employ, (ii) aid or
agree to aid any competitor, customer or supplier of the Company or its
Subsidiaries in any attempt to hire any person who shall have been employed by
the Company or its Subsidiaries within the one-year period preceding such
requested aid, or (iii) induce or attempt to influence any person or business
entity who was a customer of the Company or its Subsidiaries during any portion
of the Term or the Termination Period to transact business with a competitor of
the Company in the Company's business.
(iii) During the Term, the Termination Period and
thereafter, the Executive shall not disclose to anyone any material information
about the affairs of the Company or its Subsidiaries, including trade secrets,
trade "know-how," inventions, customer lists, business plans, operational
methods, pricing policies, marketing plans, sales plans, identity of customers,
sales, profits or other financial information which is confidential to the
Company or is not generally known in the relevant trade.
(c) If the Executive breaches, or threatens to commit a breach of
Section 6(b) (the "RESTRICTIVE COVENANTS"), the Company shall have the following
rights and remedies, each of which shall be in addition to any other rights and
remedies available to the Company at law or in equity: The Executive
acknowledges and agrees that in the event of a violation or threatened violation
of any of the provisions of Sections 6(b), the Company shall have no adequate
remedy at law and shall therefore be entitled to enforce each such provision by
temporary or permanent injunctive or mandatory relief obtained in any court of
competent jurisdiction without the necessity of proving damages, posting any
bond or other security, and without prejudice to any other rights and remedies
which may be available at law or in equity.
(d) If any of the Restrictive Covenants, or any part thereof, is
held to be invalid or unenforceable, the same shall not affect the remainder of
the covenant or covenants, which shall be given full effect, without regard to
the invalid or unenforceable portions. Without limiting the
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Employment Agreement -- Page 11
generality of the foregoing, if any of the Restrictive Covenants, or any part
thereof, is held to be unenforceable because of the duration of such provision
or the area covered thereby, the parties hereto agree that the court making such
determination shall have the power to reduce the duration and/or area of such
provision and, in its reduced form, such provision shall then be enforceable.
(e) The parties hereto intend to and hereby confer jurisdiction to
enforce the Restrictive Covenants upon the courts of any jurisdiction within the
geographical scope of such Restrictive Covenants. In the event that the courts
of any one or more of such jurisdictions shall hold such Restrictive Covenants
wholly unenforceable by reason of the breadth of such scope or otherwise, it is
the intention of the parties hereto that such determination not bar or in any
way affect the Company's right to the relief provided above in the courts of any
other jurisdictions within the geographical scope of such Restrictive Covenants,
as to breaches of such covenants as they relate to each jurisdiction being, for
this purpose, severable into diverse and independent covenants.
7. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will
be difficult, and may be impossible, for the Executive to find reasonably
comparable employment in the event of his termination pursuant to the provisions
of Section 5(b) (without Cause) or Section 5(c) because of a Material Breach or
Section 5(d) for Good Reason, and that the noncompetition covenant contained in
Section 6 will further limit the employment opportunities for the Executive.
Accordingly, the parties hereto expressly agree that the payment of the
Severance Benefit or Extended Severance Benefit by the Company to the Executive
in accordance with the terms of this Agreement will be liquidated damages, and
the Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise, nor
shall any profits, income, earnings or other benefits from any source whatsoever
create any mitigation, offset, reduction or any other obligation on the part of
the Executive hereunder or otherwise.
8. LEGAL FEES AND EXPENSES. (a) Except as provided in Section 8(b), each
party shall pay or cause to be paid and shall be solely responsible for any and
all attorneys' and related fees and expenses incurred by it in connection with
any dispute arising with respect to this Agreement; PROVIDED, HOWEVER, that if
the Executive prevails in any such dispute, the Company shall reimburse the
Executive for any and all such fees and expenses incurred by the Executive in
connection with such dispute.
(b) Except in the event that the Executive is terminated for
Cause, it is the intent of the Company that, if a Change in Control has
occurred, the Executive not be required to incur the expenses associated with
the enforcement of his rights under this Agreement by litigation or other legal
action because the cost and expense thereof would substantially detract from the
benefits intended to be extended to the Executive hereunder. Accordingly, if it
should appear to the Executive that, after a Change in Control, the Company has
failed to comply with any of its obligations under this Agreement or if the
Company or any other person takes any action to declare this Agreement void or
unenforceable, or institutes any litigation designed to deny, or to recover
from, the Executive the benefits intended to be provided to the Executive
hereunder, the Company irrevocably authorizes the Executive from time to time to
retain counsel of his choice,
<PAGE> 12
Employment Agreement -- Page 12
at the expense of the Company as hereinafter provided, to represent the
Executive in connection with the initiation or defense of any litigation or
other legal action, whether by or against the Company or any director, officer,
stockholder or other person affiliated with the Company, in any jurisdiction. If
a Change in Control has occurred, the Company shall pay or cause to be paid and
shall be solely responsible for any and all attorneys' and related fees and
expenses incurred by the Executive as a result of the Company's failure to
perform this Agreement or any provision hereof or as a result of the Company or
any person contesting the validity or enforceability of this Agreement or any
provision hereof as aforesaid.
9. MISCELLANEOUS. (a) The Company may, from time to time apply for and
take out, in its own name and at its own expense, life, health, accident,
disability or other insurance upon the Executive in any sum or sums that it may
deem necessary to protect its interests, and the Executive agrees to aid and
cooperate in all reasonable respects with the Company in procuring any and all
such insurance, including without limitation, submitting to the usual and
customary medical examinations, and by filling out, executing and delivering
such applications and other instruments in writing as may be reasonably required
by an insurance company or companies to which an application or applications for
such insurance may be made by or for the Company.
(b) This Agreement is a personal contract, and the rights and
interests of the Executive hereunder may not be sold, transferred, assigned,
pledged or hypothecated, except as otherwise expressly permitted by the
provisions of this Agreement. Except as otherwise expressly provided herein, the
Executive shall not have any power of anticipation, alienation or assignment of
payments contemplated hereunder, and all rights and benefits of the Executive
shall be for the sole personal benefit of the Executive, and no other person
shall acquire any right, title or interest hereunder by reason of any sale,
assignment, transfer, claim or judgment or bankruptcy proceedings against the
Executive; PROVIDED, HOWEVER, that in the event of the Executive's death, the
Executive's estate, legal representative or beneficiaries (as the case may be)
shall have the right to receive all of the benefits that accrued to the
Executive pursuant to, and in accordance with, the terms of this Agreement prior
to the date of the Executive's death.
(c) The Company shall have the right to assign this Agreement to
any successor of substantially all of its business or assets, and any such
successor shall be bound by all of the provisions hereof; PROVIDED, HOWEVER,
that such assignment shall not preclude the exercise of the Executive's rights,
if any, pursuant to Section 5(d).
(d) Any notice required or permitted to be given pursuant to this
Agreement shall be in writing, and sent to the party for whom or which it is
intended, at the address of such party set forth below, by registered or
certified mail, return receipt requested, or at such other address as either
party shall designate by notice to the other in the manner provided herein for
giving notice.
If to the Company: Mariner Health Group, Inc.
125 Eugene O'Neill Drive
New London, CT 06320
Attention: Chief Executive Officer
<PAGE> 13
Employment Agreement -- Page 13
with copies to: Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Attention: Mark H. Burnett, Esq.
If to the Executive: Paul J. Diaz
10411 Aubinoe Farm Road
Bethesda, MD 20814
(e) This Agreement may not be changed, amended, terminated or
superseded orally, but only by an agreement in writing, nor may any of the
provisions hereof be waived orally, but only by an instrument in writing, in any
such case signed by the party against whom enforcement of any change, amendment,
termination, waiver, modification, extension or discharge is sought.
(f) Except as otherwise provided herein, this Agreement shall
be governed by and construed and enforced in accordance with the laws of the
State of Connecticut, without giving effect to the principles of conflict of
laws thereof.
(g) All descriptive headings of the several Sections of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
(h) If any provision of this Agreement, or part thereof, is
held to be unenforceable, the remainder of this Agreement and provision, as the
case may be, shall nevertheless remain in full force and effect.
(i) Each of the parties hereto shall, at any time and from time
to time hereafter, upon the reasonable request of the other, take such further
action and execute, acknowledge and deliver all such instruments of further
assurance as necessary to carry out the provisions of this Agreement.
(j) Except as provided in this Section 9(j), this Agreement
contains the entire agreement and understanding between the Company and the
Executive with respect to the subject matter hereof. As of the date hereof, this
Agreement supersedes the terms of your Employment Agreement dated as of October
1, 1996, as amended on May 8, 1997 (the "PRIOR EMPLOYMENT AGREEMENT"), to the
extent but only to the extent the terms of such Prior Employment Agreement
relate to any period from and after the date hereof. To the extent any claim,
obligation or liability arises out of or in any way relates to the Executive's
employment (including, claims relating to compensation or other benefits) prior
to the date hereof, the terms of the Prior Employment Agreement shall remain in
full force and effect and shall govern any such claim, obligation or liability.
Notwithstanding anything herein to the contrary, the provisions of Section 4 of
the Prior Employment Agreement relating to the Executive's bonus for the quarter
ended September 30, 1997 and the year ending December 31, 1997 shall be modified
so that the Executive's bonus under the Prior Employment Agreement for such
periods shall be
<PAGE> 14
Employment Agreement -- Page 14
calculated as follows: (i) for the quarter ending September 30, 1997, the
Executive shall be entitled, subject to the terms and conditions of the Prior
Employment Agreement, to receive 1/8th of the bonus potential, if any, described
in Section 4 of the Prior Employment Agreement with respect to such quarterly
period; and (ii) for the year ending December 31, 1997, the Executive shall be
entitled, subject to the terms and conditions of the Prior Employment Agreement,
to receive 3/8ths of the bonus potential, if any, described in Section 4 of the
Prior Employment Agreement with respect to such annual period. Except as
specifically set forth herein, no bonus shall be payable under the Prior
Employment Agreement for any period ending after September 30, 1997. The Bonus
described in Section 4(c) hereof shall apply, on a pro-rata basis, for each
quarterly and annual period ending after September 30, 1997. For purposes of
this Agreement, the term "Bonus" shall include any bonus paid to the Executive
pursuant to the terms of the Prior Employment Agreement, as modified by this
Section 9(j).
(k) No representations or warranties of any kind or nature
relating to the Company or its affiliates or their respective businesses,
assets, liabilities, operations, future plans or prospects have been made by or
on behalf of the Company to the Executive; nor have any representations or
warranties of any kind or nature been made by the Executive to the Company,
expect as expressly set forth in this Agreement.
(l) The Company shall pay the reasonable legal and accounting
fees and expenses incurred by the Executive in connection with the negotiation
of this Agreement, provided that such fees and expenses do not exceed $5,000.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 15
Employment Agreement -- Page 15
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
MARINER HEALTH GROUP, INC.
By:
-------------------------------------
Arthur W. Stratton, Jr.
Chief Executive Officer and President
----------------------------------------
Paul J. Diaz
<PAGE> 1
Exhibit 10.23
AMENDMENT NO. 16 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 16 TO CREDIT AGREEMENT (the "Amendment")
dated as of January 2, 1998 by and among Mariner Health Group, Inc., a Delaware
corporation (the "Borrower"), PNC Bank, National Association, CoreStates Bank,
N.A., 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, The Long-Term Credit Bank of Japan, Ltd. New York Branch and Riggs Bank
N.A. (collectively, the "Banks"), and PNC Bank, National Association, in its
capacity as agent for the Banks (the "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 $325,000,000 revolving credit facility to
the Borrower;
WHEREAS, the Borrower, the Banks and the Agent desire to amend
and restate the Credit Agreement as hereinafter provided, including without
limitation to increase the revolving credit facility to $460,000,000, and to add
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, The Long-Term Credit Bank of Japan, Ltd. New York
Branch and Riggs Bank N.A., as Banks; and
WHEREAS, effective as of the date hereof, NationsBank of
Tennessee, N.A. shall no longer be a Bank.
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.
<PAGE> 2
2. Amendment of Credit Agreement.
A. Articles I through XI. The parties hereto do
hereby amend and restate the recitals and Articles I through XI to the Credit
Agreement as set forth on Exhibit 1 hereto.
B. Schedules. Schedule 1.01(P) [Permitted Liens],
Schedule 1.01(R)(2) [Commitments of Banks], 2.09(a) [Existing Letters of Credit;
Loans, Interest and Other Obligations under Prior Credit Agreement], Schedules
6.01(a) and 6.01(c) [Qualifications to do Business, Subsidiaries and Excluded
Entities], Schedule 6.01(u) [Material Contracts], and Schedule 6.01(aa) [Matters
Regarding Certain Leased Facilities and Indebtedness of Certain Subsidiaries](
known, prior to the date hereof, as Schedule 6.01 (aa) [Convalescent Facilities
Indebtedness, Lien Releases; Intercreditor Agreements; Non-Disturbance
Agreements; consents to Leasehold Mortgages and Second Liens]) to the Credit
Agreement are hereby amended and restated to read as set forth on the schedule
attached hereto bearing the same name and numerical reference as the original
schedule. Schedules 6.01(bb) [Regency Facilities Indebtedness; etc. . .] and
6.01(cc) [Allegis Facilities Indebtedness; etc. . .] are hereby deleted from the
Credit Agreement in their entirety.
C. Exhibits. Exhibit 2.05 [Revolving Credit Loan
Request], Exhibit 8.01(m)(i) [Acquisition Approval Certificate],
Exhibit 8.01(m)(ii) [Acquisition Notice Certificate] and Exhibit 8.03(d)
[Compliance Certificate] to the Credit Agreement are hereby amended and restated
to read as set forth on the exhibits attached hereto bearing the same name and
numerical reference as the original exhibit. In addition, new Exhibit 1.01(C)
[Conditions for Incurrence of Certain Liens and Certain Indebtedness] is hereby
added as an additional exhibit to the Credit Agreement in the form of the
exhibit attached hereto having the same name and numeral reference.
3. Conditions of Effectiveness of this Agreement. The
effectiveness of this Amendment is expressly conditioned upon satisfaction of
each of the following conditions precedent:
(a) Representations and Warranties; No Defaults. The
representations and warranties of the Borrower contained in Article VI of the
Credit Agreement shall be true and accurate on the date hereof 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), and the
Borrower shall have performed and complied with all covenants and conditions
hereof; no Event of Default or Potential Default under the Credit Agreement and
the other Loan Documents shall have occurred and be continuing or shall exist;
and an Authorized Officer shall have delivered to the Agent a duly executed
certificate certifying as to the items in this Section 3(a).
(b) Organization, Authorization and Incumbency. There
shall be delivered to the Agent for the benefit of each Bank a certificate dated
as of the date hereof and signed by the Secretary or an Assistant Secretary of
each Loan Party, certifying as appropriate as to:
-2-
<PAGE> 3
(i) all action taken by such Loan Party in
connection with this Amendment and the
other Loan Documents;
(ii) the names of the officer or officers
authorized to sign this Amendment and the
other documents executed and delivered in
connection herewith and described in this
Section 3 and the true signatures of such
officer or officers and, in the case of
the Borrower, specifying the Authorized
Officers permitted to act on behalf of the
Borrower for purposes of the Loan
Documents and the true signatures of such
officers, on which the Agent and each Bank
may conclusively rely; and
(iii) copies of its organizational documents,
including its certificate of incorporation
and bylaws if it is a corporation and its
certificate of partnership and partnership
agreement if it is a partnership, in each
case as in effect on the date hereof,
certified by the appropriate state
official where such documents are filed in
a state office together with certificates
from the appropriate state officials as to
the continued existence and good standing
of each of the Loan Parties in each state
where organized; provided that each of the
Loan Parties other than Borrower may, in
lieu of delivering copies of the foregoing
organizational documents and good standing
certificates, certify that such Loan Party
is in good standing as of the date hereof
and that the organizational documents
previously delivered by the Loan Parties
to the Agent remain in effect and have not
been amended.
(c) Opinions of Counsel. There shall be delivered to
the Agent for the benefit of each Bank a written opinion dated the date hereof
of Testa, Hurwitz & Thibeault, LLP, counsel for the Loan Parties, in form and
substance satisfactory to the Agent.
(d) Fees and Expenses. The Borrower shall pay or
cause to be paid to the Agent for itself and for the account of the Banks to the
extent not previously paid on or before December 30, 1997 (i) the fees set forth
in that certain agreement between the Borrower and the Agent regarding fees of
the Agent in connection with this Amendment, (ii) the fees (the "Amendment Fee")
payable to each Bank with respect to this Amendment and the increase in the
Revolving Credit Commitments from $325 million to $460 million, as set forth on
Exhibit 2 hereto, and (iii) all other fees accrued through the date hereof and
the costs and expenses of the Agent and the Banks including, without limitation,
fees of the Agent's counsel in connection with this Amendment.
-3-
<PAGE> 4
(e) Acknowledgment. Each of the Loan Parties, other
than the Borrower, shall have executed the Confirmation of Guaranty in the form
attached hereto as Exhibit 3 hereto.
(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 Agent, and the
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 Agent.
(g) Notes. The Borrower shall have delivered to the
Agent on behalf of each Bank a Note in the amount of each Bank's Commitment.
4. Outstanding Items. The Borrower covenants and agrees
to undertake in good faith to complete as promptly as possible, all outstanding
items required to be completed in connection with Amendments 1 through 15 of the
Credit Agreement, the satisfaction of which it is expressly agreed has not been
waived by the Banks.
5. Force and Effect. Except as 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.
6. 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.
7. Effective Date. This Amendment shall require the
consent of the Agent and all of the Banks and shall be effective as of and shall
be dated as of the date and year first above written, subject to satisfaction on
such date of all conditions set forth in Section 3 of this Amendment.
[INTENTIONALLY BLANK]
-4-
<PAGE> 5
[SIGNATURE PAGE 1 OF 20 TO AMENDMENT NO. 16]
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first above written.
MARINER HEALTH GROUP, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 6
[SIGNATURE PAGE 2 OF 20 TO AMENDMENT NO. 16]
PNC BANK, NATIONAL ASSOCIATION,
individually and as Agent
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-2-
<PAGE> 7
[SIGNATURE PAGE 3 OF 20 TO AMENDMENT NO. 16]
CORESTATES BANK, N.A.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 8
[SIGNATURE PAGE 4 OF 20 TO AMENDMENT NO. 16]
CREDITANSTALT AG
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 9
[SIGNATURE PAGE 5 OF 20 TO AMENDMENT NO. 16]
FIRST UNION NATIONAL BANK
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 10
[SIGNATURE PAGE 6 OF 20 TO AMENDMENT NO. 16]
MELLON BANK, N.A.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 11
[SIGNATURE PAGE 7 OF 20 TO AMENDMENT NO. 16]
TORONTO DOMINION (NEW YORK), INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 12
[SIGNATURE PAGE 8 OF 20 TO AMENDMENT NO. 16]
BANKERS TRUST COMPANY
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 13
[SIGNATURE PAGE 9 OF 20 TO AMENDMENT NO. 16]
CREDIT LYONNAIS NEW YORK BRANCH
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 14
[SIGNATURE PAGE 10 OF 20 TO AMENDMENT NO. 16]
AMSOUTH BANK
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 15
[SIGNATURE PAGE 11 OF 20 TO AMENDMENT NO. 16]
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 16
[SIGNATURE PAGE 12 OF 20 TO AMENDMENT NO. 16]
THE FUJI BANK, LIMITED
NEW YORK BRANCH
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 17
[SIGNATURE PAGE 13 OF 20 TO AMENDMENT NO. 16]
SUNTRUST BANK, CENTRAL FLORIDA, N.A.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 18
[SIGNATURE PAGE 14 OF 20 TO AMENDMENT NO. 16]
BANK ONE, KENTUCKY, NA
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 19
[SIGNATURE PAGE 15 OF 20 TO AMENDMENT NO. 16]
FLEET NATIONAL BANK
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 20
[SIGNATURE PAGE 16 OF 20 TO AMENDMENT NO. 16]
COMERICA BANK
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 21
[SIGNATURE PAGE 17 OF 20 TO AMENDMENT NO. 16]
THE FIRST NATIONAL BANK OF CHICAGO
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 22
[SIGNATURE PAGE 18 OF 20 TO AMENDMENT NO. 16]
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 23
[SIGNATURE PAGE 19 OF 20 TO AMENDMENT NO. 16]
THE LONG-TERM CREDIT BANK OF JAPAN,
LTD. NEW YORK BRANCH
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 24
[SIGNATURE PAGE 20 OF 20 TO AMENDMENT NO. 16]
RIGGS BANK N.A.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-1-
<PAGE> 25
STATE OF GEORGIA
COUNTY OF FULTON
On the _____ day of ___________, 1997 personally appeared ________________,
as the __________ President of SunTrust Bank, Central Florida, N.A., and before
me executed the attached Amendment No. 16 dated as of _____________, 1998 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> 26
<TABLE>
<CAPTION>
SCHEDULE 1.01(R)(2)
COMMITMENTS OF BANKS
PARTICIPATION AMOUNT OF COMMITMENT
BANK PERCENTAGE FOR REVOLVING CREDIT LOANS
---- ------------- --------------------------
<S> <C> <C>
PNC Bank, National Association 9.782608697% $45,000,000
Bankers Trust Company 7.065217391% 32,500,000
Corestates Bank, N.A. 7.065217391% 32,500,000
Credit Lyonnais New York Branch 7.065217391% 32,500,000
Mellon Bank, N.A. 7.065217391% 32,500,000
Toronto Dominion (New York), Inc. 7.065217391% 32,500,000
AmSouth Bank 4.891304348% 22,500,000
Bank of Tokyo-Mitsubishi Trust Company 4.891304348% 22,500,000
Comerica Bank 4.891304348% 22,500,000
The First National Bank of Chicago 4.891304348% 22,500,000
First Union National Bank 4.891304348% 22,500,000
Fleet National Bank 4.891304348% 22,500,000
The Industrial Bank of Japan, Limited, New York Branch 4.891304348% 22,500,000
Creditanstalt AG 4.347826087% 20,000,000
Bank One, Kentucky, N.A. 3.260869565% 15,000,000
The Fuji Bank, Limited New York Branch 3.260869565% 15,000,000
The Long-Term Credit Bank of Japan, Ltd. New York Branch 3.260869565% 15,000,000
Riggs Bank, N.A. 3.260869565% 15,000,000
SunTrust Bank, Central Florida, N.A. 3.260869565% 15,000,000
Total 100.000000000% $460,000,000
-------------- ------------
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT 2
---------
Bank Fee
---- ---
<S> <C>
PNC Bank, National Association $33,750
Bankers Trust Company 81,250
Corestates Bank, N.A. 8,125
Credit Lyonnais New York Branch 81,250
Mellon Bank, N.A. 8,125
Toronto Dominion (New York), Inc. 8,125
AmSouth Bank 56,250
Bank of Tokyo-Mitsubishi Trust Company 56,250
Comerica Bank 56,250
The First National Bank of Chicago 56,250
First Union National Bank 5,625
Fleet National Bank 56,250
The Industrial Bank of Japan, Limited, New York Branch
56,250
Creditanstalt AG 5,000
Bank One, Kentucky, N.A. 22,500
The Fuji Bank, Limited New York Branch 22,500
The Long-Term Credit Bank of Japan, Ltd. New York Branch
22,500
Riggs Bank, N.A. 22,500
SunTrust Bank, Central Florida, N.A. 22,500
</TABLE>
<PAGE> 28
EXHIBIT 3
---------
CONFIRMATION OF GUARANTY
<PAGE> 1
Exhibit 10.24
$460,000,000 REVOLVING CREDIT FACILITY
CREDIT AGREEMENT
by and among
MARINER HEALTH GROUP, INC.
and
THE BANKS PARTY HERETO
and
PNC BANK, NATIONAL ASSOCIATION, as Agent
Dated as of May 18, 1994, as amended
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I - CERTAIN DEFINITIONS............................................................................... 1
1.01 Certain Definitions.............................................................................. 1
1.02 Construction..................................................................................... 25
1.03 Accounting Principles............................................................................ 25
ARTICLE II - REVOLVING CREDIT FACILITY........................................................................ 25
2.01 Revolving Credit Commitments; Limitation on Borrowings........................................... 25
(a) Revolving Credit Commitments............................................................... 25
(b) Extension by Banks of the Expiration Date.................................................. 26
(c) Limitation on Borrowings................................................................... 26
2.02 Nature of Banks' Obligations With Respect to Revolving Credit Loans.............................. 26
2.03 Commitment Fees.................................................................................. 27
2.04 [Intentionally Omitted].......................................................................... 28
2.05 Revolving Credit Loan Requests................................................................... 28
2.06 Making Revolving Credit Loans.................................................................... 28
2.07 Revolving Credit Note............................................................................ 29
2.08 Use of Proceeds.................................................................................. 29
2.09 Letter of Credit Subfacility..................................................................... 29
2.10 Voluntary Reduction of Revolving Credit Commitments.............................................. 34
ARTICLE III - COLLATERAL...................................................................................... 34
3.01 Collateral....................................................................................... 34
ARTICLE IV - INTEREST RATES................................................................................... 35
4.01 Interest Rate Options............................................................................ 35
(a) Revolving Credit Interest Rate Options..................................................... 35
(b) Rate Quotations............................................................................ 36
4.02 Interest Periods................................................................................. 37
4.03 Interest After Default........................................................................... 37
4.04 Euro-Rate Unascertainable........................................................................ 37
4.05 Selection of Interest Rate Options............................................................... 39
ARTICLE V - PAYMENTS.......................................................................................... 39
5.01 Payments......................................................................................... 39
5.02 Pro Rata Treatment of Banks...................................................................... 39
5.03 Interest Payment Dates........................................................................... 39
5.04 Voluntary Prepayments............................................................................ 40
5.05 Mandatory Prepayments............................................................................ 41
(a) Sale of Assets............................................................................. 41
(b) Application Among Interest Rate Options.................................................... 41
5.06 Additional Compensation in Certain Circumstances................................................. 41
(a) Increased Costs or Reduced Return Resulting From Taxes, Reserves, Capital Adequacy
Requirements, Expenses, Etc............................................................. 41
(b) Indemnity.................................................................................. 42
ARTICLE VI - REPRESENTATIONS AND WARRANTIES................................................................... 43
6.01 Representations and Warranties - Effective On and After Date of This Agreement................... 43
(a) Organization and Qualification............................................................. 43
(b) [Intentionally Omitted].................................................................... 43
(c) Excluded Entities; Subsidiaries............................................................ 43
(d) Power and Authority........................................................................ 44
</TABLE>
(i)
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(e) Validity and Binding Effect................................................................ 44
(f) No Conflict................................................................................ 44
(g) Litigation................................................................................. 44
(h) Title to Properties........................................................................ 45
(i) Financial Statements....................................................................... 45
(j) Margin Stock............................................................................... 45
(k) Full Disclosure............................................................................ 46
(l) Taxes...................................................................................... 46
(m) Consents and Approvals..................................................................... 46
(n) Compliance with Instruments................................................................ 46
(o) Patents, Trademarks, Copyrights, Etc....................................................... 46
(p) Security Interests in the Collateral....................................................... 47
(q) [Intentionally Omitted.]................................................................... 47
(r) Status of the Pledged Collateral........................................................... 47
(s) Insurance.................................................................................. 48
(t) Compliance with Laws....................................................................... 48
(u) Material Contracts, Licenses, Permits and Approvals........................................ 48
(v) Investment Companies....................................................................... 49
(w) Plans and Benefit Arrangements............................................................. 49
(x) Employment Matters......................................................................... 50
(y) Environmental Matters...................................................................... 51
(z) Senior Debt Status......................................................................... 52
(aa) Matters Regarding Leased Facilities and Certain Indebtedness of Subsidiaries............. 52
(bb) Mortgage and Leasehold Mortgage Liens..................................................... 53
6.02 Updates to Schedules............................................................................. 53
ARTICLE VII - CONDITIONS OF LENDING........................................................................... 54
7.01 Each Additional Loan............................................................................. 54
ARTICLE VIII - COVENANTS...................................................................................... 54
8.01 Affirmative Covenants............................................................................ 54
(a) Preservation of Existence, Etc............................................................. 54
(b) Payment of Liabilities, Including Taxes, Etc............................................... 54
(c) Maintenance of Insurance................................................................... 55
(d) Maintenance of Properties and Leases....................................................... 55
(e) Maintenance of Patents, Trademarks, Etc.................................................... 55
(f) Visitation Rights.......................................................................... 55
(g) Keeping of Records and Books of Account.................................................... 55
(h) Plans and Benefit Arrangements............................................................. 56
(i) Compliance with Laws....................................................................... 56
(j) Use of Proceeds............................................................................ 56
(k) [Intentionally Omitted.]................................................................... 56
(l) Subordination of Intercompany Loans, Other Loans and Advances to the Borrower.............. 56
(m) Approval of Financial Statements in Permitted Acquisitions; Notice of Permitted
Acquisition............................................................................. 56
(n) Dissolution of Certain Subsidiaries........................................................ 58
(o) [Intentionally Omitted].................................................................... 58
(p) Further Assurances......................................................................... 58
(q) Owned Facilities - Termination of Liens; Intercreditor Agreements.......................... 58
(r) Leased Facilities - Termination of Liens; Intercreditor Agreements; Trustee Agreements..... 59
8.02 Negative Covenants............................................................................... 60
(a) Indebtedness............................................................................... 60
(b) Liens...................................................................................... 61
</TABLE>
(ii)
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(c) Guaranties................................................................................. 61
(d) Loans and Investments...................................................................... 62
(e) Dividends and Related Distributions........................................................ 63
(f) Liquidations, Mergers, Consolidations, Acquisitions........................................ 63
(g) Dispositions of Assets or Subsidiaries..................................................... 65
(h) Affiliate Transactions..................................................................... 66
(i) Subsidiary, Partnerships and Joint Ventures................................................ 66
(j) Continuation of or Change in Business...................................................... 66
(k) Plans and Benefit Arrangements............................................................. 66
(l) Fiscal Year................................................................................ 67
(m) Issuance of Stock.......................................................................... 67
(n) [Intentionally Omitted.]................................................................... 68
(o) [Intentionally Omitted.]................................................................... 68
(p) Capital Expenditures and Leases............................................................ 68
(q) Minimum Fixed Charge Coverage Ratio........................................................ 68
(r) Maximum Leverage Ratio..................................................................... 68
(s) [Intentionally Omitted.]................................................................... 68
(t) Minimum Net Worth.......................................................................... 68
(u) Senior Indebtedness to Cash Flow From Operations Ratio..................................... 69
(v) Incurrence of Indebtedness Permitted By the Indenture...................................... 69
(w) [Intentionally Omitted.]................................................................... 69
(x) Negative Pledges........................................................................... 69
(y) Prohibition of Defeasance of Subordinated Notes............................................ 69
8.03 Reporting Requirements........................................................................... 69
(a) [Intentionally Omitted.]................................................................... 69
(b) Quarterly Financial Statements............................................................. 69
(c) Annual Financial Statements................................................................ 70
(d) Certificate of the Borrower................................................................ 70
(e) Notice of Default.......................................................................... 70
(f) Notice of Litigation....................................................................... 71
(g) Certain Events............................................................................. 71
(h) Budgets, Forecasts, Other Reports and Information.......................................... 71
(i) Notices Regarding Plans and Benefit Arrangements........................................... 72
(j) Notices with Respect to Indenture.......................................................... 73
ARTICLE IX - DEFAULT.......................................................................................... 73
9.01 Events of Default................................................................................ 73
9.02 Consequences of Event of Default................................................................. 76
9.03 Notice of Sale................................................................................... 79
ARTICLE X - THE AGENT......................................................................................... 79
10.01 Appointment..................................................................................... 79
10.02 Delegation of Duties............................................................................ 79
10.03 Nature of Duties; Independent Credit Investigation.............................................. 79
10.04 Actions in Discretion of Agent; Instructions from the Banks..................................... 80
10.05 Reimbursement and Indemnification of Agent by the Borrower...................................... 80
10.06 Exculpatory Provisions.......................................................................... 81
10.07 Reimbursement and Indemnification of Agent by Banks............................................. 81
10.08 Reliance by Agent............................................................................... 82
10.09 Notice of Default............................................................................... 82
10.10 Notices......................................................................................... 82
10.11 Banks in Their Individual Capacities............................................................ 82
10.12 Holders of Notes................................................................................ 82
</TABLE>
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10.13 Equalization of Banks........................................................................... 83
10.14 Successor Agent................................................................................. 83
10.15 Agent's Fee..................................................................................... 83
10.16 Availability of Funds........................................................................... 83
10.17 Calculations.................................................................................... 84
10.18 Beneficiaries................................................................................... 84
10.19 Holding of Loan Documents....................................................................... 84
ARTICLE XI - MISCELLANEOUS.................................................................................... 84
11.01 Modifications, Amendments or Waivers............................................................ 84
11.02 No Implied Waivers; Cumulative Remedies; Writing Required....................................... 85
11.03 Reimbursement and Indemnification of Banks by the Borrower; Taxes............................... 85
11.04 Holidays........................................................................................ 86
11.05 Funding by Branch, Subsidiary or Affiliate...................................................... 86
(a) Notional Funding........................................................................... 86
(b) Actual Funding............................................................................. 86
11.06 Notices......................................................................................... 87
11.07 Severability.................................................................................... 87
11.08 Governing Law................................................................................... 87
11.09 Prior Understanding............................................................................. 87
11.10 Duration; Survival.............................................................................. 87
11.11 Successors and Assigns.......................................................................... 88
11.12 Confidentiality................................................................................. 89
11.13 Counterparts.................................................................................... 89
11.14 Agent's or Bank's Consent....................................................................... 89
11.15 Exceptions...................................................................................... 89
11.16 Consent to Forum; Waiver of Jury Trial.......................................................... 89
11.17 Tax Withholding Clause.......................................................................... 90
11.18 Effect on Prior Credit Agreement; Continuing Effectiveness of Certain Provisions
Regarding Interest Rates and Fees....................................................... 90
</TABLE>
(iv)
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SCHEDULES
SCHEDULE 1.01(P) PERMITTED LIENS
SCHEDULE 1.01(R)(2) COMMITMENTS OF BANKS
SCHEDULE 2.09(a) EXISTING LETTERS OF CREDIT; LOANS, INTEREST
AND OTHER OBLIGATIONS UNDER PRIOR CREDIT
AGREEMENT
SCHEDULES 6.01(a) QUALIFICATIONS TO DO BUSINESS, SUBSIDIARIES
AND and 6.01(c) EXCLUDED ENTITIES
SCHEDULE 6.01(u) MATERIAL CONTRACTS
SCHEDULE 6.01(y) ENVIRONMENTAL DISCLOSURES
SCHEDULE 6.01(z) CERTAIN DISCLOSURES REGARDING OTHER DEBT OF
THE BORROWER
SCHEDULE 6.01(aa) MATTERS REGARDING CERTAIN LEASED FACILITIES
AND INDEBTEDNESS OF CERTAIN
SUBSIDIARIES
SCHEDULE 8.01(l) CERTAIN DISCLOSURES REGARDING SUBORDINATION
OF INDEBTEDNESS
SCHEDULE 8.02(a) PERMITTED INDEBTEDNESS
SCHEDULE 8.02(c) CERTAIN GUARANTIES
SCHEDULE 8.02(x) EXISTING NEGATIVE PLEDGE COVENANTS
<PAGE> 7
EXHIBITS
EXHIBIT 1.01(A) ASSIGNMENT AND ASSUMPTION AGREEMENT
EXHIBIT 1.01(C) CONDITIONS FOR INCURRENCE OF CERTAIN LIENS
AND CERTAIN INDEBTEDNESS
EXHIBIT 1.01(G) GUARANTY AND SURETYSHIP AGREEMENT
EXHIBITS 1.01(I)(1) INTERCREDITOR AGREEMENT - LEASED FACILITY
(A) and (B)
EXHIBITS 1.01(I)(2) INTERCREDITOR AGREEMENT - OWNED FACILITY
(A) and (B)
EXHIBIT 1.01(L) LEASEHOLD MORTGAGE
EXHIBIT 1.01(M) MORTGAGE
EXHIBIT 1.01(P)(1) PLEDGE AGREEMENT (Borrower)
EXHIBIT 1.01(P)(2) PLEDGE AGREEMENT
(Subsidiaries Pledging Stock)
EXHIBIT 1.01(P)(3) PLEDGE AGREEMENT (Subsidiaries Pledging
Partnership Interests)
EXHIBIT 1.01(R) REVOLVING CREDIT NOTE
EXHIBIT 1.01(S) SUBORDINATION AGREEMENT (Intercompany)
EXHIBIT 1.01(T) TRUSTEE AGREEMENT
EXHIBIT 2.05 REVOLVING CREDIT LOAN REQUEST
EXHIBIT 8.01(l) TERMS OF CERTAIN SUBORDINATED INDEBTEDNESS
EXHIBIT 8.01(m)(i) ACQUISITION APPROVAL CERTIFICATE
EXHIBIT 8.01(m)(ii) ACQUISITION NOTICE CERTIFICATE
EXHIBIT 8.03(d) COMPLIANCE CERTIFICATE
<PAGE> 8
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is dated as of May 18, 1994, as amended
and is made by and among MARINER HEALTH GROUP, INC., a Delaware corporation (the
"Borrower"), the BANKS (as hereinafter defined), and PNC BANK, NATIONAL
ASSOCIATION, in its capacity as agent for the Banks under this Agreement
(hereinafter referred to in such capacity as the "Agent").
WITNESSETH:
WHEREAS, the Borrower has requested the Banks to provide a
revolving credit facility to the Borrower in an aggregate principal amount not
to exceed $460,000,000; and
WHEREAS, the Banks are willing to provide such credit upon the
terms and conditions hereinafter set forth.
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:
ARTICLE I
CERTAIN DEFINITIONS
1.01 Certain Definitions. In addition to words and terms
defined elsewhere in this Agreement, the following words and terms shall have
the following meanings, respectively, unless the context hereof clearly requires
otherwise:
Acquisition Approval Certificate shall have the meaning
set forth in Section 8.01(m)(i).
Acquisition Income Reporting Period shall mean the period
during which Borrower shall measure Consolidated Cash Flow from Operations
pursuant to Section 8.01(m) for purposes of computing Borrower's leverage ratio
and its other financial covenants on the date on which Borrower makes any
Permitted Acquisition, which period shall be either:
(1) the four fiscal quarters ending immediately
before the date of such Permitted Acquisition (the "Immediately Preceding Four
Quarters") if such Permitted Acquisition occurs after the Delivery Date for the
financial statements of Borrower for such Immediately Preceding Four Quarters,
or
(2) the four fiscal quarters ending one quarter
period prior to the end of the Immediately Preceding Four Quarters (the "Second
Preceding Four Quarters") if such Permitted Acquisition occurs before the
Delivery Date for the financial statements of Borrower for the Immediately
Preceding Four Quarters.
Acquisition Notice Certificate shall have the meaning
given to such term in Section 8.01(m)(ii).
<PAGE> 9
Acquisition Reporting Certification shall mean any
Permitted Acquisition with respect to which Borrower delivers or is required to
deliver either an Acquisition Notice Certificate or an Acquisition Approval
Certificate pursuant to Section 8.01(m).
Adjusted Consolidated Net Income shall mean for any
period of determination an amount equal to the net income of the Borrower and
its Subsidiaries for such period determined and consolidated in accordance with
GAAP, plus such extraordinary nonrecurring charges as are approved by the
Required Banks pursuant to Section 8.01(m), to the extent such expenses are
deducted in computing such net income.
Affiliate as to any person shall mean any other person
(i) which directly or indirectly controls, is controlled by, or is under common
control with such person, (ii) which beneficially owns or holds 50% or more of
any class of the voting stock of the Borrower, or (iii) 50% or more of the
voting stock (or in the case of a person which is not an individual or a
corporation, 50% or more of the equity interest) of which is beneficially owned
or held, directly or indirectly, by the Borrower. Control, as used herein, shall
mean the possession, directly or indirectly, of the power 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, including the power to
elect a majority of the directors or trustees of a corporation or trust, as the
case may be.
Agent shall mean PNC Bank, National Association and its
successors.
Agent's Fee shall have the meaning assigned to that term
in Section 10.15 hereof.
Agreement shall mean this Credit Agreement as the same
may be supplemented, amended, modified or restated from time to time including
all schedules and exhibits hereto.
Amendment No. 15 shall mean that certain Amendment No 15
to Credit Agreement dated October 3, 1997 among Borrower, the Banks and Agent,
together with schedules and exhibits thereto.
Amendment No. 16 shall mean that certain Amendment No. 16
to Credit Agreement dated January 2, 1998 among Borrower, the Banks and Agent,
together with schedules and exhibits thereto.
Ansonia shall mean Mariner Health Care of Southern
Connecticut, a corporation organized and existing under the laws of the State of
Connecticut.
Applicable Percentage Over Euro-Rate shall have the
meaning assigned to such term in Section 4.01(a)(ii).
Assignment and Assumption Agreement shall mean an
Assignment and Assumption Agreement by and among a Purchasing Bank, the
Transferor Bank and the Agent, as Agent and on behalf of the remaining Banks,
substantially in the form of Exhibit 1.01(A) hereto.
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Authorized Officer shall mean with respect to each Loan
Party those persons designated by written notice to the Agent from the Borrower,
authorized to execute notices, reports and other documents required hereunder.
The Borrower may amend such list of persons from time to time by giving written
notice of such amendment to the Agent.
Banks shall mean the financial institutions named on
Schedule 1.01(R)(2) hereto and their respective successors and assigns as
permitted hereunder, each of which is referred to herein as a Bank.
Base Rate shall mean the greater of (i) the interest rate
per annum announced from time to time by the Agent at its Principal Office as
its then prime rate, which rate may not necessarily be the lowest rate then
being charged commercial borrowers by the Agent, or (ii) the Federal Funds
Effective Rate plus one-half percent (0.5%) per annum.
Base Rate Option shall mean Loans subject to the
Revolving Credit Base Rate Option.
Benefit Arrangement shall mean at any time an "employee
benefit plan," within the meaning of Section 3(3) of ERISA, which is neither a
Plan or a Multiemployer Plan and which is maintained, sponsored or otherwise
contributed to, by any member of the ERISA Group.
Borrower shall mean Mariner Health Group, Inc., a
corporation organized and existing under the laws of the State of Delaware.
Borrowing Date shall mean, with respect to any Loan, the
date for the making thereof or the renewal thereof or conversion thereof to the
same or a different Interest Rate Option, which shall be a Business Day.
Borrowing Tranche shall mean (i) with respect to the
Revolving Credit Euro-Rate Portion of the Loans, Loans to which a Euro-Rate
Option applies by reason of the selection of, conversion to or renewal of such
Interest Rate Option on the same day and having the same Euro-Rate Interest
Period, and (ii) with respect to the Revolving Credit Base Rate Portion of the
Loans, Loans to which the Base Rate Option applies by reason of the selection of
or conversion of such Interest Rate Option.
Business Day shall mean (i) with respect to matters
relating to the Euro-Rate Option, a day on which banks in the London interbank
market are dealing in U.S. Dollar deposits and on which commercial banks are
open for domestic and international business in Pittsburgh, Pennsylvania and New
York, New York, and (ii) with respect to any other matter, a day on which
commercial banks are open for business in Pittsburgh, Pennsylvania and New York,
New York.
Change in Ownership shall mean if, from and after the
Closing Date, any person or group within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "1934 Act") and the rules and
regulations promulgated thereunder (other than a
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<PAGE> 11
person or group owning stock of the Borrower prior to the initial public
offering of the Borrower's stock consummated on June 15, 1993) shall have
acquired beneficial ownership (within the meaning of Rule 13d-3 of the 1934
Act), directly or indirectly, of securities of the Borrower (or other securities
convertible into such securities) representing 50% or more of combined voting
power of all securities of the Borrower entitled to a vote in the election of
directors (hereinafter called a "Controlling Person"). For purposes of this
definition, a person or group shall not be a Controlling Person if such person
or group holds voting power in good faith and not for the purpose of
circumventing this definition as an agent, bank, broker, nominee, trustee, or
holder of irrevocable proxies given in response to a solicitation pursuant to
the 1934 Act, for one or more beneficial owners who do not individually, or, if
they are a group acting in concert, as a group, have the voting power specified
in this definition.
Class A Excluded Entities shall mean collectively those
Excluded Entities which have not incurred any Restricted Indebtedness nor are
subject to or bound by the terms of any agreement with respect to Restricted
Indebtedness, and Class A Excluded Entity shall mean separately any Class A
Excluded Entity.
Closing Date shall mean May 18, 1994, which is the
Business Day on which the first Loan was made.
Collateral shall mean the Pledged Collateral, all of the
collateral under the Mortgages and the Leasehold Mortgages and any other
collateral security in which any of the Loan Parties may hereafter grant a
security interest or other lien to the Agent for the benefit of the Banks as
security for their obligations under the Loan Documents.
Commitment shall mean as to any Bank its Revolving Credit
Commitment, and Commitments shall mean the aggregate of the Revolving Credit
Commitments of all of the Banks.
Commitment Fee shall have the meaning assigned to that
term in Section 2.03 hereof.
Conditions for Incurrence of Certain Liens and Certain
Indebtedness shall mean those conditions set forth on Exhibit 1.01(C).
Consolidated Cash Flow from Operations for any period of
determination shall mean the difference between the amounts determined under the
following clauses (i) and (ii): (i) the sum of (X) the sum of Consolidated Net
Income, depreciation, amortization, other non-cash charges to Consolidated Net
Income, interest expense and income tax expense of the Borrower and its
Restricted Subsidiaries for such period determined in accordance with GAAP, plus
(Y) the sum of the Consolidated Cash Flow from Operations Adjustment Amount for
all Class A Excluded Entities, minus (ii) non-cash credits to net income of the
Borrower and its Restricted Subsidiaries for such period determined in
accordance with GAAP, subject to the adjustments described in this definition
below.
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<PAGE> 12
If the Loan Parties make a Permitted Acquisition and the
Banks approve of the historical and pro forma financial statements of the
business acquired in such Permitted Acquisition pursuant to Section 8.01(m)
hereof, Consolidated Cash Flow from Operations shall be adjusted as set forth in
paragraphs (A), (B) and (C) below. The adjustments in Paragraphs (A), (B) and
(C) below shall apply to computations of the ratios in Sections 2.01, 2.03,
4.01(a), 8.02(f), 8.02(r) and 8.02(u) on the date of such Permitted Acquisition
and at the end of each of the four fiscal quarters after such Permitted
Acquisition. (The adjustments described in Paragraphs (A) and (B) below shall
not apply to computations of such ratios made as of the end of the fiscal
quarter immediately preceding the date of such Permitted Acquisition.)
(A) Consolidated Cash Flow from Operations for
periods prior to such Permitted Acquisition shall include (i) the sum of net
income, depreciation, amortization, other non-cash charges to net income,
interest expense and income tax expense of the acquired business, plus the
adjustment, if any pursuant to clause (C) below, minus (ii) non-cash credits to
net income of such business, in each case as determined in accordance with GAAP,
(B) Extraordinary or nonrecurring expenses under GAAP
incurred in connection with such Permitted Acquisition shall be excluded from
the net income of the acquired business when computing Consolidated Cash Flow
from Operations in the preceding sentence if the Required Banks have agreed to
such exclusion pursuant to Section 8.01(m), and
(C) To the extent, in the determination of net income
of the acquired business utilized in clause (A) above, deductions were taken in
respect of rental expense pursuant to operating leases in accordance with GAAP
and following the consummation of a Permitted Acquisition the Borrower
appropriately amends such leases so that, in accordance with GAAP, such rental
expense pursuant to operating leases may properly be treated as rental expense
pursuant to capital leases (and the Borrower treats such leases as capital
leases for periods following the consummation by the Borrower of such Permitted
Acquisition) then, such net income for purposes of clause (A) above shall be
increased by the deductions taken in respect of rental expense pursuant to such
operating leases during the period of determination.
Consolidated Cash Flow from Operations Adjustment Amount
shall mean, for each Class A Excluded Entity, for any period of determination,
the amount equal to the product of (A) a percentage, as determined by the Agent
in its reasonable discretion, multiplied by (B) the difference between (i) the
sum of net income, depreciation, amortization, other non-cash charges to such
net income, interest expense and income tax expense of such Class A Excluded
Entity for such period, as determined in accordance with GAAP, minus (ii)
non-cash credits to net income of such Class A Excluded Entity for such period,
as determined in accordance with GAAP. In determining the applicable percentage
under clause (A) above, the Agent shall review with the Borrower the constituent
documents of each Excluded Entity, including without limitation, partnership
agreements, shareholder agreements and other relevant documents which the
Borrower agrees to provide as the Agent may reasonably request, and the Agent
shall also review the equity ownership interests of the Loan Parties in each
Excluded
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<PAGE> 13
Entity and the actual cash flow available to be distributed to the Loan Parties
from the operations of each Excluded Entity.
Consolidated Net Income shall mean for any period of
determination an amount equal to the net income of the Borrower and its
Restricted Subsidiaries for such period determined in accordance with GAAP, but
without regard to net income attributable to Excluded Entities, plus such
extraordinary nonrecurring charges as approved by the Required Banks pursuant to
Section 8.01(m), to the extent such expenses are deducted in computing such net
income.
Consolidated Net Worth shall mean as of any date of
determination total stockholders' equity of the Borrower and its Subsidiaries as
of such date determined and consolidated in accordance with GAAP.
Corporate Shares shall have the meaning assigned to that
term in Section 6.01(c).
Corporate Subsidiaries shall mean collectively the
Subsidiaries of Borrower which are corporations, and Corporate Subsidiary shall
mean individually any of them.
Delivery Date shall mean the date which is the earlier of
(i) the date on which the Borrower delivers its consolidated financial
statements to the Agent and the Banks pursuant to Sections 8.03(b) and (c), or
(ii) one Business Day following the date on which such financial statements are
due to be delivered pursuant to such Sections.
Dollar Dollars U.S. Dollars and the symbol $ shall mean
lawful money of the United States of America.
Drawing Date shall have the meaning assigned to that term
in Section 2.09(d).
Environmental Complaint shall mean any written complaint
setting forth a cause of action for personal, property or natural resource
damage or equitable relief, order, notice of violation, citation, request for
information issued pursuant to any Environmental Laws by an Official Body,
subpoena or other written notice of any type relating to, arising out of, or
issued pursuant to any of the Environmental Laws or any Environmental
Conditions, as the case may be, in each case with respect to any violation or
alleged violation of Environmental Laws or release or threatened release of a
Regulated Substance.
Environmental Conditions shall mean any conditions of the
environment, including, without limitation, the work place, the ocean, natural
resources (including flora or fauna), soil, surface water, ground water, any
actual or potential drinking water supply sources, substrata or the ambient air,
relating to or arising out of, or caused by the use, handling, storage,
treatment, recycling, generation, transportation, release, spilling, leaking,
pumping, emptying, discharging, injecting, escaping, leaching, disposal,
dumping, threatened release or other
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<PAGE> 14
management or mismanagement of Regulated Substances resulting from the use of,
or operations on, the Property.
Environmental Laws shall mean all federal, state, local
and foreign laws and regulations, including without limitation permits,
licenses, authorizations, bonds, orders, judgments, consent decrees issued, or
entered into, pursuant thereto, relating to pollution or protection of human
health or the environment or employee safety in the work place or the operation
of the activities of the Borrower and its Subsidiaries.
ERISA shall mean the Employee Retirement Income Security
Act of 1974, as the same may be amended or supplemented from time to time, and
any successor statute of similar import, and the rules and regulations
thereunder, as from time to time in effect.
ERISA Group shall mean, at any time, the Borrower and all
members of a controlled group of corporations and all trades or businesses
(whether or not incorporated) under common control and all other entities which,
together with the Borrower, are treated as a single employer under Section 414
of the Internal Revenue Code.
Euro-Rate shall mean with respect to the Loans comprising
any Borrowing Tranche to which the Euro-Rate Option applies for any Euro-Rate
Interest Period, the interest rate per annum determined by the Agent by dividing
(the resulting quotient rounded upward to the nearest 1/100 of 1% per annum) (i)
the rate of interest determined by the Agent in accordance with its usual
procedures (which determination shall be conclusive absent manifest error) to be
the "offered" eurodollar rate as quoted by Exco-Noonan Incorporated (or
appropriate successor or, if Exco-Noonan or its successor ceases to provide such
quotes, a comparable replacement as determined by the Agent) as evidenced on Dow
Jones Markets Service (formerly known as Telerate) display page 4756 (or such
other display page on the Dow Jones Markets Service system as may replace Dow
Jones Markets Service display page 4756), two (2) Business Days prior to the
first day of such Euro-Rate Interest Period for an amount comparable to such
Borrowing Tranche and having a borrowing date and maturity comparable to such
Euro-Rate Interest Period by (ii) a number equal to 1.00 minus the Euro-Rate
Reserve Percentage. The Euro-Rate may also be expressed by the following
formula:
Dow Jones Markets Service page 4756 as quoted by Exco-Noonan,
Euro-Rate = (or appropriate successor)
1.00 - Euro-Rate Reserve Percentage
The Euro-Rate shall be adjusted with respect to any Euro-Rate Option outstanding
on the effective date of any change in the Euro-Rate Reserve Percentage as of
such effective date. The Agent shall give prompt notice to the Borrower of the
Euro-Rate as determined or adjusted in accordance herewith, which determination
shall be conclusive absent manifest error.
Euro-Rate Interest Period shall have the meaning assigned
to that term in Section 4.02 hereof.
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Euro-Rate Option shall mean Loans subject to the
Revolving Credit Euro-Rate Option.
Euro-Rate Reserve Percentage shall mean the maximum
percentage (expressed as a decimal rounded upward to the nearest 1/100 of 1%) as
determined by the Agent (which determination shall be conclusive absent manifest
error) which is in effect during any relevant period, as prescribed by the Board
of Governors of the Federal Reserve System (or any successor) for determining
the reserve requirements (including, without limitation, supplemental, marginal
and emergency reserve requirements) with respect to eurocurrency funding
(currently referred to as "Eurocurrency Liabilities") of a member bank in such
System.
Event of Default shall mean any of the Events of Default
described in Section 9.01 of this Agreement.
Excluded Entities shall mean (i) any partnership,
corporation or limited liability company which is not a Subsidiary of any Loan
Party and with respect to which a Loan Party has made a Restricted Investment
permitted by Section 8.02(d)(iv), and (ii) any Unrestricted Subsidiary of the
Borrower which the Borrower has designated as one of the Excluded Entities and
with respect to which a Loan Party has made a Restricted Investment permitted by
Section 8.02(d)(iv), and Excluded Entity shall mean separately any Excluded
Entity.
Existing Letters of Credit shall have the meaning given
to such term in Section 2.09.
Expiration Date shall mean, with respect to the Revolving
Credit Commitment, January 2, 2003, subject to extension as provided in Section
2.01(b).
Facility Purchase Option shall mean an option provided by
a Lessor Lender or Owned Facility Lender in an Intercreditor Agreement giving
the Agent or the Banks the right to purchase the Lessor Indebtedness or Owned
Facility Indebtedness from such Lessor Lender or Owned Facility Lender upon
certain events of default relating to such Indebtedness.
Federal Funds Effective Rate for any day shall mean the
rate per annum (based on a year of 360 days and actual days elapsed and rounded
upward to the nearest 1/100 of 1%) announced by the Federal Reserve Bank of New
York (or any successor) on such day as being the weighted average of the rates
on overnight Federal funds transactions arranged by Federal funds brokers on the
previous trading day, as computed and announced by such Federal Reserve Bank (or
any successor) in substantially the same manner as such Federal Reserve Bank
computes and announces the weighted average it refers to as the "Federal Funds
Effective Rate" as of the date of this Agreement; provided, if such Federal
Reserve Bank (or its successor) does not announce such rate on any day, the
"Federal Funds Effective Rate" for such day shall be the Federal Funds Effective
Rate for the last day of which such rate was announced.
GAAP shall mean generally accepted accounting principles
as are in effect on the Closing Date, subject to the provisions of Section 1.03
hereof, and applied on a consistent
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<PAGE> 16
basis (except for changes in application in which the Borrower's independent
certified public accountants concur) both as to classification of items and
amounts.
Guaranty of any person shall mean any obligation of such
person guaranteeing or in effect guaranteeing any liability or obligation of any
other person in any manner, whether directly or indirectly, including, without
limiting the generality of the foregoing, any agreement to indemnify or hold
harmless any other person, any performance bond or other suretyship arrangement
and any other form of assurance against loss, except endorsement of negotiable
or other instruments for deposit or collection in the ordinary course of
business.
Guaranty Agreements shall mean collectively the Guaranty
and Suretyship Agreements, in substantially the form attached hereto as Exhibit
1.01(G) executed and delivered by the Subsidiaries of Borrower except for
Pinnacle Rehab of Gwinnette and Pinnacle's Kansas Joint Venture to the Agent for
the benefit of the Banks, and Guaranty Agreement shall mean separately any
Guaranty Agreement.
Historical Statements shall have the meaning given to
such term in Section 6.01(i)(i).
Indebtedness shall mean as to any person at any time, any
and all indebtedness, obligations or liabilities (whether matured or unmatured,
liquidated or unliquidated, direct or indirect, absolute or contingent, or joint
or several) of such person for or in respect of: (i) borrowed money, including,
without limitation the Subordinated Notes, (ii) amounts raised under or
liabilities in respect of any note purchase or acceptance credit facility, (iii)
reimbursement obligations under any letter of credit, currency swap agreement,
interest rate swap, cap, collar or floor agreement or other interest rate
protection agreement, (iv) any other transaction (including without limitation
forward sale or purchase agreements, capitalized (not operating) leases required
under GAAP to be disclosed as a liability on the Loan Party's balance sheet and
conditional sales agreements) having the commercial effect of a borrowing of
money entered into by such person to finance its operations or capital
requirements (but not including the deferred portion of any Restricted
Investment in an Excluded Entity if such amount is to be paid from available
cash flow from operations of the Borrower and its Subsidiaries and also not
including trade payables and accrued expenses incurred in the ordinary course of
business which are not represented by a promissory note, instrument or other
evidence of indebtedness and which are not more than ninety (90) days past due
(unless such past due indebtedness is being disputed in good faith and an
appropriate reserve has been established with respect to such indebtedness in
accordance with GAAP)), provided that, for purposes of this clause (iv) the
phrase "other evidence of indebtedness" shall not include any ordinary course
evidence of trade accounts payable of the Borrower or any Subsidiary such as
purchase orders or invoices, or (v) any Guaranty of Indebtedness for borrowed
money.
Indenture shall mean that certain Indenture dated April
4, 1996, between the Borrower and State Street Bank and Trust Company, as
trustee, in respect of the
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<PAGE> 17
Subordinated Notes, as the same may be amended, modified, supplemented or
restated from time to time in accordance with this Agreement.
Insolvency Proceedings 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 Loan Party 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 for creditors, or other, similar arrangement in respect of
such Person's creditors generally or any substantial portion of its creditors;
undertaken under any Law.
Intercreditor Agreements shall mean collectively, as of
any date of determination, each Intercreditor Agreement entered into between the
Agent and a Lessor Lender, each Intercreditor Agreement entered into between the
Agent and an Owned Facility Lender, each Intercreditor Agreement entered into as
required by Section 8.02(d)(iv), and each other Intercreditor Agreement entered
into between the Agent and any other Person, as required pursuant to this
Agreement, and Intercreditor Agreement shall mean, individually, any of the
Intercreditor Agreements.
Interest Payment Date shall mean each date specified for
the payment of interest in Section 5.03.
Interest Rate Option shall mean the Revolving Credit
Euro-Rate Option or Revolving Credit Base Rate Option.
Internal Revenue Code shall mean the Internal Revenue
Code of 1986, as the same may be amended or supplemented from time to time, and
any successor statute of similar import, and the rules and regulations
thereunder, as from time to time in effect.
Labor Contracts shall have the meaning assigned to that
term in Section 6.01(u).
Law shall mean any law (including common law),
constitution, statute, treaty, regulation, rule, ordinance, opinion, release,
ruling, order, injunction, writ, decree or award of any Official Body.
Leased Facilities shall mean collectively all health care
facilities leased by a Subsidiary of Borrower, as lessee, and Leased Facility
shall mean any of the Leased Facilities, individually.
Leasehold Mortgages shall mean collectively, as of any
date of determination, each Leasehold Mortgage granted by a Subsidiary Lessee in
favor of the Agent for the benefit of the Banks with respect to the Leased
Facility leased by such Subsidiary Lessee, and Leasehold Mortgage shall mean
individually any of the Leasehold Mortgages.
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<PAGE> 18
Lessor shall mean with respect to a Leased Facility, the
person which owns such facility and leases such facility to a Subsidiary Lessee.
Lessor Indebtedness shall mean Indebtedness of a Lessor
either secured by the assets of or related to the Leased Facility owned by such
Lessor or which includes restrictive covenants or other provisions related or
applicable to such Leased Facility.
Lessor Lender shall mean, with respect to any Lessor
Indebtedness, the obligee thereof.
Letter of Credit shall have the meaning assigned to that
term in Section 2.09.
Letter of Credit Borrowing shall mean an extension of
credit resulting from a drawing under any Letter of Credit which shall not have
been reimbursed on the date when made and shall not have been converted into a
Revolving Credit Loan under Section 2.09(d).
Letter of Credit Fee shall have the meaning assigned to
that term in Section 2.09.
Letters of Credit Outstanding shall mean at any time the
sum of (i) the aggregate undrawn face amount of outstanding Letters of Credit
and (ii) the aggregate amount of all unpaid and outstanding Reimbursement
Obligations.
Lien shall mean any mortgage, deed of trust, pledge,
lien, security interest, charge or other encumbrance or security arrangement of
any nature whatsoever, whether voluntarily or involuntarily given, including but
not limited to any conditional sale or title retention arrangement, and any
assignment, deposit arrangement or capitalized lease intended as, or having the
effect of, security and any filed financing statement or other notice of any of
the foregoing (whether or not a lien or other encumbrance is created or exists
at the time of the filing).
Loan Documents shall mean this Agreement, the Notes, the
Guaranty Agreements, the Pledge Agreements, the Mortgages, the Leasehold
Mortgages, the Intercreditor Agreements, the Trustee Agreement, the
Subordination Agreement (Intercompany), and any other instruments, certificates
or documents delivered or contemplated to be delivered hereunder or thereunder
or in connection herewith or therewith, as the same may have previously been or
in the future be supplemented or amended from time to time in accordance
herewith or therewith, and Loan Document shall mean any of the Loan Documents.
Loan Parties shall mean the Borrower and its
Subsidiaries, other than those Subsidiaries which are permitted Excluded
Entities.
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<PAGE> 19
Loan Request shall mean a request for Revolving Credit
Loans made in accordance with Section 2.05 hereof or a request to select,
convert to or renew a Euro-Rate Option in accordance with Section 4.02 hereof.
Loans shall mean collectively and Loan shall mean
separately all Revolving Credit Loans or any Revolving Credit Loan.
Mariner Maryland shall mean Mariner Health Care of
Baltimore, Inc., a corporation organized and existing under the laws of the
Commonwealth of Massachusetts.
Mariner Nashville shall mean Mariner Health Care of
Nashville, Inc., a Delaware corporation, a Subsidiary of the Borrower and the
successor by merger to Convalescent Services Inc., a Georgia corporation.
Material Adverse Change shall mean any set of
circumstances or events which (a) has or could reasonably be expected to have
any material adverse effect whatsoever upon the validity or enforceability of
this Agreement or any other Loan Document, (b) is or could reasonably be
expected to be material and adverse to the business, properties, assets,
financial condition, results of operations or prospects of the Borrower and its
Subsidiaries taken as a whole, (c) impairs materially or could reasonably be
expected to impair materially the ability of the Borrower or any of its
Subsidiaries to duly and punctually pay or perform its Indebtedness, or (d)
impairs materially or could reasonably be expected to impair materially the
ability of the Agent or any of the Banks, to the extent permitted, to enforce
their legal remedies pursuant to this Agreement or any other Loan Document.
Material Subsidiary shall mean any Subsidiary the revenue
or net income of which represented more than five percent (5%) of the Borrower's
consolidated revenues or consolidated net income during the preceding four (4)
fiscal quarters.
Member Interests shall have the meaning assigned to that
term in Section 6.01(c).
month, with respect to a Euro-Rate Interest Period, shall
mean the interval between the days in consecutive calendar months numerically
corresponding to the first day of such Euro-Rate Interest Period. The last day
of a calendar month shall be deemed to be such numerically corresponding day for
such calendar month (i) if there is no such numerically corresponding day in
such calendar month, or (ii) if the first day of such Euro-Rate Interest Period
is the last Business Day of a calendar month.
Mortgages shall mean collectively, as of any date of
determination, the second lien Mortgages granted by a Subsidiary Owner in favor
of the Agent for the benefit of the Banks with respect to the Owned Facility of
such Subsidiary Owner, and Mortgage shall mean individually any of the
Mortgages.
Multiemployer Plan shall mean any employee benefit plan
which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of
ERISA and to which the
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<PAGE> 20
Borrower or any member of the ERISA Group is then making or accruing an
obligation to make contributions or, within the preceding five Plan years, has
made or had an obligation to make such contributions.
Multiple Employer Plan shall mean a Plan which has two or
more contributing sponsors (including the Borrower or any member of the ERISA
Group) at least two of whom are not under common control, as such a plan is
described in Sections 4063 and 4064 of ERISA.
NBG shall mean NationsBank of Georgia, N.A.
NBT shall mean NationsBank of Tennessee, N.A.
Ninth Amendment Effective Date shall mean April 30, 1996,
which shall be the effective date of the Amendment No. 9 to this Agreement.
Non-Disturbance Agreements shall mean collectively, as of
any date of determination, the non-disturbance agreements executed by a Lessor
Lender and the applicable Subsidiary Lessee, each providing in part that the
Lessor Lender shall recognize the rights of the Subsidiary Lessee which is
lessee of the Leased Facility so financed by such Lessor Lender should such
Lessor Lender foreclose upon such Leased Facility.
Notes shall mean collectively the Revolving Credit Notes.
Official Body shall mean any national, federal, state,
local or other government or political subdivision thereof or any agency,
authority, bureau, central bank, commission, department or instrumentality of
any government or political subdivision thereof, or any court, tribunal, grand
jury or arbitrator, in each case whether foreign or domestic.
Owned Facilities shall mean all health care facilities
acquired by a Subsidiary of the Borrower (or the health care facilities which
are owned by a person which is acquired by a Loan Party and such person thereby
becomes a Subsidiary of the Borrower), which facilities (as of the date of
acquisition by a Loan Party or the date the owner of such facility becomes a
Subsidiary of the Borrower) have outstanding Indebtedness payable to a lender,
other than Indebtedness payable to the Banks pursuant to the Loan Documents, and
Owned Facility shall mean any Owned Facilities, individually.
Owned Facility Indebtedness shall mean with respect to an
Owned Facility, the Indebtedness of the Subsidiary Owner thereof payable to a
lender other than the Banks under this Agreement, which Indebtedness is secured
by the assets of such Owned Facility.
Owned Facility Lender shall mean with respect to a
Subsidiary Owner, the obligee of the Owned Facility Indebtedness payable by such
Subsidiary Owner.
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Participation Advance shall mean, with respect to any
Bank, such Bank's payment in respect of its participation in a Letter of Credit
Borrowing according to its Ratable Share pursuant to Section 2.09(g).
Partnership Interest shall have the meaning given to such
term in Section 6.01(c).
Partnership Subsidiaries shall mean collectively the
Subsidiaries of Borrower which are general or limited partnerships and
Partnership Subsidiary shall mean individually any of them.
PBGC shall mean the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA or any successor.
Permitted Acquisition shall mean any merger,
consolidation or acquisition after the Closing Date described in and permitted
under clause (iii) or (iv) of Section 8.02(f).
Permitted Distribution Amount shall mean:
(A) for any Subsidiary (the "Payor Subsidiary"),
other than those Subsidiaries listed in (B) below, the permitted amount of
distributions to be made by the Payor Subsidiary which shall equal the
applicable amount so that the ratio of the following (x) to (y) shall be at
least equal to or greater than 2.0 to 1.0: (x) the sum of (i) net income, plus
(ii) to the extent deducted in determining net income for the applicable period
of determination under the preceding clause (i), interest expense, income tax
expense, depreciation, amortization, operating lease expense, and expense in
respect of capital leases of the Payor Subsidiary, plus (iii) capital
expenditures, all for the Payor Subsidiary, as determined in accordance with
GAAP, for the four fiscal quarters of the Payor Subsidiary immediately preceding
the date of the proposed distribution, to (y) the sum of (i) all payments of
principal and other amounts due in respect of Indebtedness (without limitation,
prepayment fees, penalties or other amounts) of the Payor Subsidiary during the
fiscal quarter when the proposed distribution shall be made and the following
three fiscal quarters, plus (ii) the sum of the amounts in respect of income tax
expense, operating lease expense, expense in respect of capital leases, and
capital expenditures under clauses (x)(ii) and (iii) above for the Payor
Subsidiary for the four fiscal quarters immediately preceding the date of the
proposed distribution, plus (iii) the aggregate amount of the proposed
distribution by the Payor Subsidiary; and
(B) for each of Alimar Physicians resources, LLC.
Mariner Health of Forest Hills, LLC, Mariner Health of Bel Air, LLC, Medwin of
connecticut, LLC, Tampa Health Properties, LTD (Bay-to-Bay), Westbury
Associates, New Hanover/Mariner Health, LLC (Wilmington), and Global Healthcare
Center - Bethesda, LLC, the permitted amount of distributions to be made by each
of them shall equal the amount permitted to be made in accordance with the
distribution provisions of their respective joint venture agreement, limited
liability company agreement, partnership agreement or similar agreement in
effect on the Sixteenth Amendment Effective Date ( a copy of which has been
delivered to the Agent), and no amendment shall be made to such provisions
regarding distributions in such joint venture
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<PAGE> 22
agreements, limited liability company agreements, partnership agreements or
similar agreements following the Sixteenth Amendment Effective Date without the
prior written approval of the Agent unless any distributions by such Subsidiary
are permitted by the provisions of clause (A) above and distributions by such
Subsidiary are otherwise in compliance with Section 8.02(e).
Permitted General Intangibles shall mean licenses,
permits, certificates or Medicare/Medicaid reimbursement contracts.
Permitted Investments shall mean:
(i) direct obligations of the United States of
America or any agency or instrumentality thereof or obligations backed by the
full faith and credit of the United States of America maturing in twelve months
or less from the date of acquisition;
(ii) commercial paper maturing in 180 days or
less rated not lower than A-1 by Standard & Poor's Corporation or P-1 by Moody's
Investors Service on the date of acquisition;
(iii) demand deposits, time deposits or
certificates of deposit maturing within one year in commercial banks whose
obligations are rated A-1, A or the equivalent or better by Standard & Poor's
Corporation or Moody's Investors Service on the date of acquisition;
(iv) publicly traded debt securities or
preferred stocks rated at least A or better by either Standard & Poor's
Corporation or by Moody's Investors Service which in the aggregate do not have,
at any time, a cost basis under GAAP in excess of $1,000,000;
(v) common stocks, or mutual funds which invest
in common stocks provided that (A) such stocks are of corporations organized and
existing under the laws of the United States of America, (B) such stocks are
traded publicly on a national securities exchange or the "over the counter
market", (C) the Borrower or its Subsidiaries do not have a cost basis in excess
of $15,000,000 in the aggregate in such stocks and mutual funds, (D) the
Borrower or its Subsidiaries invest in such stocks or mutual funds using funds
obtained from sources other than, directly or indirectly, proceeds of Loans
hereunder and (E) the cost basis of the Borrower or its Subsidiaries in such
stocks and mutual funds does not exceed at any time the amount of cash invested
in investments described in clauses (i) through (iv) and (vi) of this definition
of Permitted Investments; and
(vi) investments in money market funds rated AA
or AAm-G or higher by Standard & Poor's Corporation (or equivalent rating) whose
net asset value remains a constant $1.00 per share.
Permitted Leased Facility Liens shall mean, with
respect to a Subsidiary Lessee, Liens, meeting all of the criteria specified
below, solely on certain of the Permitted General Intangibles of such Subsidiary
Lessee, granted in favor of the Lessor Lender providing financing to the Lessor
which is the lessor of such Subsidiary Lessee's Leased Facility, and such
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Liens secure the Lessor Indebtedness provided by such Lessor Lender. Such Liens
are permitted under this Agreement and shall be deemed to be "Permitted Leased
Facility Liens" only if the following limitations are satisfied:
(i) Such Liens must be terminated on or before
the earlier of: (i) the maturity of the Lessor Indebtedness which such Liens
secure (without giving effect to any extension of such maturity after the
Sixteenth Amendment Effective Date , unless the extension of such maturity is
otherwise permitted by and is in accordance with this Agreement) or (ii) any
refinancing, replacement or substitution of such Lessor Indebtedness which such
Lien secures;
(ii) Such Subsidiary Lessee shall have granted
to Agent perfected security interests in each of the assets of such Subsidiary
Lessee encumbered by such Liens, and the Agent's security interests shall have
priority over all other Liens on such assets, except that they shall be
subordinate to the Liens in favor of the Lessor Lender unless the Lessor Lender
is listed on Schedule 6.01(aa) hereto and such Schedule states that such Lessor
Lender has refused to consent to the grant to Agent of such second Liens;
(iii) The amount of Lessor Indebtedness secured
by such Liens may not be increased after the date such Subsidiary Lessee becomes
a Subsidiary of the Borrower, and any reductions in the amount of such Lessor
Indebtedness after such date shall be permanent; and
(iv) Any termination by such Lessor Lender of
such Liens in an asset after the date such Subsidiary Lessee becomes a
Subsidiary of the Borrower shall be permanent, and no Loan Party shall
thereafter grant any new Lien on assets of any Loan Party in favor of such
Lessor Lender.
Permitted Liens shall mean:
(i) Liens for taxes, assessments, or similar
charges, incurred in the ordinary course of business and which are not yet due
and payable;
(ii) 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;
(iii) Liens of mechanics, materialmen,
warehousemen, carriers, or other like Liens, securing obligations incurred in
the ordinary course of business that are not yet due and payable and Liens of
landlords securing obligations to pay lease payments that are not yet due and
payable or in default;
(iv) 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
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<PAGE> 24
amount due thereunder, or to secure statutory obligations, or surety, appeal,
indemnity, performance or other similar bonds required in the ordinary course of
business;
(v) Encumbrances consisting of zoning
restrictions, easements, reservations, rights of way or other restrictions on
the use of real property, none of which materially impairs the use of such
property as currently used or the value thereof, and none of which is violated
in any material respect by existing or proposed structures or land use;
(vi) Liens, security interests and mortgages in
favor of the Agent for the benefit of the Banks;
(vii) Liens in respect of capital leases as and
to the extent permitted in Section 8.02(p) and Liens in respect of operating
leases;
(viii) Any Lien existing on the Sixteenth
Amendment Effective Date and described on Schedule 1.01(P) hereto (excluding
Permitted Leased Facility Liens and Permitted Owned Facility Liens which are
addressed in clauses (xi) and (xii) below) provided that the principal amount
secured thereby is not hereafter increased and no additional assets become
subject to such Lien (other than through after-acquired property clauses in
effect on the date hereof);
(ix) Purchase Money Security Interests or other
liens, provided that the aggregate amount of loans and deferred payments secured
by such Purchase Money Security Interests or other liens shall not exceed
$5,000,000 (excluding for the purpose of this computation any loans or deferred
payments secured by Liens described on Schedule 1.01(P) hereto);
(x) The following, (A) if the validity or
amount thereof is being contested in good faith by appropriate and lawful
proceedings diligently conducted so long as levy and execution thereon have been
stayed and continue to be stayed or (B) if a final judgment is entered and such
judgment is discharged within thirty (30) days of entry, and in either case they
do not materially affect the Collateral or, in the aggregate, materially impair
the ability of any Loan Party to perform its obligations hereunder or under the
other Loan Documents:
(1) Claims or Liens for taxes, assessments
or charges due and payable and subject to interest or penalty,
provided that such Loan Party maintains such reserves or other
appropriate provisions as shall be required by GAAP and pays
all such taxes, assessments or charges forthwith upon the
commencement of proceedings to foreclose any such Lien;
(2) Claims, Liens or encumbrances upon, and
defects of title to, real or personal property other than a
material portion of the Collateral, including any attachment
of personal or real property or other legal process prior to
adjudication of a dispute on the merits; or
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<PAGE> 25
(3) Claims or Liens of mechanics,
materialmen, warehousemen, carriers, or other statutory
nonconsensual Liens;
(xi) Permitted Leased Facility Liens existing
as of the Sixteenth Amendment Effective Date which are described on Schedule
6.01(aa) as of such date, and, after the Sixteenth Amendment Effective Date,
subject to the approval of the Required Banks (including without limitation
satisfaction of all applicable conditions set forth on Exhibit 1.01(C)),
additional Permitted Leased Facility Liens;
(xii) Permitted Owned Facility Liens existing
as of the Sixteenth Amendment Effective Date which are described on Schedule
6.01(aa) as of such date, and, after the Sixteenth Amendment Effective Date,
subject to the approval of the Required Banks (including without limitation,
satisfaction of all applicable conditions set forth on Exhibit 1.01(C)),
additional Permitted Owned Facility Liens; and
(xiii) With respect to an Unrestricted
Subsidiary which is an Excluded Entity, Liens securing Indebtedness incurred by
such Unrestricted Subsidiary, provided that the sole assets subject to such Lien
are assets of such Unrestricted Subsidiary or assets of a person other than any
Loan Party or other Unrestricted Subsidiary.
Permitted Owned Facility Liens shall mean, with
respect to a Subsidiary Owner, Liens, meeting all of the criteria specified
below, on real and personal property of such Subsidiary Owner relating to the
Owned Facility of such Subsidiary Owner, granted in favor of the Owned Facility
Lender providing financing with respect to such Owned Facility, and such Liens
secure the Owned Facility Indebtedness provided by such Owned Facility Lender.
Such Liens are permitted under this Agreement and shall be deemed to be
"Permitted Owned Facility Liens" only if the following limitations are
satisfied:
(i) Such Liens must be terminated on or before
the earlier of: (i) the maturity of the Owned Facility Indebtedness which such
Liens secure (without giving effect to any extension of such maturity after the
Sixteenth Amendment Effective Date, unless the extension of such maturity is
otherwise permitted by and is in accordance with this Agreement) or (ii) any
refinancing, replacement or substitution of the Owned Facility Indebtedness
which such Lien secures;
(ii) The Subsidiary Owner shall have granted to
Agent second priority mortgage liens and security interests in each of the
assets which is encumbered by such Liens;
(iii) The amount of Owned Facility Indebtedness
secured by such Liens may not be increased after the earlier of the date such
Owned Facility was acquired by a Loan Party or the person owning such facility
becomes a Subsidiary of the Borrower and any reductions in the amount of such
Owned Facility Indebtedness after such date shall be permanent; and
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<PAGE> 26
(iv) Any termination by an Owned Facility
Lender of such Liens in an asset after the earlier of the date such Owned
Facility was acquired by a Loan Party or the person owning such facility becomes
a Subsidiary of the Borrower shall be permanent and the Subsidiaries of Borrower
may not thereafter grant any new Lien on assets of any Loan Party in favor of
such Owned Facility Lender.
Permitted Redemption Period shall have the meaning as
set forth in Section 8.02(e).
Person shall mean any individual, corporation,
partnership, association, joint-stock company, trust, unincorporated
organization, joint venture, government or political subdivision or agency
thereof, or any other entity.
Pinnacle shall mean Pinnacle Care Corporation, a
corporation organized and existing under the laws of the State of Delaware.
Pinnacle Rehab of Gwinnette shall mean Pinnacle Rehab
of Gwinnette, a general partnership formed and existing under the laws of the
State of Georgia, with Pinnacle Rehabilitation of Georgia, Inc., a Georgia
corporation, Maurice Jove and Howard Krone as its general partners.
Pinnacle's Kansas Joint Venture shall mean Pinnacle's
Kansas Joint Venture, a general partnership formed and existing under the laws
of the State of Kansas, with Pinnacle Rehabilitation of Missouri, Inc., a
Missouri corporation, and Jusker Corporation, a Kansas corporation as its
general partners.
Plan shall mean at any time an employee pension
benefit plan (including a Multiple Employer Plan but not a Multiemployer Plan)
which is covered by Title IV of ERISA or is subject to the minimum funding
standards under Section 412 of the Internal Revenue Code and either (i) is
maintained 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 by any entity which was at such time a member of the ERISA Group for
employees of any entity which was at such time a member of the ERISA Group.
Pledge Agreements shall mean collectively the Pledge
Agreements in substantially the form attached hereto as: (i) Exhibit 1.01(P)(1)
executed and delivered by the Borrower to the Agent for the benefit of the
Banks; (ii) Exhibit 1.01(P)(2) executed and delivered by any Subsidiary which
owns any equity ownership interest in another Corporate Subsidiary to the Agent
for the benefit of the Banks; (iii) Exhibit 1.01(P)(3) executed by any
Subsidiary which owns any interest in a Partnership Subsidiary; and (iv) any
other agreement pledging equity interests of a Subsidiary to the Agent for the
benefit of the Banks, in form and substance satisfactory to the Agent, as any
such Pledge Agreement may hereinafter be modified, amended, restated or replaced
from time to time in form and substance satisfactory to the Agent, and Pledge
Agreement shall mean separately any Pledge Agreement.
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<PAGE> 27
Pledged Collateral shall have the meaning assigned to
that term in the respective Pledge Agreements.
PNC Bank shall mean PNC Bank, National Association, a
national banking association, its successors and assigns.
Potential Default shall mean any event or condition
which with notice, passage of time or a determination by the Agent or the
Required Banks, or any combination of the foregoing, would constitute an Event
of Default.
Principal Office shall mean the main banking office
of the Agent, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707.
Prior Credit Agreement shall mean that certain Credit
Agreement dated as of October 6, 1993 among Borrower, certain of the Banks and
PNC Bank, as Agent.
Prior Security Interest shall mean a valid and
enforceable perfected first priority security interest under the Uniform
Commercial Code in the UCC Collateral which is subject only to Permitted Liens.
Prohibited Transaction shall mean any prohibited
transaction as defined in Section 4975 of the Internal Revenue Code or Section
406 of ERISA for which neither an individual nor a class exemption has been
issued by the United States Department of Labor.
Property shall mean all real property, both owned and
leased, of the Loan Parties.
Purchase Money Security Interest shall mean Liens
upon tangible personal property securing loans to a Loan Party or deferred
payments by a Loan Party for the purchase of such tangible personal property.
Purchase Price shall mean, with respect to any
Permitted Acquisition by the Loan Parties, the sum of (i) cash paid at closing,
(ii) the amount of any deferred payments, which are not contingent on the
financial performance of the business being acquired, (iii) the projected amount
of any deferred payments which are contingent on the financial performance of
the business being acquired following the acquisition, provided that it shall be
assumed for purposes of such projection that the cash flow and other financial
performance of the acquired business in each year after the acquisition date
shall be the same as the financial performance of such business during the
twelve (12) months preceding such date, (iv) the amount of any debt assumed or
guaranteed by any Loan Party, (v) if the Loan Parties are acquiring stock of
another person (whether by purchase, merger or otherwise) the amount of debt of
such person outstanding after the acquisition, plus (vi) the value of any stock,
securities or other consideration given by any of the Loan Parties in connection
therewith. If the consideration to be paid in connection with a Permitted
Acquisition includes deferred payments which are contingent on the financial
performance of the acquired business after the acquisition, the Loan Parties
shall compare the amount of deferred payments which the Loan Parties actually
pay (or which become
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<PAGE> 28
ascertainable if the Loan Parties can ascertain the amount of any deferred
payments before paying them) with the amount which the Loan Parties projected
they would pay pursuant to clause (iii) in the preceding sentence. The Purchase
Price in connection with such acquisition shall be deemed to increase by the
amount of such excess for purposes of determining the aggregate Purchase Price
paid by the Loan Parties in connection with Permitted Acquisitions pursuant to
Sections 8.02(f)(iii)(v) and 8.02(f)(iv)(x).
Purchasing Bank shall mean a Bank which becomes a
party to this Agreement by executing an Assignment and Assumption Agreement.
Ratable Share shall mean the proportion that a Bank's
Revolving Credit Commitment bears to the Revolving Credit Commitments of all of
the Banks, respectively.
Regulated Substances shall mean any substance,
including without limitation any solid, liquid, gaseous, thermal or thoriated
material, refuse, garbage, wastes, chemicals, petroleum products or by-products,
dust, scrap, PCB's, heavy metals, any substances defined as "hazardous
substances," "pollutants," "pollution," "contaminant," "hazardous or toxic
substances," "toxic wastes," "regulated substances," "industrial waste,"
"residual waste," "solid wastes," "municipal wastes," "infectious waste,"
"chemotherapeutic waste," "medical waste" or any related materials or substances
as now or hereafter defined pursuant to any Environmental Laws, ordinances,
rules or directives of any Official Body, the generation, manufacture,
processing, distribution, treatment, storage, disposal, transport, recycling,
reclamation, use, reuse or other management or mismanagement of which is
regulated by the Environmental Laws.
Regulation U shall mean Regulation U, T, G or X as
promulgated by the Board of Governors of the Federal Reserve System, as amended
from time to time.
Reimbursement Obligations shall have the meaning
assigned to such term in Section 2.09(d).
Reportable Event means a reportable event described
in Section 4043 of ERISA and regulations thereunder with respect to a Plan or
Multiemployer Plan.
Required Banks shall mean: (i) if there are no Loans
outstanding, Banks whose Commitments aggregate at least 51% of the Commitments
of all of the Banks, or (ii) if there are Loans outstanding, Banks whose Loans
outstanding aggregate at least 51% of the total principal amount of the Loans
outstanding hereunder.
Restricted Indebtedness shall mean with respect to
the Excluded Entities, Indebtedness secured by any Liens, other than
Indebtedness not to exceed $250,000 in the aggregate for all Excluded Entities
secured by Purchase Money Security Interests.
Restricted Investments shall mean collectively the
following with respect to the Excluded Entities: (i) investments or
contributions by any of the Loan Parties directly or indirectly in or to the
capital of or other payments to (except in connection with transactions for fair
value in the ordinary course of business) an Excluded Entity, (ii) loans by any
of the Loan
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<PAGE> 29
Parties directly or indirectly to an Excluded Entity, (iii) guaranties by any of
the Loan Parties directly or indirectly of the obligations of an Excluded
Entity, or (iv) other obligations, contingent or otherwise, of any of the Loan
Parties to or for the benefit of an Excluded Entity. If the nature of a
Restricted Investment is tangible property then the amount of such Restricted
Investment shall be determined by valuing such property at fair value in
accordance with the past practice of the Loan Parties and such fair values shall
be satisfactory to the Agent, in its sole discretion.
Restricted Subsidiaries shall mean all Subsidiaries
of the Borrower other than the Unrestricted Subsidiaries of the Borrower which
as of the date of determination are Excluded Entities.
Revolving Credit Base Rate Option shall have the
meaning assigned to that term in Section 4.01(a)(i).
Revolving Credit Base Rate Portion shall mean the
portion of the Revolving Credit Loans bearing interest at any time under the
Revolving Credit Base Rate Option.
Revolving Credit Commitment shall mean as to any Bank
at any time, the amount initially set forth opposite its name on Schedule
1.01(R)(2) hereto in the column labeled "Amount of Commitment for Revolving
Credit Loans," and thereafter on Schedule I to the most recent Assignment and
Assumption Agreement, as such amount shall be reduced from time to time pursuant
to Sections 2.01 and 2.10 hereof, and Revolving Credit Commitments shall mean
the aggregate Revolving Credit Commitments of all of the Banks.
Revolving Credit Euro-Rate Option shall have the
meaning assigned to that term in Section 4.01(a)(ii).
Revolving Credit Euro-Rate Portion shall mean the
portion of the Revolving Credit Loans bearing interest at any time under the
Revolving Credit Euro-Rate Option.
Revolving Credit Loan Request shall have the meaning
set forth in Section 2.05.
Revolving Credit Loans shall mean collectively and
Revolving Credit Loan shall mean separately all Revolving Credit Loans or any
Revolving Credit Loan made by the Banks or one of the Banks to the Borrower
pursuant to Section 2.01 hereof.
Revolving Credit Notes shall mean collectively all
the Revolving Credit Notes of the Borrower in the form of Exhibit 1.01(R) hereto
evidencing the Revolving Credit Loans together with all amendments, extensions,
renewals, replacements, refinancings or refundings thereof in whole or in part
and Revolving Credit Note shall mean separately any Revolving Credit Note.
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<PAGE> 30
Revolving Facility Usage shall mean at any time the
sum of the Revolving Credit Loans outstanding and the Letters of Credit
Outstanding.
Sixteenth Amendment Effective Date shall mean January
2, 1998.
Solvent shall mean, with respect to any person on a
particular date, that on such date (i) the fair value of the property of such
person is greater than the total amount of liabilities, including, without
limitation, contingent liabilities, of such person, (ii) the present fair
saleable value of the assets of such person is not less than the amount that
will be required to pay the probable liability of such person on its debts as
they become absolute and matured, (iii) such person is able to realize upon its
assets and pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (iv) such person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such person's ability to pay as such debts and liabilities
mature, and (v) such person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such person's
property would constitute unreasonably small capital after giving due
consideration to the prevailing practice in the industry in which such person is
engaged. In computing the amount of contingent liabilities at any time, it is
intended that such liabilities will be computed at the amount which, in light of
all the facts and circumstances existing at such time, represents the amount
that can reasonably be expected to become an actual or matured liability.
Subordinated Indebtedness Incurrence Date shall mean
March 28, 1996, the date of issuance by the Borrower of the Subordinated Notes
pursuant to and in accordance with the Indenture.
Subordinated Notes shall mean the $150 million in
original principal amount of Subordinated Notes due 2006 issued by the Borrower
pursuant to the Indenture. It is acknowledged that prior to the Exchange Offer,
the Subordinated Notes shall consist of the Series A Securities, and following
the Exchange Offer, the Subordinated Notes shall consist of the Series B
Securities and any Series A Securities which are not exchanged in the Exchange
Offer, as such terms are defined in the Indenture.
Subordination Agreement (Intercompany) shall mean
that certain Subordination Agreement (Intercompany) in the form of Exhibit
1.01(S) hereto executed and delivered by each Loan Party to the Agent for the
benefit of the Banks.
Subsidiary of any person at any time shall mean (i)
any corporation, limited liability company or trust of which more than 50% (by
number of shares or number of votes) of the outstanding capital stock, member
interests or shares of beneficial interest normally entitled to vote for the
election of one or more directors or trustees (regardless of any contingency
which does or may suspend or dilute the voting rights) is at such time owned
directly or indirectly by such Person or one or more of such Person's
Subsidiaries, or any partnership of which such Person is a general partner or of
which more than 50% of the general or voting partnership interests is at the
time directly or indirectly owned by such Person or one or more of such Person's
Subsidiaries, and (ii) any corporation, trust, limited liability company,
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<PAGE> 31
partnership or other entity which is controlled or capable of being controlled
by such Person or one or more of such Person's Subsidiaries.
Subsidiary Lessee shall mean each Subsidiary of
Borrower which is the lessee of a Leased Facility.
Subsidiary Owner shall mean, with respect to an Owned
Facility, the Subsidiary of Borrower which is the owner thereof.
Total Indebtedness shall mean as of any date of
determination, without duplication, the total Indebtedness of the Borrower and
its Subsidiaries.
Transferor Bank shall mean the selling Bank pursuant
to an Assignment and Assumption Agreement.
Tri-State shall mean Tri-State Health Care, Inc., a
West Virginia corporation, which is a Subsidiary of Pinnacle and the sole
general partner of Seventeenth Street Partnership.
Trustee Agreement shall mean, as of any date of
determination, collectively (i) that certain Paying Agency Agreement executed by
Mariner Nashville, PNC Bank and certain of the Lessors listed on Schedule
6.01(aa), in the form of Exhibit 1.01(T) providing for the payment by Mariner
Nashville to PNC Bank, as trustee for Mariner Nashville and such Lessors, of
monies due to such Lessors under the leases between such Lessors and Mariner
Nashville, and the subsequent payment of such monies by PNC Bank to the Lessors;
and (ii) in accordance with the requirements of this Agreement, each other
similar agreement, in form and substance satisfactory to the Agent relating to
certain Subsidiaries of the Borrower and certain Lessors.
UCC Collateral shall mean the Pledged Collateral and
that portion of the Collateral under the Mortgages and the Leasehold Mortgages
which consists of personal property in which a security interest may be granted
under the Uniform Commercial Code.
Uniform Commercial Code shall have the meaning
assigned to that term in Section 6.01(p).
Unrestricted Subsidiary of any person at any time
shall mean any corporation or limited liability company of which more than 50%
but less than 80% (by number of shares or number of votes) of the outstanding
capital stock or member interests normally entitled to vote for the election of
one or more directors (regardless of any contingency which does or may suspend
or dilute the voting rights) is at such time owned directly or indirectly by
such Person or one or more of such Person's Subsidiaries, or any partnership of
which such Person is a general partner or of which more than 50% but less than
80% of the general or voting partnership interests is at the time directly or
indirectly owned by such Person or one or more of such Person's Subsidiaries.
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<PAGE> 32
1.02 Construction. Unless the context of this Agreement
otherwise clearly requires, references to the plural include the singular, the
singular the plural and the part the whole, "or" has the inclusive meaning
represented by the phrase "and/or," and "including" has the meaning represented
by the phrase "including without limitation." References in this Agreement to
"determination" of or by the Agent or the Banks shall be deemed to include good
faith calculations by the Agent or the Banks (in the case of quantitative
determinations) and good faith beliefs by the Agent or the Banks (in the case of
qualitative determinations). Whenever the Agent or the Banks are granted the
right herein to act in its or their sole discretion or to grant or withhold
consent such right shall be exercised in good faith. The words "hereof,"
"herein," "hereunder" and similar terms in this Agreement refer to this
Agreement as a whole and not to any particular provision of this Agreement. The
section and other headings contained in this Agreement and the Table of Contents
preceding this Agreement are for reference purposes only and shall not control
or affect the construction of this Agreement or the interpretation thereof in
any respect. Section, subsection, schedule and exhibit references are to this
Agreement unless otherwise specified.
1.03 Accounting Principles. Except as otherwise provided in
this Agreement, all computations and determinations as to accounting or
financial matters and all financial statements to be delivered pursuant to this
Agreement shall be made and prepared in accordance with GAAP (including
principles of consolidation where appropriate), and all accounting or financial
terms shall have the meanings ascribed to such terms by GAAP. In the event of:
(i) any dissolution or liquidation of any Subsidiary pursuant to Section 8.02(f)
of this Agreement, (ii) any consolidation or merger of any Subsidiary with or
into any person (other than the Borrower or another Subsidiary) pursuant to
Section 8.02(f) of this Agreement, or (iii) the sale, transfer, lease or
disposition of assets of the Borrower or any Subsidiary permitted pursuant to
Section 8.02(g)(v) of this Agreement, then, in the case of any of the foregoing
clauses (i), (ii) or (iii), any financial covenant to be calculated hereunder
(including, without limitation, those set forth in Sections 2.01(c), 4.01, and
8.02(q) through 8.02(u), inclusive) shall be calculated for the period during
which such sale, transfer, lease or other disposition occurs, excluding all
financial items (for example and without limitation, all cash flow, revenues,
expenses, and income) attributable to the assets sold, transferred, leased or
otherwise disposed of.
ARTICLE II
REVOLVING CREDIT FACILITY
2.01 Revolving Credit Commitments; Limitation on
Borrowings.
(a) Revolving Credit Commitments. Subject to the
terms and conditions hereof and relying upon the representations and warranties
herein set forth, each Bank severally agrees to make revolving credit loans (the
"Revolving Credit Loans") to the Borrower at any time and from time to time on
or after the date hereof to, but not including, the Expiration Date in an
aggregate principal amount not to exceed at any one time such Bank's Revolving
Credit Commitment minus such Bank's Ratable Share of the Letters of Credit
Outstanding. Within such limits of time and amount and subject to the other
provisions of this Agreement, the Borrower may borrow, repay and reborrow
pursuant to this Section 2.01. In no event shall the
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<PAGE> 33
aggregate of outstanding Revolving Credit Loans and Letters of Credit
Outstanding as of any date exceed the Revolving Credit Commitments as of such
date, and the entire outstanding principal amount of the Revolving Credit Loans
shall be due and payable on the Expiration Date.
(b) Extension by Banks of the Expiration Date. Upon
or promptly after delivery by the Borrower of the annual financial statements to
be provided under Section 8.03(c) for the fiscal year ending December 31, 1998
or any subsequent fiscal year, the Borrower may request a one-year extension of
the Expiration Date by written notice to the Banks, and the Banks agree to
respond to the Borrower's request for an extension by the later of sixty (60)
days following receipt of the request or May 31 of such year; provided, however,
that all the Banks must consent to any extension of the Expiration Date and the
failure of the Banks to respond within such time period shall not in any manner
constitute an extension of the Expiration Date.
(c) Limitation on Borrowings. Notwithstanding the
provisions of Sections 2.01(a) and 2.01(b) of this Agreement, the outstanding
principal amount of Revolving Credit Loans to the Borrower shall not exceed at
any time an amount such that after giving effect to such borrowings, the ratio
of (i) Total Indebtedness to (ii) Consolidated Cash Flow from Operations
exceeds: (A) 5.25 to 1.0 through and including September 30, 1998; (B) 5.00 to
1.0 from October 1, 1998 through and including September 30, 1999; (C) 4.75 to
1.0 from October 1, 1999 through and including September 30, 2000; and (D) 4.5
to 1.0 from October 1, 2000 and thereafter.
For purposes of such ratio, the amount determined
under clause (i) shall be as of the date of determination and the amount
determined under clause (ii) shall be for the twelve-month period ending on the
last day of the month which precedes such date of determination.
Notwithstanding the provisions of this subsection
(c), at no time shall the outstanding principal amount of proceeds of Revolving
Credit Loans made to the Borrower which are used by the Borrower or any
Subsidiary of the Borrower to, directly or indirectly, make an investment in or
loan to Ansonia, exceed Two Million Dollars ($2,000,000). Notwithstanding the
provisions of this subsection (c), at no time shall proceeds of Revolving Credit
Loans be used by the Borrower or any Subsidiary of the Borrower to, directly or
indirectly, make an investment in or loan to Pinnacle Rehab of Gwinnette or
Pinancle's Kansas Joint Venture.
2.02 Nature of Banks' Obligations With Respect to Revolving
Credit Loans. Each Bank shall be obligated to participate in each request for
Revolving Credit Loans pursuant to Section 2.05 hereof in accordance with its
Ratable Share. The aggregate of each Bank's Revolving Credit Loans outstanding
hereunder to the Borrower at any time shall never exceed its Revolving Credit
Commitment minus its Ratable Share of Letters of Credit Outstanding. The
obligations of each Bank hereunder are several. The failure of any Bank to
perform its obligations hereunder shall not affect the obligations of the
Borrower to any other party nor shall any other party be liable for the failure
of such Bank to perform its obligations hereunder. The
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<PAGE> 34
Banks shall have no obligation to make Revolving Credit Loans hereunder on or
after the Expiration Date.
2.03 Commitment Fees. Accruing from January 1, 1998 until the
Expiration Date, the Borrower agrees to pay to the Agent for the account of each
Bank, as consideration for such Bank's Revolving Credit Commitment hereunder, a
commitment fee (the "Commitment Fee") equal to the applicable percentage set
forth below based on the ratio of Total Indebtedness to Consolidated Cash Flow
from Operations.
<TABLE>
<CAPTION>
Ratio of Total Indebtedness
to Consolidated Commitment Fee
Cash Flow From Operations (per annum)
------------------------- -----------
<S> <C>
Greater than 5.0 to 1.0 .350%
Greater than 4.5 to 1.0 but .300%
less than or equal to 5.0 to 1.0
Greater than 4.0 to 1.0 but .275%
less than or equal to 4.5 to 1.0
Greater than 3.5 to 1.0 but .250%
less than or equal to 4.0 to 1.0
Greater than 3.0 to 1.0 .225%
but less than or equal to 3.5 to 1.0
Greater than 2.5 to 1.0 .200%
but less than or equal to 3.0 to 1.0
Less than or equal to 2.5 to 1.0 .150%
</TABLE>
Such ratio shall be computed on the date of each Acquisition Requiring
Certification as more fully set forth in the third sentence of Section
8.01(m)(i) or the second sentence of Section 8.01(m)(ii), as applicable, and any
adjustment to the Commitment Fee attributable to such computation shall be
effective on the date of such Acquisition Requiring Certification. If Borrower
does not make any Acquisition Requiring Certification during any fiscal quarter,
(1) such ratio shall also be computed as of the end of such fiscal quarter, with
Consolidated Cash Flow from Operations computed for the four fiscal quarters
then ended and Total Indebtedness computed as of the end of such fiscal quarter,
and (2) any increase in the Commitment Fee attributable to a change in such
ratio shall be effective as of the Delivery Date for the Borrower's consolidated
financial statements for such quarter and (3) any decrease of the Commitment
Fees attributable to a change in such ratio shall be effective as of the later
of the Delivery Date for such financial statements and the date on which such
financial statements are actually delivered to the Agent and the Banks.
Commitment Fees shall be computed on the basis of a year of 365 or 366 days, as
the case may be, and actual days elapsed on the average daily unborrowed amount
of such Bank's Revolving Credit Commitment (less its Ratable Share of the
Letters of
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<PAGE> 35
Credit Outstanding) as the same may be constituted from time to time. All
Commitment Fees shall be payable in arrears on the first Business Day of each
April, July, October and January after the date hereof commencing on April 1,
1998 and on the Expiration Date or upon acceleration of maturity of the Notes.
2.04 [Intentionally Omitted].
2.05 Revolving Credit Loan Requests. Except as otherwise
provided herein, the Borrower may from time to time prior to the Expiration Date
request the Banks to make Revolving Credit Loans, or renew or convert the
Interest Rate Option applicable to existing Revolving Credit Loans, by the
delivery to the Agent, not later than 10:00 A.M. Pittsburgh time (i) three (3)
Business Days prior to the proposed Borrowing Date with respect to the making of
Revolving Credit Loans to which the Revolving Euro-Rate Option applies or the
conversion to or the renewal of the Euro-Rate Option for any Revolving Credit
Loans; and (ii) on the Business Day which is the proposed Borrowing Date with
respect to the making of a Revolving Credit Loan to which the Revolving Credit
Base Rate Option applies or the last day of the preceding Euro-Rate Interest
Period with respect to the conversion to the Revolving Credit Base Rate Option
for any Revolving Credit Loan, of a duly completed request therefor
substantially in the form of Exhibit 2.05 hereto or a request by telephone
immediately confirmed in writing by letter, facsimile or telex in such form
(each, a "Revolving Credit Loan Request"), it being understood that the Agent
may rely in good faith on the authority of any person making such a telephonic
request and purporting to be an Authorized Officer. Each Revolving Credit Loan
Request shall be irrevocable and shall (i) specify the proposed Borrowing Date;
(ii) specify the aggregate amount of the proposed Revolving Credit Loans
comprising the Borrowing Tranche, which shall be in integral multiples of
$500,000 and not less than $5,000,000 for Revolving Credit Loans to which the
Revolving Credit Euro-Rate Option applies and not less than the lesser of
$500,000 or the maximum amount available for Revolving Credit Loans to which the
Revolving Credit Base Rate Option applies; (iii) specify whether the Revolving
Euro-Rate Option or Base Rate Option shall apply to the proposed Revolving
Credit Loans comprising the Borrowing Tranche; (iv) specify in the case of
Revolving Credit Loans to which the Revolving Euro-Rate Option applies, an
appropriate Euro-Rate Interest Period for the proposed Revolving Credit Loans
comprising the Borrowing Tranche; (v) specify the use by the Borrower of the
Loan proceeds; (vi) certify that no Event of Default or Potential Default has
occurred and is continuing after giving effect to the proposed Revolving Credit
Loan and without limiting the generality of this clause (vi), certify compliance
with Section 2.01(c) of this Agreement; and (vii) in the event that the proceeds
of the proposed Revolving Credit Loan will be used to acquire a new health care
facility or other business, permitted to be acquired pursuant to this Agreement,
certify, in detail satisfactory to the Agent, a calculation of the ratio
specified in Section 2.01(c).
2.06 Making Revolving Credit Loans. The Agent shall, promptly
after receipt by it of a Loan Request pursuant to Section 2.05, notify the Banks
of its receipt of such Loan Request specifying: (i) the proposed Borrowing Date
and the time and method of disbursement of such Revolving Credit Loan; (ii) the
amount and type of such Revolving Credit Loan and the applicable Euro-Rate
Interest Period (if any); and (iii) the apportionment among the Banks of the
Revolving Credit Loans as determined by the Agent in accordance with Section
2.02 hereof.
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<PAGE> 36
Each Bank shall remit the principal amount of each Revolving Credit Loan to the
Agent such that the Agent is able to, and the Agent shall, to the extent the
Banks have made funds available to it for such purpose, fund such Revolving
Credit Loan to the Borrower in U.S. Dollars and immediately available funds at
the Principal Office prior to 2:00 P.M. Pittsburgh time on the Borrowing Date,
provided that if any Bank fails to remit such funds to the Agent in a timely
manner the Agent may elect in its sole discretion to fund with its own funds the
Revolving Credit Loan of such Bank on the Borrowing Date.
2.07 Revolving Credit Note. The obligation of the Borrower to
repay the aggregate unpaid principal amount of the Revolving Credit Loans made
to it by each Bank, together with interest thereon, shall be evidenced by a
promissory note of the Borrower dated the Closing Date in substantially the form
attached hereto as Exhibit 1.01(R) payable to the order of each Bank in a face
amount equal to the Revolving Credit Commitment of such Bank.
2.08 Use of Proceeds. The proceeds of the Revolving Credit
Loans shall be used for (a) the acquisition and development of health care
related businesses and facilities and (b) general corporate purposes, which,
among other things, may include working capital or intercompany loans to a
Subsidiary of the Borrower provided the Borrower and such Subsidiary comply with
Section 8.01(1) hereof.
2.09 Letter of Credit Subfacility.
(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 Agent a
completed application and agreement for letters of credit in such form as the
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 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 Agent will issue a Letter of Credit provided
that each Letter of Credit shall (A) have a maximum maturity of twelve (12)
months from the date of issuance, and (B) in no event expire later than ten (10)
Business Days prior to the Expiration Date and providing that in no event shall
(i) the Letters of Credit Outstanding exceed, at any one time, $30,000,000 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 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. (Schedule 2.09(a) also lists all amounts of Loans, interest and expenses
outstanding under the Prior Credit Agreement.)
(b) The Borrower shall pay to the Agent for the ratable
account of the Banks a fee (the "Letter of Credit Fee") equal to the applicable
interest rate per annum then in effect for Revolving Credit Loans which are
subject to the Euro-Rate Option less the Euro-Rate, which fee shall be computed
on the daily average Letters of Credit Outstanding (computed on the
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<PAGE> 37
basis of a year of 360 days and actual days elapsed) and shall be payable
quarterly in arrears commencing with the first Business Day of each April, July,
October and January following issuance of the first Letter of Credit and on the
expiration date for the last Letter of Credit then outstanding, with such fees
accruing through and including the expiration date for each Letter of Credit.
The Borrower shall pay to the Agent for its own account a fronting fee equal to
1/8% per annum, which fee shall be computed on the daily average Letters of
Credit Outstanding (computed on the basis of a year of 360 days and actual days
elapsed) and shall be payable quarterly in arrears commencing with the first
business day of each October, January, April and July following issuance of the
first Letter of Credit and on the expiration date for the last Letter of Credit
then outstanding. The Borrower shall also pay to the Agent the Agent's then in
effect customary fees and administrative expenses payable with respect to
Letters of Credit as the Agent may generally charge or incur from time to time
in connection with the issuance, maintenance, modification (if any), assignment
or transfer (if any), negotiation and administration of Letters of Credit.
(c) Immediately upon the issuance of each Letter of
Credit, each Bank shall be deemed to, and hereby irrevocably and unconditionally
agrees to, purchase from the Agent a participation in such Letter of Credit and
each drawing thereunder in an amount equal to such Bank's Ratable Share of the
maximum amount available to be drawn under such Letter of Credit and the amount
of such drawing, respectively.
(d) In the event of any request for a drawing under a
Letter of Credit by the beneficiary or transferee thereof, the Agent will
promptly notify the Borrower. Provided that it shall have received such notice,
the Borrower shall reimburse (such obligation to reimburse the Agent shall
sometimes be referred to as a "Reimbursement Obligation") the Agent prior to
11:00 a.m., Pittsburgh time on each date that an amount is paid by the Agent
under any Letter of Credit (each such date, a "Drawing Date") in an amount equal
to the amount so paid by the Agent. In the event the Borrower fails to reimburse
the 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 Agent will promptly notify each
Bank thereof, and 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. Any notice given by the Agent pursuant to this Section 2.09(d) may
be oral if immediately confirmed in writing; provided that the lack of such an
immediate confirmation shall not affect the conclusiveness or binding effect of
such notice.
(e) Each Bank shall upon any notice pursuant to Section
2.09(d) make available to the Agent an amount in immediately available funds
equal to its Ratable Share of the amount of the drawing, 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. If any Bank so notified fails to make available to the Agent for the
account of the Agent the amount of such Bank's Ratable Share of such amount by
no later than 2:00 p.m., Pittsburgh time on the Drawing Date, then interest
shall accrue on such Bank's obligation to
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<PAGE> 38
make such payment, from the Drawing Date to the date on which such Bank makes
such payment at a rate per annum equal to the Federal Funds Effective Rate. The
Agent will promptly give notice of the occurrence of the Drawing Date, but
failure of the Agent to give any such notice on the Drawing Date or in
sufficient time to enable any Bank to effect such payment on such date shall not
relieve such Bank from its obligation under this Section 2.09(e).
(f) 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 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, the
Borrower shall be deemed to have incurred from the Agent a Letter of Credit
Borrowing in the amount of such drawing. Such Letter of Credit Borrowing shall
be due and payable on demand (together with interest) and shall bear interest at
the rate per annum applicable to the Revolving Credit Loans under the Base Rate
Option. Each Bank's payment to the Agent pursuant to Section 2.09(e) shall be
deemed to be a payment in respect of its participation in such Letter of Credit
Borrowing and shall constitute a Participation Advance from such Bank in
satisfaction of its participation obligation under this Section 2.09.
(g)(i) Upon (and only upon) receipt by the Agent for its
account of immediately available funds from the Borrower (i) in reimbursement of
any payment made by the Agent under the Letter of Credit with respect to which
any Bank has made a Participation Advance to the Agent, or (ii) in payment of
interest on such a payment made by the Agent under such a Letter of Credit, the
Agent will pay to each Bank, in the same funds as those received by the Agent,
the amount of such Bank's Ratable Share of such funds, except the Agent shall
retain the amount of the Ratable Share of such funds of any Bank that did not
make a Participation Advance in respect of such payment by Agent.
(g)(ii) If the Agent is required at any time to return to
any Loan Party, or to a trustee, receiver, liquidator, custodian, or any
official in any Insolvency Proceeding, any portion of the payments made by any
Loan Party to the Agent pursuant to Section 2.09(g)(i) in reimbursement of a
payment made under the Letter of Credit or interest or fee thereon, each Bank
shall, on demand of the Agent, forthwith return to the Agent the amount of its
Ratable Share of any amounts so returned by the Agent plus interest thereon from
the date such demand is made to the date such amounts are returned by such Bank
to the Agent, at a rate per annum equal to the Federal Funds Effective Rate in
effect from time to time.
(h) Each Loan Party agrees to be bound by the terms of
the Agent's application and agreement for letters of credit and the Agent's
written regulations and customary practices relating to letters of credit,
though such interpretation may be different from the such Loan Party's own. In
the event of a conflict between such application or agreement and this
Agreement, this Agreement shall govern. It is understood and agreed that, except
in the case of gross negligence or willful misconduct, the Agent shall not be
liable for any error, negligence and/or mistakes, whether of omission or
commission, in following any Loan Party's instructions or those contained in the
Letters of Credit or any modifications, amendments or supplements thereto.
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<PAGE> 39
(i) In determining whether to honor any request for
drawing under any Letter of Credit by the beneficiary thereof, the Agent 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.
(j) Each Bank's obligation in accordance with this
Agreement to make the Revolving Credit Loans or Participation Advances, as
contemplated by Section 2.09, as a result of a drawing under a Letter of Credit,
and the Obligations of the Borrower to reimburse the Agent 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 2.09 under all
circumstances, including the following circumstances:
(i) any set-off, counterclaim, recoupment, defense or
other right which such Bank may have against the Agent, the Borrower or any
other Person for any reason whatsoever;
(ii) the failure of any Loan Party or any other
Person to comply, in connection with a Letter of Credit Borrowing, with the
conditions set forth in Section 2.01 [Revolving Credit Commitments], 2.05
[Revolving Credit Loan Requests], 2.06 [Making Revolving Credit Loans] or 7.1
[Each Additional Loan] or as otherwise set forth in this Agreement for the
making of a Revolving Credit Loan, it being acknowledged that such conditions
are not required for the making of a Letter of Credit Borrowing and the
obligation of the Banks to make Participation Advances under Section 2.09;
(iii) any lack of validity or enforceability of any
Letter of Credit;
(iv) the existence of any claim, set-off, defense or
other right which any Loan Party or any Bank 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 Agent or any Bank 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 Loan Party or Subsidiaries of a Loan Party and the beneficiary for
which any Letter of Credit was procured);
(v) 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 Agent has been notified thereof;
(vi) payment by the Agent 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;
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<PAGE> 40
(vii) any adverse change in the business, operations,
properties, assets, condition (financial or otherwise) or prospects of any Loan
Party or Subsidiaries of a Loan Party;
(viii) any breach of this Agreement or any other Loan
Document by any party thereto;
(ix) the occurrence or continuance of an Insolvency
Proceeding with respect to any Loan Party;
(x) the fact that an Event of Default or a Potential
Default shall have occurred and be continuing;
(xi) the fact that the Expiration Date shall have
passed or this Agreement or the Commitments hereunder shall have been
terminated; and
(xii) any other circumstance or happening whatsoever,
whether or not similar to any of the foregoing.
(k) In addition to amounts payable as provided in Section
10.05 [Reimbursement of Agent by Borrower, Etc.], the Borrower hereby agrees to
protect, indemnify, pay and save harmless the Agent from and against any and all
claims, demands, liabilities, damages, losses, costs, charges and expenses
(including reasonable fees, expenses and disbursements of counsel and allocated
costs of internal counsel) which the Agent may incur or be subject to as a
consequence, direct or indirect, of (i) the issuance of any Letter of Credit,
other than as a result of (A) the gross negligence or willful misconduct of the
Agent as determined by a final judgment of a court of competent jurisdiction or
(B) subject to the following clause (ii), the wrongful dishonor by the Agent of
a proper demand for payment made under any Letter of Credit, or (ii) the failure
of the Agent to honor a drawing under any such Letter of Credit as a result of
any act or omission, whether rightful or wrongful, of any present or future de
jure or de facto government or governmental authority (all such acts or
omissions herein called "Governmental Acts").
(l) As between any Loan Party and the Agent, such Loan Party
assumes all risks of the acts and omissions of, or misuse of the Letters of
Credit by, the respective beneficiaries of such Letters of Credit. In
furtherance and not in limitation of the foregoing, the Agent shall not be
responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or
legal effect of any document submitted by any party in connection with the
application for an issuance of any such Letter of Credit, even if it should in
fact prove to be in any or all respects invalid, insufficient, inaccurate,
fraudulent or forged (even if the Agent shall have been notified thereof); (ii)
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; (iii) 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 Loan Party against any
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<PAGE> 41
beneficiary of such Letter of Credit, or any such transferee, or any dispute
between or among any Loan Party and any beneficiary of any Letter of Credit or
any such transferee; (iv) errors, omissions, interruptions or delays in
transmission or delivery of any messages, by mail, cable, telegraph, telex or
otherwise, whether or not they be in cipher; (v) errors in interpretation of
technical terms; (vi) any loss or delay in the transmission or otherwise of any
document required in order to make a drawing under any such Letter of Credit or
of the proceeds thereof; (vii) the misapplication by the beneficiary of any such
Letter of Credit of the proceeds of any drawing under such Letter of Credit; or
(viii) any consequences arising from causes beyond the control of the Agent,
including any Governmental Acts, and none of the above shall affect or impair,
or prevent the vesting of, any of the Agent's rights or powers hereunder.
Nothing in the preceding sentence shall relieve the Agent from liability for the
Agent's gross negligence or willful misconduct in connection with actions or
omissions described in such clauses(i) through (viii) of such sentence.
In furtherance and extension and not in limitation of
the specific provisions set forth above, any action taken or omitted by the
Agent under or in connection with the Letters of Credit issued by it or any
documents and certificates delivered thereunder, if taken or omitted in good
faith, shall not put the Agent under any resulting liability to the Borrower or
any Bank.
2.10 Voluntary Reduction of Revolving Credit Commitments. The
Borrower shall have the right at any time and from time to time upon not less
than three (3) Business Days' prior written notice (which notice shall be
irrevocable) to the Agent to terminate or to permanently and ratably reduce, in
an aggregate amount of not less than $1,000,000 or an integral multiple thereof,
the respective Revolving Credit Commitments without penalty or premium, except
as hereinafter set forth. The Agent shall promptly advise each Bank of the date
and amount of each such reduction. After each such reduction, the Commitment Fee
shall be calculated upon the unused portion of the Revolving Credit Commitments
as so reduced and the amount of reduction may not be reinstated.
ARTICLE III
COLLATERAL
3.01 Collateral. The Borrower shall execute and deliver the
Pledge Agreement in the form of Exhibit 1.01(P)(1) pledging all of the stock,
partnership interests or other ownership interests owned by the Borrower in each
existing or hereafter formed or acquired Subsidiary and in each existing or
hereafter formed or acquired Excluded Entity. Each of the Borrower's Restricted
Subsidiaries (whether now existing or hereafter formed or acquired, including
without limitation any Excluded Entity which becomes a Restricted Subsidiary,
upon so becoming a Restricted Subsidiary) shall execute and deliver a Guaranty
Agreement in the form of Exhibit 1.01(G). Each of the Borrower's Subsidiaries
(whether now owned or hereafter acquired) owning stock, partnership interests or
other ownership interests of each existing or hereafter formed or acquired
Subsidiary or each existing or hereafter formed or acquired
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<PAGE> 42
Excluded Entity shall execute a Pledge Agreement in the form of Exhibit
1.01(P)(2) or (3), as the case may be or other Pledge Agreement in form and
substance satisfactory to the Agent.
ARTICLE IV
INTEREST RATES
4.01 Interest Rate Options. The Borrower shall pay interest in
respect of the outstanding unpaid principal amount of the Loans as selected by
it from the Base Rate Option or Euro-Rate Option set forth below applicable to
the Loans (it being understood that, subject to the provisions of this
Agreement, the Borrower may select different Interest Rate Options and different
Euro-Rate Interest Periods to apply simultaneously to the Loans comprising
different Borrowing Tranches and may convert to or renew one or more Interest
Rate Options with respect to all or any portion of the Loans comprising any
Borrowing Tranche; provided that there shall not be at any one time outstanding
more than fourteen (14) Borrowing Tranches in the aggregate among all the Loans
accruing interest at a Euro-Rate Option). The Agent's determination of a rate of
interest and any change therein shall in the absence of manifest error be
conclusive and binding upon all parties hereto. If at any time the designated
rate applicable to any Loan made by any Bank exceeds such Bank's highest lawful
rate, the rate of interest on such Bank's Loan shall be limited to such Bank's
highest lawful rate.
(a) Revolving Credit Interest Rate Options. The Borrower
shall have the right to select from the following Interest Rate Options
applicable to the Loans for the period commencing on January 1, 1998 and
thereafter:
(i) Revolving Credit Base Rate Option: A fluctuating
rate per annum (computed on the basis of a year of 365 or 366 days, as the case
may be, and actual days elapsed) equal to the Base Rate plus the applicable
percentage set forth below, based upon the ratio of (a) Total Indebtedness, to
(b) Consolidated Cash Flow from Operations, such interest rate to change
automatically from time to time effective as of the effective date of each
change in the Base Rate.
<TABLE>
<CAPTION>
Ratio of Total
Indebtedness to
Consolidated
Cash Flow from Applicable
Operations Interest Rate
---------- -------------
<S> <C>
Greater than 5.0 to 1.0 Base Rate plus 1/4%
Less than or equal to 5.0 to 1.0 Base Rate
</TABLE>
(ii) Revolving Credit Euro-Rate Option: A fluctuating
rate per annum (computed on the basis of a year of 360 days and actual days
elapsed) equal to the Euro-Rate plus the applicable percentage (such percentage
is sometimes hereafter referred to as the
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"Applicable Percentage Over Euro-Rate") set forth below, based upon the ratio of
(a) Total Indebtedness, to (b) Consolidated Cash Flow from Operations.
(iii) The ratios pursuant to clauses (i) and (ii)
above shall be computed on the date of each Acquisition Requiring Certification
as more fully set forth in the third sentence of Section 8.01(m)(i) or the
second sentence of Section 8.01(m)(ii), as applicable, and any interest rate
adjustment attributable to such computation shall be effective on the date of
such Acquisition Requiring Certification. If Borrower does not make any
Acquisition Requiring Certification during any fiscal quarter, such ratio shall
also be computed as of the end of such quarter with Consolidated Cash Flow from
Operations computed for the four fiscal quarters then ended and Total
Indebtedness computed as of the end of such fiscal quarter, but any interest
adjustments attributable to a change in such ratio shall be effective (a) with
respect to an increase of the applicable interest rate, as of the Delivery Date
for the Borrower's consolidated financial statements for such quarter and (b)
with respect to a decrease of the applicable interest rate, as of the later of
the Delivery Date for such financial statements and the date on which such
financial statements are actually delivered to the Agent and the Banks.
<TABLE>
<CAPTION>
Ratio of Total Indebtedness
to Consolidated
Cash Flow from Operations Applicable Interest Rate
------------------------- ------------------------
<S> <C>
Greater than 5.0 to 1.0 Euro-Rate plus 1.75%
Greater than 4.5 to 1.0 but less than or
equal to 5.0 to 1.0 Euro-Rate plus 1.50%
Greater than 4.0 to 1.0 but less than or
equal to 4.5 to 1.0 Euro-Rate plus 1.25%
Greater than 3.5 to 1.0 but less than or
equal to 4.0 to 1.0 Euro-Rate plus 1%
Greater than 3.0 to 1.0 but less than or
equal to 3.5 to 1.0 Euro-Rate plus .875%
Greater than 2.5 to 1.0 but less than or
equal to 3.0 to 1.0 Euro-Rate plus .625%
Less than or equal to 2.5 to 1.0 Euro-Rate plus .500%
</TABLE>
(b) Rate Quotations. The Borrower may call the Agent
on or before the date on which a Loan Request is to be delivered to receive an
indication of the rates then in effect, but it is acknowledged that such
indication shall not be binding on the Agent or the Banks nor affect the rate of
interest which thereafter is actually in effect when the election is made.
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4.02 Interest Periods. At any time when the Borrower shall
select, convert to or renew a Euro-Rate Option, the Borrower shall notify the
Agent thereof at least three (3) Business Days prior to the effective date of
such Euro-Rate Option by delivering a Loan Request. The notice shall specify an
interest period during which such Interest Rate Option shall apply, such periods
to be one, two, three or six months in the event of a Euro-Rate Option
("Euro-Rate Interest Period"), provided, that:
(a) any Euro-Rate Interest Period which would otherwise
end on a date which is not a Business Day shall be extended to the next
succeeding Business Day unless such Business Day falls in the next calendar
month, in which case such Euro-Rate Interest Period shall end on the next
preceding Business Day;
(b) any Euro-Rate Interest Period which begins on the
last day of a calendar month for which there is no numerically corresponding day
in the subsequent calendar month during which such Euro-Rate Interest Period is
to end shall end on the last Business Day of such subsequent month;
(c) the Revolving Credit Euro-Rate Portion for each
Euro-Rate Interest Period shall be in integral multiples of $500,000 and not
less than $5,000,000;
(d) the Borrower shall not select, convert to or renew a
Euro-Rate Interest Period for any portion of the Loans that would end after the
Expiration Date; and
(e) in the case of the renewal of a Euro-Rate Option at
the end of a Euro-Rate Interest Period, the first day of the new Euro-Rate
Interest Period shall be the last day of the preceding Euro-Rate Interest
Period, without duplication in payment of interest for such day.
4.03 Interest After Default. To the extent permitted by Law,
upon the occurrence and during the continuation of an Event of Default, any
principal, interest, fee or other amount payable hereunder shall bear interest
for each day thereafter until paid in full (before and after judgment) at a rate
per annum which shall be equal to two hundred (200) basis points (2% per annum)
above the rate of interest otherwise applicable with respect to such amount or
two hundred (200) basis points (2% per annum) above the Base Rate if no rate of
interest is otherwise applicable, but in no event in excess of the highest rate
permitted under applicable law. The Borrower acknowledges that such increased
interest rate reflects, among other things, the fact that such Loans or other
amounts have become a substantially greater risk given their default status and
that the Banks are entitled to additional compensation for such risk. If an
Event of Default shall occur and be continuing, the Agent may in its discretion
limit the Borrower to the Base Rate Option.
4.04 Euro-Rate Unascertainable.
(a) If on any date on which a Euro-Rate would otherwise
be determined, the Agent shall have determined (which determination shall be
conclusive absent manifest error) that:
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<PAGE> 45
(i) adequate and reasonable means do not exist
for ascertaining such Euro-Rate, or
(ii) a contingency has occurred which
materially and adversely affects the London interbank market relating to the
Euro-Rate, or
(b) if at any time any Bank shall have determined
(which determination shall be conclusive absent manifest error) that:
(i) the making, maintenance or funding of any
Loan to which a Euro-Rate Option applies has been made impracticable or unlawful
by compliance by such Bank in good faith with any Law or any interpretation or
application thereof by any Official Body or with any request or directive of any
such Official Body (whether or not having the force of Law), or
(ii) such Euro-Rate Option will not adequately
and fairly reflect the cost to such Bank of the establishment or maintenance of
any such Loan, or
(iii) after making all reasonable efforts that
deposits of the relevant amount in Dollars for the relevant Euro-Rate Interest
Period for a Loan to which a Euro-Rate Option applies, respectively, are not
available to such Bank with respect to a proposed Euro-Rate Loan in the London
interbank market, in the case of any event specified in subsection (a) above,
then the Agent shall promptly so notify the Banks and the Borrower thereof and
in the case of an event specified in subsection (b) above, such Bank shall
promptly so notify the Agent and endorse a certificate to such notice as to the
specific circumstances of such notice and the Agent shall promptly send copies
of such notice and certificate to the other Banks and the Borrower. Upon such
date as shall be specified in such notice (which shall not be earlier than the
date such notice is given) the obligation of (A) the Banks in the case of such
notice given by the Agent or (B) such Bank in the case of such notice given by
such Bank to allow the Borrower to select, convert to or renew a Euro-Rate
Option shall be suspended until the Agent shall have later notified the Borrower
or such Bank shall have later notified the Agent, of the Agent's or such Bank's,
as the case may be, determination (which determination shall be conclusive
absent manifest error) that the circumstances giving rise to such previous
determination no longer exist. If at any time the Agent makes a determination
under subsection (a) or (b) of this Section 4.04 and the Borrower has previously
notified the Agent of its selection of, conversion to or renewal of a Euro-Rate
Option and such Interest Rate Option has not yet gone into effect, such
notification shall be deemed to provide for selection of, conversion to or
renewal of the Base Rate Option otherwise available with respect to such Loans.
If any Bank notifies the Agent of a determination under subsection (b) of this
Section 4.04, the Borrower shall, subject to the Borrower's indemnification
obligations under Section 5.06(b), as to any Loan of the Bank to which a
Euro-Rate Option applies, on the date specified in such notice either convert
such Loan to the Base Rate Option otherwise available with respect to such Loan
or prepay such Loan in accordance with Section 5.04 hereof. Absent due notice
from the Borrower of conversion or prepayment such Loan shall automatically be
converted to the Base Rate Option otherwise available with respect to such Loan
upon such specified date.
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<PAGE> 46
4.05 Selection of Interest Rate Options. If the Borrower fails
to select a Euro-Rate Interest Period in accordance with the provisions of
Section 4.02 in the case of renewal of the Revolving Credit Euro-Rate Portion,
the Borrower shall be deemed to have converted such Loan or portion thereof to
the Base Rate Option otherwise available with respect to such Loans, commencing
upon the last day of that Euro-Rate Interest Period. If an Event of Default
shall occur and be continuing, the Agent may in its discretion limit the
Borrower to the Base Rate Option hereunder.
ARTICLE V
PAYMENTS
5.01 Payments. All payments and prepayments to be made in
respect of principal, interest, Commitment Fees, Closing Fee, Letter of Credit
Fees, Agent's Fee or other fees or amounts due from the Borrower hereunder shall
be payable prior to 11:00 A.M. (Pittsburgh time) on the date when due without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived by the Borrower, and without setoff, counterclaim or other
deduction of any nature, and an action therefor shall immediately accrue. Such
payments shall be made to the Agent at the Principal Office for the ratable
accounts of the Banks with respect to the Loans in U.S. Dollars and in
immediately available funds, and the Agent shall promptly distribute such
amounts to the Banks in immediately available funds, provided that in the event
payments are received by 11:00 A.M. (Pittsburgh time) by the Agent with respect
to the Loans and such payments are not distributed to the Banks on the same day
received by the Agent, the Agent shall pay the Banks the Federal Funds Effective
Rate with respect to the amount of such payments for each day held by the Agent
and not distributed to the Banks. The Agent's and each Bank's statement of
account, ledger or other relevant record shall, in the absence of manifest
error, be conclusive as the statement of the amount of principal of and interest
on the Loans and other amounts owing under this Agreement and shall be deemed an
"account stated."
5.02 Pro Rata Treatment of Banks. Each borrowing, and each
selection of, conversion to or renewal of any Interest Rate Option and each
payment or prepayment by the Borrower with respect to principal, interest,
Commitment Fees, Closing Fee, Letter of Credit Fees, or other fees or amounts
due from the Borrower hereunder to the Banks with respect to the Loans, shall
(except as provided in Section 4.04(b) [Euro-Rate Unascertainable], 5.04(b)
[Voluntary Prepayments] or 5.06(a) [Additional Compensation in Certain
Circumstances] hereof) be made in proportion to the Loans outstanding from each
Bank and if no such Loans are then outstanding, in proportion to the Ratable
Share of each Bank.
5.03 Interest Payment Dates. Interest on Loans to which the
Base Rate Option applies shall be due and payable in arrears on the first
Business Day of each April, July, October and January after the date hereof and
on the Expiration Date or upon acceleration of the Notes. Interest on Loans to
which a Euro-Rate Option applies shall be due and payable on the last day of
each Euro-Rate Interest Period for those Loans, and if any such Euro-Rate
Interest Period is longer than three months, also on the last day of every third
month during such period.
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<PAGE> 47
5.04 Voluntary Prepayments.
(a) The Borrower shall have the right at its option
from time to time to prepay the Loans in whole or part without premium or
penalty (except as provided in subsection (b) below or in Section 5.06 hereof):
(i) at any time with respect to any Loan to which
the Base Rate Option applies,
(ii) on the last day of the applicable Euro-Rate
Interest Period with respect to Loans to which a Euro-Rate Option applies,
(iii) on the date specified in a notice by any
Bank pursuant to Section 4.04(b) [Euro-Rate Unascertainable] hereof with respect
to any Loan to which a Euro-Rate Option applies.
Whenever the Borrower desires to prepay any part of the Loans,
it shall provide a prepayment notice to the Agent at least one (1) Business Day
prior to the date of prepayment of Loans setting forth the following
information:
(x) the date, which shall be a
Business Day, on which the proposed prepayment is to be made;
and
(y) the total principal amount of
such prepayment, which shall not be less than $5,000,000.
All prepayment notices shall be irrevocable. The principal
amount of the Loans for which a prepayment notice is given, together with
interest on such principal amount except with respect to Loans to which the Base
Rate Option applies, shall be due and payable on the date specified in such
prepayment notice as the date on which the proposed prepayment is to be made.
Unless otherwise specified by the Borrower with respect to prepayments of the
Revolving Credit Euro-Rate Portion of the Loans permitted under (ii) or (iii)
above, all prepayments shall be applied first to the Revolving Credit Base Rate
Portion of such Loans, and then to the Revolving Credit Euro-Rate Portion of
such Loans, subject to Section 5.06(b) hereof.
(b) In the event any Bank gives notice under Section
4.04(b) [Euro-Rate Unascertainable] or Section 5.06(a) [Additional Compensation
in Certain Circumstances] hereof, the Borrower shall have the right, with the
consent of the Agent, which shall not be unreasonably withheld, to: (y) prepay
the Loans of such Bank, in whole together with all interest accrued thereon and
thereby permanently and irrevocably terminate the Revolving Credit Commitment of
such Bank, or (z) replace such Bank, so long as, in the case of (y) or (z), such
replacement or prepayment occurs within ninety (90) days after receipt of such
Bank's notice under Section 4.04(b) or 5.06(a), provided the Borrower shall also
pay to such Bank in the case of either the foregoing (y) or (z) at the time of
such prepayment or replacement any amounts required under Section 5.06 and
accrued Commitment Fees due on such amount and all other costs, fees and any
amounts due to such Bank being prepaid or replaced.
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5.05 Mandatory Prepayments.
(a) Sale of Assets. Within five (5) Business Days of
any sale of assets authorized by Section 8.02(g)(v) hereof, the Borrower shall
make a mandatory prepayment of principal on the Revolving Credit Loans in the
amount, if any, necessary to bring the Borrower into compliance with Section
8.02(r) [Maximum Leverage Ratio] after giving effect to such disposition. In
addition to the foregoing mandatory prepayment provisions, in the event that any
sale of assets will result in the Borrower or any Subsidiary receiving "Net Cash
Proceeds" which would otherwise become "Excess Proceeds" (as each of those terms
are defined in the Indenture), then at least sixty (60) days prior to the date
any Net Cash Proceeds would become Excess Proceeds under the Indenture, the
Borrower shall give written notice to the Agent thereof setting forth the amount
of Net Cash Proceeds at issue. Upon the direction of the Agent with the consent
of the Required Banks, the Borrower shall make a permanent payment of principal
on the Revolving Credit Loans in the amount of said Net Cash Proceeds, and the
Revolving Credit Commitment of each Bank shall be reduced by its Ratable Share
of the principal payment made to such Bank from the Net Cash Proceeds.
(b) Application Among Interest Rate Options. All
prepayments required pursuant to this Section 5.05 shall first be applied among
the Interest Rate Options to the principal amount of the Loans subject to a Base
Rate Option, then to Loans subject to Euro-Rate Option. In accordance with
Section 5.06(b), the Borrower shall indemnify the Banks for any loss or expense
including loss of margin incurred with respect to any such prepayments applied
against Loans subject to a Euro-Rate Option on any day other than the last day
of the applicable Euro-Rate Interest Period.
5.06 Additional Compensation in Certain Circumstances.
(a) Increased Costs or Reduced Return Resulting From
Taxes, Reserves, Capital Adequacy Requirements, Expenses, Etc. If any Law,
guideline or interpretation or any change in any Law, guideline or
interpretation or application thereof by any Official Body charged with the
interpretation or administration thereof or compliance with any request or
directive (whether or not having the force of Law) of any central bank or other
Official Body:
(i) subjects any Bank to any tax or changes the
basis of taxation with respect to this Agreement, the Notes, the Loans or
payments by the Borrower of principal, interest, Commitment Fees, or other
amounts due from the Borrower hereunder or under the Notes (except for taxes on
the overall net income of such Bank),
(ii) imposes, modifies or deems applicable any
reserve, special deposit or similar requirement against credits or commitments
to extend credit extended by, or assets (funded or contingent) of, deposits with
or for the account of, or other acquisitions of funds by, any Bank, or
(iii) imposes, modifies or deems applicable any
capital adequacy or similar requirement (A) against assets (funded or
contingent) of, or letters of credit,
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other credits or commitments to extend credit extended by, any Bank, or (B)
otherwise applicable to the obligations of any Bank under this Agreement,
and the result under any of the foregoing clauses (i), (ii) or (iii) is to
increase the cost to, reduce the income receivable by, or impose any expense
(including loss of margin) upon any Bank with respect to this Agreement, the
Notes or the making, maintenance or funding of any part of the Loans (or, in the
case of any capital adequacy or similar requirement, to have the effect of
reducing the rate of return on any Bank's capital, taking into consideration
such Bank's customary policies with respect to capital adequacy) by an amount
which such Bank in its sole discretion deems to be material, such Bank shall
from time to time notify the Borrower and the Agent of the amount determined in
good faith (using any averaging and attribution methods employed in good faith)
by such Bank (which determination shall be conclusive absent manifest error) to
be necessary to compensate such Bank for such increase in cost, reduction of
income or additional expense. Such notice shall set forth in reasonable detail
the basis for such determination. Such amount shall be due and payable by the
Borrower to such Bank ten (10) Business Days after such notice is given.
(b) Indemnity. In addition to the compensation required by
subsection (a) of this Section 5.06, the Borrower shall indemnify each Bank
against all liabilities, losses or expenses (including loss of margin, any loss
or expense incurred in liquidating or employing deposits from third parties and
any loss or expense incurred in connection with funds acquired by a Bank to fund
or maintain Loans subject to the Euro-Rate Option) which such Bank sustains or
incurs as a consequence of any:
(i) payment, prepayment, conversion or renewal of any Loan
to which the Euro-Rate Option applies on a day other than the last day of the
corresponding Euro-Rate Interest Period (whether or not such payment or
prepayment is mandatory, voluntary or automatic and whether or not such payment
or prepayment is then due),
(ii) attempt by the Borrower to revoke (expressly, by later
inconsistent notices or otherwise) in whole or part any notice relating to Loan
Requests under Section 2.05 or Section 4.02 or prepayments under Section 5.04,
or reductions of Revolving Credit Commitments under Section 2.10, or
(iii) Event of Default by the Borrower in the performance or
observance of any covenant or condition contained in this Agreement or any other
Loan Document, including without limitation any failure of the Borrower to pay
when due (by acceleration or otherwise) any principal, interest, Commitment Fee
or any other amount due hereunder.
If any Bank sustains or incurs any such loss or expense it shall from
time to time notify the Borrower of the amount determined in good faith by such
Bank (which determination shall be conclusive absent manifest error and may
include such assumptions, allocations of costs and expenses and averaging or
attribution methods as such Bank shall deem reasonable) to be necessary to
indemnify such Bank for such loss or expense. Such notice shall set forth in
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reasonable detail the basis for such determination. Such indemnification may
include an amount equal to the excess, if any, of (i) the amount of interest
which would have accrued on the amount so prepaid, or not so borrowed, converted
or continued, for the period from the date of such prepayment or of such failure
to borrow, convert or continue to the last day of the applicable Interest Period
(or, in the case of a failure to borrow, convert or continue, the Interest
Period that would have commenced on the date of such failure) in each case at
the applicable rate of interest for such Loans, subject to the Euro-Rate Option
provided for herein (excluding, however, the Applicable Percentage Over
Euro-Rate included therein, if any) over (ii) the amount of interest (as
reasonably determined by such Bank) which would have accrued to such Bank on
such amount by placing such amount on deposit for a comparable period with
leading banks in the interbank Eurodollar market. This covenant shall survive
the termination of this Agreement and the payment of the Loans and all other
amounts payable hereunder. Such amount shall be due and payable by the Borrower
to such Bank ten (10) Business Days after such notice is given.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
6.01 Representations and Warranties - Effective On and After Date of
This Agreement. The Borrower represents and warrants to the Agent and each of
the Banks as follows:
(a) Organization and Qualification. The Borrower, each Restricted
Subsidiary of the Borrower and each Excluded Entity in which a Restricted
Investment has been made are duly organized, validly existing and in good
standing under the laws of their respective jurisdiction of organization; the
Borrower, each Restricted Subsidiary of the Borrower and each Excluded Entity in
which a Restricted Investment has been made have the power to own or lease their
properties and to engage in the business they presently conduct or propose to
conduct; and the Borrower and each Subsidiary of the Borrower are duly qualified
as a foreign corporation, limited liability company or partnership and in good
standing in each jurisdiction listed on Schedule 6.01(a) hereto and in all other
jurisdictions where the property owned or leased by them or the nature of the
business transacted by them or both makes such qualification necessary, except
where the failure to so qualify would not have a material adverse effect on the
Borrower or any Subsidiary.
(b) [Intentionally Omitted.]
(c) Excluded Entities; Subsidiaries. Schedule 6.01(c) attached
hereto states (i) the name of each of the Borrower's Restricted Subsidiaries and
each Excluded Entity in which a Restricted Investment has been made, (ii) in the
case of each Corporate Subsidiary or Excluded Entity which is a corporation, its
jurisdiction of incorporation, its authorized capital stock, the issued and
outstanding shares (referred to herein as the "Corporate Shares") and the owners
thereof, (iii) in the case of each Partnership Subsidiary or Excluded Entity
which is a partnership, the jurisdiction in which it is organized, the type of
organization (limited or general partnership) and the owners of its partnership
interests (the "Partnership Interests"), and (iv) in the case of each Subsidiary
or Excluded Entity which is a limited liability company, the
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jurisdiction in which it is organized, its authorized member interests, the
issued and outstanding member interests (the "Member Interests") and the owners
thereof. The Borrower and each Subsidiary have good and valid title to all of
the Corporate Shares, Partnership Interests or Member Interests they purport to
own, free and clear in each case of any Lien other than under the Loan
Documents. All Corporate Shares, Partnership Interests and Member Interests have
been validly issued. All Corporate Shares are fully paid and nonassessable.
There are no options, warrants or other rights outstanding to purchase any
Member Interests, Corporate Shares or Partnership Interests except as indicated
on Schedule 6.01(c).
(d) Power and Authority. Each Loan Party has full power to enter
into, execute, delivery and carry out this Agreement, the other Loan Documents
to which it is a party, to incur the Indebtedness contemplated by the Loan
Documents and to perform its obligations under the Loan Documents to which it is
a party and all such actions have been duly authorized by all necessary
proceedings on its part.
(e) Validity and Binding Effect. This Agreement has been duly
executed and delivered by each Loan Party that is a party hereto, and each other
Loan Document, when duly executed and delivered by each Loan Party which is a
party thereto, will have been duly executed and delivered by such Loan Party.
This Agreement and each other Loan Document delivered by the Loan Parties
pursuant to the provisions hereof will constitute legal, valid and binding
obligations of the Loan Parties thereto, enforceable against such Loan Party in
accordance with their respective terms, except to the extent that (i)
enforceability of any of the foregoing Loan Documents may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforceability of creditors' rights generally or limiting the
right of specific performance or by general equitable principles and (ii) the
exercise by the Banks of their rights with respect to the Collateral would be
subject to the prior approval of health care regulatory authorities.
(f) No Conflict. Neither the execution and delivery of this
Agreement or the other Loan Documents by the Loan Parties nor the consummation
of the transactions herein or therein contemplated or compliance with the terms
and provisions hereof or thereof by them will conflict with, constitute a
default under or result in any breach of (i) the terms and conditions of the
certificate of incorporation, by-laws or other organizational documents of any
Loan Party or (ii) of any Law or of any material agreement or instrument or
order, writ, judgment, injunction or decree to which any Loan Party is a party
or by which it is bound or to which it is subject, or result in the creation or
enforcement of any Lien, charge or encumbrance whatsoever upon any property (now
or hereafter acquired) of any Loan Party (other than Liens granted under the
Loan Documents).
(g) Litigation. Except as previously disclosed to the Agent in
that certain letter dated January 2, 1996 by the Borrower, there are no actions,
suits, proceedings or investigations pending or, to the knowledge of the
Borrower, threatened against the Borrower or any Subsidiary of the Borrower at
law or equity before any Official Body which individually or in the aggregate
would constitute a Material Adverse Change. Neither the Borrower nor any
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<PAGE> 52
Subsidiary of the Borrower is in violation of any order, writ, injunction or any
decree of any Official Body which would constitute a Material Adverse Change.
(h) Title to Properties. The Borrower and each Subsidiary of the
Borrower have good and marketable title to or valid leasehold interest in all
material properties, assets and other rights which they purport to own or lease
or which are reflected as owned or leased on their respective books and records,
free and clear of all Liens and encumbrances except Permitted Liens, and subject
to the terms and conditions of the applicable leases. All material leases of
real property are in full force and effect without the necessity for any consent
which has not previously been obtained for the consummation of the transactions
contemplated hereby.
(i) Financial Statements.
(i) Historical Statements.
The Borrower has delivered to the Agent copies of
its audited consolidated year-end financial statements for and as of the end of
the fiscal years ended December 31, 1992, 1993, 1994, 1995, 1996 and the
unaudited consolidated statements for 1997 for the three quarters ending on
September 30, 1997 (collectively the "Historical Statements"). The Mariner
Historical Statements were compiled from the books and records maintained by the
Borrower's management, fairly present the consolidated financial condition of
the Loan Parties (which were Loan Parties as of the date of the respective
Mariner Historical Statements) as of their dates and the results of operations
for the fiscal periods then ended and have been prepared in accordance with GAAP
consistently applied, subject (in the case of the interim statements) to normal
year-end audit adjustments.
(ii) Accuracy of Financial Statements. Neither the
Borrower nor any Subsidiary of Borrower has any liabilities, contingent or
otherwise, or material forward or long-term commitments that are not disclosed
in the Historical Statements or in the notes thereto or that are required to be
disclosed under GAAP, and except as disclosed therein there are no unrealized or
anticipated losses from any commitments of the Borrower or any Subsidiary which
may cause a Material Adverse Change. Since December 31, 1996, no Material
Adverse Change has occurred; provided, however, that with the written approval
of the Required Banks, express disclosures to the Banks by the Borrower in the
reports provided by the Borrower to the Banks, pursuant to Section 8.03 hereof,
shall be deemed to be an update and an exception to the representation made in
the foregoing portion of this sentence.
(j) Margin Stock. Neither the Borrower nor any Subsidiary engages
or intends to engage principally, or as one of its important activities, in the
business of extending credit for the purpose, immediately, incidentally or
ultimately, of purchasing or carrying margin stock (within the meaning of
Regulation U). No part of the proceeds of any Loan has been or will be used,
immediately, incidentally or ultimately, to purchase or carry any margin stock
or to extend credit to others for the purpose of purchasing or carrying any
margin stock or to refund Indebtedness originally incurred for such purpose, or
for any purpose which entails a violation of or which is inconsistent with the
provisions of the regulations of the Board of Governors of the Federal Reserve
System.
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(k) Full Disclosure. Neither this Agreement nor any other Loan
Document contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein and
therein, in light of the circumstances under which they were made, not
misleading considered as a whole; provided that any information provided after
the date hereof shall be deemed to supersede any prior inconsistent information.
There is no fact known to the Borrower or any Subsidiary which materially
adversely affects the business, property, assets, financial condition, results
of operations or prospects of the Borrower or any Material Subsidiary, which:
(i) prior to or at the date hereof, has not been set forth in the Agreement or
in the certificates, statements, agreements or other documents furnished in
writing to the Agent and the Banks in connection with the transactions
contemplated hereby or in the Borrower's public filings with the Securities and
Exchange Commission, or (ii) following the date hereof and with the written
approval of the Required Banks, has not been set forth in other documents
furnished in writing to the Agent and the Banks.
(l) Taxes. All material federal, state, local and other tax
returns required to have been filed with respect to the Borrower or any
Subsidiary have been filed and payment or adequate provision has been made for
the payment of all taxes, fees, assessments and other governmental charges which
have or may become due pursuant to said returns or to assessments received
except to the extent that such taxes, fees, assessments and other charges are
being contested in good faith by appropriate proceedings diligently conducted
and for which such reserves or other appropriate provisions, if any, as shall be
required by GAAP shall have been made. As of the date hereof, there are no
agreements or waivers extending the statutory period of limitations applicable
to any federal income tax return of the Borrower or any Subsidiary for any
period.
(m) Consents and Approvals. No consent, approval, exemption, order
or authorization of, or a registration or filing with any Official Body or any
other person is required by any Law or any agreement in connection with the
execution, delivery and carrying out of this Agreement, or the other Loan
Documents by any Loan Party, all of which have been obtained or made; provided,
however, that it is acknowledged that consent of health care regulatory
authorities issuing any licenses or regulating any health care facilities may be
required if the Agent on behalf of the Banks exercises the rights and remedies
in respect of the Pledged Collateral and such exercise of remedies results in or
constitutes an assignment of any health care license issued by a health care
regulatory authority or constitutes a change of control with respect to the
ownership of a health care facility.
(n) Compliance With Instruments. Neither the Borrower nor any
Subsidiary is in violation of (i) any term of its certificate of incorporation,
by-laws, or other organizational documents or (ii) any material agreement or
instrument to which it is a party or by which it or any of its properties may be
subject or bound where such violation would constitute a Material Adverse
Change.
(o) Patents, Trademarks, Copyrights, Etc. The Borrower and each
Subsidiary owns or possesses all the material patents, trademarks, service
marks, trade names,
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copyrights and other intellectual property rights necessary to own and operate
its properties and to carry on its business as presently conducted and planned
to be conducted by the Borrower and each Subsidiary, without known conflict with
the rights of others.
(p) Security Interests in the Collateral. The Liens and security
interests granted to the Agent for the benefit of the Banks pursuant to the
Pledge Agreements, Mortgages and Leasehold Mortgages in the UCC Collateral
constitute, and will continue to constitute, Prior Security Interests under the
Uniform Commercial Code as in effect in each applicable jurisdiction (the
"Uniform Commercial Code") or other applicable Law entitled to all the rights,
benefits and priorities provided by the Uniform Commercial Code or such Law to
the fullest extent permitted by applicable law, except that the security
interests in the Collateral under the Mortgages and Leasehold Mortgages may be
subordinated to the security interests granted to certain of the Lessor Lenders
or Owned Facility Lenders, as indicated on Schedule 6.01 (aa). Upon the filing
of financing statements relating to said security interests in each office and
in each jurisdiction where required in order to perfect the security interests
described above and taking possession of the stock certificates or certificates
of ownership of member interests in a limited liability company, as the case may
be, evidencing the Pledged Collateral which constitutes stock of a corporation
or member interests of a limited liability company, as the case may be, all such
action as is necessary or advisable to establish such rights of the Agent will
have been taken, and there will be upon execution and delivery of the Pledge
Agreements, Mortgages and Leasehold Mortgages, such filings, and such taking of
possession no necessity for any further action in order to preserve, protect and
continue such rights, except for maintaining possession of such certificates and
filing continuation statements with respect to such financing statements within
six (6) months prior to each five-year anniversary of the filing of such
financing statements. Any expenses in connection with each such action have been
or will be paid by the Borrower. It is acknowledged that the exercise by the
Banks of their rights and remedies in respect of the Pledged Collateral which
would result in or constitute any assignment of any license issued by a health
care regulatory authority or any change of control with respect to a health care
facility may be subject to the prior approval of such health care regulatory
authorities.
(q) [Intentionally Omitted.]
(r) Status of the Pledged Collateral. All the shares of capital
stock, partnership interests, or member interests in a limited liability
company, as the case may be, included in the Pledged Collateral to be pledged
pursuant to the Pledge Agreements are or will be upon issuance duly authorized
and validly issued. All shares of capital stock included in the Pledged
Collateral are or will be upon issuance fully paid and nonassessable. All of the
Pledged Collateral is owned beneficially and of record by the pledgor free and
clear of any Lien or restriction on transfer, except as otherwise provided in
the Pledge Agreements and except as the right of the Banks to dispose of the
Pledged Collateral may be limited by the Securities Act of 1933, as amended, and
the regulations promulgated by the Securities and Exchange Commission thereunder
and by applicable state securities laws. Except as otherwise disclosed to the
Banks, in writing, there are no shareholder or other agreements or
understandings with respect to the Pledged Collateral.
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(s) Insurance. The insurance policies and bonds to which the
Borrower or any Subsidiary is a party provide adequate coverage from reputable
and financially sound insurers in amounts sufficient to insure the assets and
risks of the Borrower and its Subsidiaries in accordance with prudent business
practice in the industry of the Borrower and its Subsidiaries, including
self-insurance to the extent customary, and such policies and bonds are valid
and in full force and effect.
(t) Compliance with Laws. The Borrower and its Subsidiaries are
in compliance in all material respects with all applicable Laws (other than
Environmental Laws which are specifically addressed in subsection (y)) in all
jurisdictions in which the Borrower or any Subsidiary is presently or will be
doing business except where the failure to do so would not constitute a Material
Adverse Change.
(u) Material Contracts, Licenses, Permits and Approvals.
(A) As of the date hereof, Schedule 6.01(u) hereto lists
the following contracts relating to the business operations of the Borrower and
its Subsidiaries: (i) all employee benefit plans, employment agreements where
the compensation paid by the Borrower or any Subsidiary exceeds $250,000 in any
fiscal year, collective bargaining agreements and labor contracts (the "Labor
Contracts"), (ii) all written provider or similar agreements (the "Provider
Agreements") pursuant to which the Borrower and its Subsidiaries 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 the Borrower or any
Subsidiary 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 the Borrower
or any Subsidiary 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 the Borrower or any Subsidiary exceeded or are expected to
exceed $1,000,000 in the aggregate in the current fiscal year; (v) all
management contracts pursuant to which the Borrower or a Subsidiary provides
management services to any other person where the payments received or expected
to be received by the Borrower or any Subsidiary exceed $500,000 in the current
fiscal year; and (vi) all other material contracts filed as exhibits to any
report filed by the Borrower with the SEC during the past twelve months. All
contracts listed on Schedule 6.01(u) and any Provider Agreements which provide
for annual payments in excess of $6,000,000 which are not listed on Schedule
6.01(u) are valid, binding and enforceable upon the Borrower or its
Subsidiaries, as the case may be, and, to the best knowledge of the Borrower,
each of the other parties thereto in accordance with their respective terms and
there is no default thereunder, to the knowledge of the Borrower and of its
Subsidiaries, with respect to parties other than the Borrower or any of its
Subsidiaries. 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 Borrower or any of its Subsidiaries as
to constitute a Material Adverse Change.
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(B) Except as set forth on Schedule 6.01(u), the Borrower
and each of its Subsidiaries has all material accreditations, authorizations,
approvals, certificates of need, consents, licenses, permits and qualifications
(collectively, "Approvals") required (i) for them to construct, acquire, own,
manage, lease and/or operate their facilities and services, (ii) for them to
receive payment and reimbursement from any patient or third party payor, to the
extent in the case of (i) and (ii) such Approvals are presently required. The
Borrower and each of its Subsidiaries have all other material Approvals required
for the lawful operation of their businesses. All material Approvals of the
Borrower and each of its Subsidiaries 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 the Borrower or any Subsidiary) 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 would not have a
material adverse effect upon the Borrower and its Subsidiaries taken as a
whole). The continuation, validity and effectiveness of all such Approvals will
in no way be adversely affected by the transactions contemplated by this
Agreement. Neither the Borrower nor any of its Subsidiaries 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 the Borrower or any Subsidiary in any Medicare, Medicaid or
other reimbursement programs which would preclude such participation.
(v) Investment Companies; Public Utility Holding Company. The
Borrower is not an "investment company" registered or required to be registered
under the Investment Company Act of 1940 or under the "control" of an
"investment company" as such terms are defined in the Investment Company Act of
1940 and shall not become such an "investment company" or under such "control."
The Borrower is not a "holding company" nor a "subsidiary" or "affiliate" of any
Person that is a "holding company" as those terms are defined in the Public
Utility Holding Company Act of 1935.
(w) Plans and Benefit Arrangements.
(i) The Borrower and each member of the ERISA Group are in
compliance in all material respects with any applicable provisions of ERISA with
respect to all Benefit Arrangements, Plans and Multiemployer Plans. There has
been no Prohibited Transaction with respect to any Benefit Arrangement or any
Plan or, to the best knowledge of the Borrower, with respect to any
Multiemployer Plan or Multiple Employer Plan, which could result in any material
liability of the Borrower or any other member of the ERISA Group. The Borrower
and all members of the ERISA Group have made when due any and all payments
required to be made under any agreement relating to a Multiemployer Plan or a
Multiple Employer Plan or any Law pertaining thereto. With respect to each Plan
and Multiemployer Plan, the Borrower and each member of the ERISA Group (i) have
fulfilled in all material respects their obligations under the minimum funding
standards of ERISA, (ii) have not incurred
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any liability to the PBGC and (iii) have not had asserted against them any
penalty for failure to fulfill the minimum funding requirements of ERISA.
(ii) To the best of the Borrower's knowledge, each
Multiemployer Plan and Multiple Employer Plan is able to pay benefits thereunder
when due.
(iii) Neither the Borrower nor any other
member of the ERISA Group has instituted or intends to institute proceedings to
terminate any Plan.
(iv) No event requiring notice to the PBGC under Section
302(f)(4)(A) of ERISA has occurred or is reasonably expected to occur with
respect to any Plan, and no amendment with respect to which security is required
under Section 307 of ERISA has been made or is reasonably expected to be made to
any Plan.
(v) The aggregate actuarial present value of all benefit
liabilities (whether or not vested) under each Plan, determined on a plan
termination basis, as disclosed in, and as of the date of, the most recent
actuarial report for such Plan, does not exceed the aggregate fair market value
of the assets of such Plan by an amount in excess of $250,000.
(vi) Neither the Borrower nor any other member of the ERISA
Group has incurred or reasonably expects to incur any material withdrawal
liability under ERISA to any Multiemployer Plan or Multiple Employer Plan.
Neither the Borrower nor any other member of the ERISA Group has been notified
by any Multiemployer Plan or Multiple Employer Plan that such Multiemployer Plan
or Multiple Employer Plan has been terminated within the meaning of Title IV of
ERISA and, to the best knowledge of the Borrower, no Multiemployer Plan or
Multiple Employer Plan is reasonably expected to be reorganized or terminated,
within the meaning of Title IV of ERISA.
(vii) To the extent that any Benefit Arrangement is
insured, the Borrower and all members of the ERISA Group have paid when due all
premiums required to be paid for all periods. To the extent that any Benefit
Arrangement is funded other than with insurance, the Borrower and all members of
the ERISA Group have made when due all contributions required to be paid for all
periods.
(x) Employment Matters. The Borrower and each of its Subsidiaries
are in compliance with the Labor Contracts and all applicable federal, state and
local labor and employment Laws including, but not limited to, those related to
equal employment opportunity and affirmative action, labor relations, minimum
wage, overtime, child labor, medical insurance continuation, worker adjustment
and relocation notices, immigration controls and worker and unemployment
compensation, where the failure to comply would constitute a Material Adverse
Change. There are no outstanding grievances, arbitration awards or appeals
therefrom arising out of the Labor Contracts or current or threatened strikes,
picketing, handbilling or other work stoppages or slowdowns at facilities of the
Borrower or any of its Subsidiaries which in any case would constitute a
Material Adverse Change. The Borrower has delivered to the Agent true and
correct copies of each of the Labor Contracts in effect as of the date hereof.
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(y) Environmental Matters. Except as disclosed on Schedule
6.01(y) hereto:
(i) Neither the Borrower nor any of its Subsidiaries has
received any Environmental Complaint from any Official Body or private person
alleging that the Borrower, any of its Subsidiaries or any prior or subsequent
owner of the Property is a potentially responsible party under the Comprehensive
Environmental Response, Cleanup and Liability Act ("CERCLA"), 42
U.S.C. Section 9601, et seq., or is potentially liable under the Solid Waste
Disposal Act, as amended, ("SWDA") 42 U.S.C. Section 6901, et seq., or any
comparable state or foreign law, statute or regulation of either CERCLA or SWDA
and the Borrower has no reason to believe that such an Environmental Complaint
might be received. There are no pending or, to the Borrower's knowledge,
threatened Environmental Complaints relating to the Borrower, any of its
Subsidiaries or, to the Borrower's knowledge, any prior or subsequent owner of
the Property pertaining to, or arising out of, any Environmental Conditions
which, individually or in the aggregate, if adversely determined could
reasonably be expected to have a material adverse effect on the Borrower or any
Subsidiary of the Borrower taken as a whole.
(ii) Except for conditions, violations or failure which
individually and in the aggregate are not reasonably likely to result in a
Material Adverse Change, there are no circumstances at, on or, to the best of
the Borrower's knowledge, under the Property that constitute a breach of or
non-compliance with any of the Environmental Laws, and there are, to the best of
the Borrower's knowledge, no past or present Environmental Conditions at, on or
under the Property or, to the Borrower's knowledge, at, on or, to the best of
the Borrower's knowledge, under adjacent property, that prevent compliance with
the Environmental Laws at the Property.
(iii) Neither the Property nor any structures, improvements,
equipment, fixtures, activities or facilities thereon or thereunder contain or
use Regulated Substances except in compliance in all material respects with
Environmental Laws. There are no processes, facilities, operations, equipment or
any other activities at, on or, to the best of the Borrower's knowledge, under
the Property, or, to the Borrower's knowledge, at, on or under adjacent
property, that currently result in the release or threatened release of
Regulated Substances onto the Property, except to the extent that such releases
or threatened releases are not a material breach of or otherwise not a material
violation of the Environmental Laws, or are not likely to result in a Material
Adverse Change.
(iv) There are no above ground storage tanks, underground
storage tanks, or underground piping associated with such tanks, used for the
management of Regulated Substances at, on or under the Property that (a) do not
have, to the extent required by applicable Environmental Laws, a full
operational secondary containment system in place, and (b) are not otherwise in
compliance in all material respects with all Environmental Laws. To Borrower's
best knowledge, there are no abandoned underground storage tanks or underground
piping associated with such tanks, previously used for the management of
Regulated Substances at, on or under the Property that have not been either
abandoned in place, or removed, in accordance with the Environmental Laws.
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(v) The Borrower and each of its Subsidiaries have all
material permits, licenses, authorizations, plans and approvals necessary under
the Environmental Laws for the conduct of the business of the Borrower and each
such Subsidiary as presently conducted. The Borrower and each such Subsidiary
have submitted all material notices, reports and other filings required by the
Environmental Laws to be submitted to an Official Body which pertain to past and
current operations on the Property.
(vi) Except for violations which individually and in the
aggregate are not likely to result in a Material Adverse Change, all present
and, to the best knowledge of the Borrower, past on-site generation, storage,
processing, treatment, recycling, reclamation or disposal of Regulated
Substances at, on, or under the Property and, to the best knowledge of the
Borrower, all off-site transportation, storage, processing, treatment,
recycling, reclamation or disposal of Regulated Substances has been done in
accordance with the Environmental Laws.
(z) Senior Debt Status. The obligations of the Borrower under
this Agreement and the Notes and the obligations of the Subsidiaries of Borrower
under the Guaranties do rank and will rank at least pari passu in priority of
payment with all other Indebtedness of the Borrower or such Subsidiaries, as the
case may be, except Indebtedness of the Borrower or its Subsidiaries to the
extent secured by Permitted Liens. The obligations of the Borrower under this
Agreement and the Notes constitute "Designated Senior Indebtedness" as such term
is defined in the Indenture. There is no Lien upon or with respect to any of the
properties or income of the Borrower or any of its Subsidiaries which secures
Indebtedness or other obligations of any person except for Permitted Liens.
(aa) Matters Regarding Leased Facilities and Certain Indebtedness
of Subsidiaries.
(i) Indebtedness Related to Leased Facilities. Schedule
6.01(aa) describes each Leased Facility and with respect thereto: (1) the
Subsidiary Lessee which is the lessee thereof; (2) the Lessor thereof; (3) the
amount of Lessor Indebtedness secured by any assets of such Leased Facility; (4)
the Lessor Lender which is the obligee under such Lessor Indebtedness; (5) any
assets of the Subsidiary Lessee leasing such Leased Facility which relate to
such facility in which such Subsidiary Lessee has granted Liens in favor of the
Lessor (it is acknowledged that the Lessor has assigned such Liens to the Lessor
Lender) or Lessor Lender and confirmation that such Liens are Permitted Leased
Facility Liens and Permitted Liens; (6) the original maturity date of such
Lessor Indebtedness, without giving effect to subsequent amendments unless
permitted by this Agreement; (7) whether a Facility Purchase Option has been
granted as part of an Intercreditor Agreement between the Agent and the Lessor
Lender with respect to such Leased Facility; (8) whether the Lessor Lender and
Lessor have consented to the grant by the Subsidiary Lessee of a Leasehold
Mortgage, in favor of the Agent for the benefit of the Banks and Liens on the
assets of such Subsidiary Lessee (such Liens to be second in priority to the
Liens granted by such Subsidiary Lessee to such Lessor Lender in such assets if
such Subsidiary granted Liens in such assets to such Lessor Lender) with respect
to such Leased Facility; (9) whether the applicable Lessor Lender has agreed to
release its liens in the
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assets of the applicable Subsidiary Lessee leasing such Leased Facility related
to such facility; (10) whether the applicable Lessor Lender has entered into a
Non-Disturbance Agreement; (11) whether the applicable Lessor Lender has entered
into an Intercreditor Agreement with the Agent; and (12) whether the applicable
Lessor Lender has entered into a Trustee Agreement with the Agent.
(ii) Indebtedness Related to Subsidiary Owned Facilities.
Schedule 6.01(aa) describes each Owned Facility and with respect thereto: (1)
the Subsidiary Owner; (2) the amount of the Owned Facility Indebtedness, secured
by any assets of such Owned Facility; (3) the Owned Facility Lender which is the
obligee under such Owned Facility Indebtedness; (4) the assets of the Subsidiary
Owner relating to such Owned Facility in which the Subsidiary Owner has granted
Liens in favor of such Owned Facility Lender and confirmation that such Liens
are Permitted Owned Facility Liens and Permitted Liens; (5) the original
maturity date of such Owned Facility Indebtedness, without giving effect to
subsequent amendments unless permitted by this Agreement; (6) whether a Facility
Purchase Option has been granted as part of an Intercreditor Agreement between
the Agent and the Owned Facility Lender with respect to such Owned Facility; (7)
whether the Owned Facility Lender has consented to the grant by the Subsidiary
Owner of a Mortgage, in favor of the Agent for the benefit of the Banks and
Liens on the assets of such Subsidiary Owner (such Liens to be second in
priority to the Liens granted by such Subsidiary Owner to such Owned Facility
Lender in such assets if such Subsidiary Owner granted Liens in such assets to
such Owned Facility Lender) with respect to such Owned Facility; and (8) whether
the applicable Owned Facility Lender entered into an Intercreditor Agreement
with Agent.
(bb) Mortgage and Leasehold Mortgage Liens. The Liens granted to
the Agent for the benefit of the Banks pursuant to the Mortgages and the
Leasehold Mortgages constitute valid Liens under applicable law having priority
over all other Liens except that if otherwise permitted by this Agreement they
may be subordinate to Liens in favor of the Owned Facility Lenders and Lessor
Lenders, as the case may be, and Schedule 6.01(aa) indicates if such Liens are
subordinated. All such action as will be necessary or advisable to establish
such Liens of the Agent and its priority as described in the preceding sentence
will be taken at or prior to the time required for such purpose, and there will
be as of the date of execution and delivery of the Mortgages and Leasehold
Mortgages no necessity for any further action in order to protect, preserve and
continue such Liens and such priority.
6.02 Updates to Schedules. Should any of the information or disclosures
provided on any of the Schedules attached hereto (other than Schedules relating
solely to representations and warranties made solely as of the date expressly
specified therein, which representations and warranties shall be true and
correct as of such specified date) become outdated or incorrect in any material
respect, the Borrower shall promptly provide the Agent in writing with such
revisions or updates to such Schedule as may be necessary or appropriate to
update or correct the same; provided, however that no Schedule shall be deemed
to have been amended, modified or superseded by any such correction or update
that would disclose the occurrence of an event or condition which constitutes a
Potential Default or Event of Default, nor shall any breach of warranty or
representation resulting from the inaccuracy or incompleteness of
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any such Schedule be deemed to have been cured thereby, unless and until the
Required Banks, in their sole and absolute discretion, shall have accepted in
writing such revisions or updates to such Schedule.
ARTICLE VII
CONDITIONS OF LENDING
The obligation of each Bank to make Loans and of the Agent to issue
Letters of Credit hereunder is subject to the performance by the Borrower of its
obligations to be performed hereunder at or prior to the making of any such
Loans or issuance of such Letters of Credit and to the satisfaction of the
following conditions:
7.01 Each Additional Loan. At the time of making any Loans or issuing
any Letters of Credit other than the Loan made on the Closing Date hereunder and
after giving effect to the proposed borrowings: the representations and
warranties of the Borrower contained in Article VI hereof shall be true on and
as of the date of such additional Loan with the same effect as though such
representations and warranties had been made on and as of such date (except
representations and warranties which expressly 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) and the Borrower shall
have performed and complied with all covenants and conditions hereof; no Event
of Default or Potential Default shall have occurred and be continuing or shall
exist; the making of the Loans or issuing of such Letters of Credit shall not
contravene any Law applicable to the Borrower or any of the Banks; and the
Borrower shall have delivered to the Agent a duly executed and completed Loan
Request.
ARTICLE VIII
COVENANTS
8.01 Affirmative Covenants. The Borrower covenants and agrees that
until payment in full of the Loans and interest thereon, satisfaction of all of
the Borrower's other obligations hereunder and termination of the Revolving
Credit Commitments, the Borrower shall comply at all times with the following
affirmative covenants:
(a) Preservation of Existence, Etc. The Borrower shall, and shall
cause each of its Subsidiaries to, maintain its corporate existence and its
qualification to do business as a foreign corporation and good standing in each
jurisdiction in which its ownership or lease of property or the nature of its
business makes such qualification necessary, except where the failure to be so
qualified or in such good standing would not constitute a Material Adverse
Change.
(b) Payment of Liabilities, Including Taxes, Etc. The Borrower
shall, and shall cause each of its Subsidiaries to, duly pay and discharge all
liabilities to which it is subject or which are asserted against it, promptly as
and when the same shall become due and payable, including all taxes, assessments
and governmental charges upon it or any of its properties, assets, income or
profits, prior to the date on which penalties attach thereto, except to the
extent that such liabilities, including taxes, assessments or charges, are being
contested in
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good faith and by appropriate and lawful proceedings diligently conducted and
for which such reserve or other appropriate provisions, if any, as shall be
required by GAAP shall have been made, but only to the extent that failure to
discharge any such liabilities would not result in any additional liability
which would adversely affect to a material extent the financial condition of the
Borrower and its Subsidiaries taken as a whole and which would affect the
Collateral.
(c) Maintenance of Insurance. The Borrower shall, and shall cause
each of its Subsidiaries to, insure its properties and assets against loss or
damage by fire and such other insurable hazards as such assets are commonly
insured (including fire, extended coverage, property damage, worker's
compensation, public liability and business interruption insurance) and against
other risks (including errors and omissions) in such amounts as similar
properties and assets are insured by prudent companies in similar circumstances
carrying on similar businesses, and with reputable and financially sound
insurers, including self-insurance to the extent customary. At the request of
the Agent, the Borrower shall deliver (x) on the Closing Date and annually
thereafter an original certificate of insurance signed by the Borrower's
independent insurance broker describing and certifying as to the existence of
the insurance on the Collateral required to be maintained by this Agreement and
the other Loan Documents and (y) from time to time a summary schedule indicating
all insurance then in force with respect to the Borrower.
(d) Maintenance of Properties and Leases. The Borrower shall, and
shall cause each of its Subsidiaries to, maintain in good repair, working order
and condition (ordinary wear and tear excepted) in accordance with the general
practice of other businesses of similar character and size, all of those
properties useful or necessary to its business, and from time to time, the
Borrower will make or cause to be made all appropriate repairs, renewals or
replacements thereof.
(e) Maintenance of Patents, Trademarks, Etc. The Borrower shall,
and shall cause each of its Subsidiaries to, maintain in full force and effect
all patents, trademarks, trade names, copyrights, licenses, franchises, permits
and other authorizations necessary for the ownership and operation of its
properties and business if the failure so to maintain the same would constitute
a Material Adverse Change.
(f) Visitation Rights. The Borrower shall, and shall cause each of
its Subsidiaries to, permit any of the officers or authorized employees or
representatives of the Agent or any of the Banks to visit and inspect any of its
properties and to examine and make excerpts from its books and records and
discuss its business affairs, finances and accounts with its officers, all in
such detail and at such times during normal business hours and as often as any
of the Banks may reasonably request, provided that each Bank shall provide the
Borrower and the Agent with reasonable notice prior to any visit or inspection.
In the event any Bank desires to conduct an audit of the Borrower, such Bank
shall make a reasonable effort to conduct such audit contemporaneously with any
audit to be performed by the Agent.
(g) Keeping of Records and Books of Account. The Borrower shall,
and shall cause each of its Subsidiaries to, maintain and keep proper books of
record and account which enable the Borrower and its Subsidiaries to issue
financial statements in accordance with
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GAAP and as otherwise required by applicable Laws of any Official Body having
jurisdiction over the Borrower or any of its Subsidiaries, and which accurately
and fairly reflect the transactions and dispositions of assets of the Borrower
or such Subsidiary.
(h) Plans and Benefit Arrangements. The Borrower shall, and shall
cause each member of the ERISA Group to, comply with ERISA, the Internal Revenue
Code and other applicable Laws applicable to Plans and Benefit Arrangements
except where such failure, alone or in conjunction with any other failure, would
not result in a Material Adverse Change. Without limiting the generality of the
foregoing, the Borrower shall cause all of its Plans and all Plans maintained by
any member of the ERISA Group to be funded in accordance with the minimum
funding requirements of ERISA and shall make, and cause each member of the ERISA
Group to make, in a timely manner, all contributions due to Plans, Benefit
Arrangements and Multiemployer Plans.
(i) Compliance With Laws. The Borrower shall, and shall cause
each of its Subsidiaries to, comply with all applicable Laws, including all
Environmental Laws, in all respects provided that it shall not be deemed to be a
violation of this Section 8.01(i) if any failure to comply with any Law would
not result in fines, penalties, other similar liabilities or injunctive relief
which in the aggregate would constitute a Material Adverse Change.
(j) Use of Proceeds. The Borrower will use the proceeds of the
Loans only for lawful purposes in accordance with Section 2.08 hereof as
applicable and such uses shall not contravene any applicable Law or any other
provision hereof.
(k) [Intentionally Omitted.]
(l) Subordination of Intercompany Loans, Other Loans and Advances
to the Borrower. Except for Indebtedness described on Schedule 8.01(l), the
Borrower shall cause any intercompany Indebtedness, and shall cause any other
Indebtedness, loans or advances owed by any Loan Party to any other person
(other than a Loan Party) to be subordinated to the Loan Parties' obligations
under the Loan Documents on the terms set forth in Exhibit 8.01(l), with such
revisions thereto as are reasonably satisfactory to the Agent.
(m) Approval of Financial Statements in Permitted Acquisitions;
Notice of Permitted Acquisition.
(i) Approval of Financial Statements. The Borrower shall
deliver to the Banks a certificate in the form of Exhibit 8.01(m)(i) hereof (the
"Acquisition Approval Certificate") before making a Permitted Acquisition if
they desire that the cash flow of the business to be acquired during periods
prior to the acquisition shall be included when they compute Cash Flow from
Operations under this Agreement. The Borrower shall attach to such Acquisition
Approval Certificate copies of the historical financial statements of the
business to be acquired including the annual and interim balance sheets and
income statements for at least three (3) fiscal years prior to the Permitted
Acquisition and pro forma statements which shall include a combined balance
sheet as of the acquisition date and cash flow statements for the preceding
year. The pro forma statements shall set forth: (1) Consolidated Cash Flow from
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Operations of the Loan Parties and the acquired business, adjusted in accordance
with clause (A) of the definition of Consolidated Cash Flow from Operations, for
the Acquisition Income Reporting Period in connection with such Permitted
Acquisition, and (2) Total Indebtedness on the date of the Permitted Acquisition
after giving effect to the acquisition and the Loans to be made on such date,
and (3) the ratio of the amount in clause (2) to the amount in clause (1), which
ratio shall not exceed (A) 5.25 to 1.0 through and including September 30, 1998;
(B) 5.00 to 1.0 from October 1, 1998 through and including September 30, 1999;
(C) 4.75 to 1.0 from October 1, 1999 through and including September 30, 2000;
and (D) 4.5 to 1.0 from October 1, 2000 and thereafter. The Acquisition Approval
Certificate shall confirm the accuracy of the foregoing computations and that,
after giving effect to the Permitted Acquisition and the Loans made on the date
thereof, no Event of Default shall exist and the Loan Parties shall be in
compliance with all of their covenants hereunder, assuming, for purposes of
Borrower's financial covenants, that all items of income, expense and cash flow
are reported for the Acquisition Income Reporting Period and that all balance
sheet items (such as Indebtedness) are measured on the date of such Permitted
Acquisition. The Loan Parties may make the Permitted Acquisition prior to
receiving the Required Banks' approval of Borrower's Acquisition Approval
Certificate with respect thereto; provided that the Loan Parties may not, until
they have received such approval, include the cash flow of the business to be
acquired for periods prior to the acquisition in their net income when they
compute Consolidated Cash Flow from Operations. The Banks shall use their best
efforts to respond to the Borrower's request for approval of each Acquisition
Approval Certificate within two (2) Business Days following the Banks' receipt
of such certificate and shall not unreasonably withhold or delay such approval.
The Borrower may request that extraordinary, nonrecurring expenses under GAAP
incurred in connection with such Permitted Acquisition be excluded from the
Consolidated Net Income of the Loan Parties and from the net income of the
business to be acquired when they compute Consolidated Cash Flow from Operations
pursuant to clause (1) above. Examples of such expenses include, without
limitation, transaction costs, debt prepayments and similar charges, brokers'
fees, attorneys' fees and accountants' fees. The foregoing expenses shall be
excluded from net income in such computations of Consolidated Cash Flow from
Operations if the Required Banks agree in writing to such request.
(ii) Notice. The Borrower shall deliver to the Banks a
notice in the form of Exhibit 8.01(m)(ii) (the "Acquisition Notice Certificate")
at least two (2) Business Days before making any Permitted Acquisition except
for: (1) a Permitted Acquisition described in Section 8.01(m)(i) with respect to
which the Borrower is delivering an Acquisition Approval Certificate, or (2) a
Permitted Acquisition if the Purchase Price in connection therewith is less than
$2,500,000. The Acquisition Notice Certificate shall set forth the ratio of (1)
Consolidated Cash Flow From Operations (excluding the cash flow of the acquired
business) for the Acquisition Income Reporting Period in connection with such
Permitted Acquisition, and (2) Total Indebtedness on the date of the Permitted
Acquisition after giving effect to the acquisition and the Loans to be made on
such date, which ratio shall not exceed (A) 5.25 to 1.0 through and including
September 30, 1998; (B) 5.00 to 1.0 from October 1, 1998 through and including
September 30, 1999; (C) 4.75 to 1.0 from October 1, 1999 through and including
September 30, 2000; and (D) 4.5 to 1.0 from October 1, 2000 and thereafter. The
Acquisition Notice Certificate also shall confirm that, after giving effect to
the Permitted Acquisition and the
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Loans made on the date thereof, no Event of Default shall exist and the Loan
Parties shall be in compliance with all of their covenants hereunder, assuming,
for purposes of Borrower's financial covenants, that all items of income,
expense and cash flow are reported for the Acquisition Income Reporting Period
and that all balance sheet items (such as Indebtedness) are measured on the date
of such Permitted Acquisition.
(iii) Additional Information. With respect to any Acquisition
Approval Certificate or Acquisition Notice Certificate, the Borrower shall
provide to the Banks, as the Banks may reasonably request detailed calculations
and information supporting the financial calculations therein and the financial
statements attached thereto.
(n) Dissolution of Certain Subsidiaries. Borrower shall cause
Pinnacle Rehab of Gwinnette and Pinnacle's Kansas Joint Venture to be dissolved
on or before December 31, 1998. Borrower shall not, directly or indirectly, make
any capital contributions or other investments in, loans to, guarantees or other
obligations on behalf of, or other payments, distributions or contributions to
or for the benefit of, Pinnacle Rehab of Gwinnette or Pinnacle's Kansas Joint
Venture on or after the Closing Date, except for payment of immaterial expenses
on behalf of such entities relating to their dissolution.
(o) [Intentionally Omitted] .
(p) Further Assurances. Each Loan Party shall, from time to time,
at its expense, faithfully preserve and protect the Agent's Lien on or perfected
security interest in the Collateral as a continuing perfected Lien, subject only
to Permitted Liens, and shall do such other acts and things as the Agent in its
sole discretion may deem necessary or advisable from time to time in order to
preserve, perfect and protect the Liens granted under the Loan Documents and to
exercise and enforce its rights and remedies thereunder with respect to the
Collateral.
(q) Owned Facilities - Termination of Liens; Intercreditor
Agreements.
The Borrower shall:
(i) Cause any Lien securing any Owned Facility Indebtedness
to be terminated on or before the earlier of: the maturity of such Owned
Facility Indebtedness (without giving effect to any extension of such maturity
after the Sixteenth Amendment Effective Date, unless such extension of maturity
is otherwise approved in accordance with this Agreement) or any refinancing,
replacement or substitution of such Owned Facility Indebtedness, unless, in the
case of a refinancing, such refinancing is otherwise approved in accordance with
this Agreement;
(ii) Not permit the amount of Owned Facility Indebtedness
secured by Liens in favor of an Owned Facility Lender to exceed the amount of
such Owned Facility Indebtedness existing on the Sixteenth Amendment Effective
Date;
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(iii) Cause each Subsidiary Owner not to grant a Lien on any
asset of such Subsidiary Owner if the Owned Facility Lender has previously
terminated its Liens or has never obtained a Lien on such asset; and
(iv) Cause each Owned Facility Lender and any other person
which loans money to any Subsidiary Owner, or otherwise obtains a Lien in any of
the assets of any Subsidiary Owner relating to any of the Owned Facilities
(whether by assignment of the Owned Facility Indebtedness or otherwise), on the
date of such loan or lien to execute and deliver to Agent an Intercreditor
Agreement and Borrower shall deliver or cause to be delivered to Agent a true
and correct copy of the original of each Intercreditor Agreement within one (1)
Business Day after such agreement has been executed. The Borrower shall use its
best efforts to obtain each Intercreditor Agreement in the form of Exhibit
1.01(I)(2)(A), and if the Borrower is not successful in obtaining such form of
Intercreditor Agreement after using best efforts, then the Borrower shall use
best efforts to obtain an Intercreditor Agreement in the form of Exhibit
1.01(I)(2)(B). If the Borrower is not successful, after using best efforts, in
obtaining either such form of Intercreditor Agreement, then the Borrower shall
negotiate such other Intercreditor Agreement as is reasonably satisfactory, in
form and substance, to the Agent.
(r) Leased Facilities - Termination of Liens; Intercreditor
Agreements; Trustee Agreements.
The Borrower shall:
(i) Cause any Lien securing any Lessor Indebtedness to be
terminated on or before the earlier of: (i) the maturity of such Lessor
Indebtedness (without giving effect to any extension of such maturity after the
Sixteenth Amendment Effective Date unless such extension of maturity is
otherwise approved in accordance with this Agreement) or (ii) any refinancing,
replacement or substitution of such Lessor Indebtedness unless, in the case of a
refinancing, such refinancing is otherwise approved in accordance with this
Agreement;
(ii) Not permit the amount of Lessor Indebtedness secured by
Liens in favor of the Lessor Lenders to exceed the amount of such Indebtedness
existing on the Sixteenth Amendment Effective Date; and
(iii) Cause each Subsidiary Lessee not to grant a Lien on any
asset of such Subsidiary Lessee if the applicable Lessor or Lessor Lender has
previously terminated its Liens or has never obtained a Lien on such asset;
(iv) Deliver to the Agent for the benefit of the Banks an
Intercreditor Agreement with respect each Lessor Lender and, if reasonably
requested by the Agent, a Non-Disturbance Agreement. Each Non-Disturbance
Agreement shall be satisfactory, in form and substance to the Agent. Borrower
shall deliver or cause to be delivered to Agent a true and correct copy of each
Non-Disturbance Agreement and the original of each Intercreditor Agreement
within one (1) Business Day after such agreement has been executed pursuant to
the preceding sentence. The Borrower shall use its best efforts to obtain each
Intercreditor Agreement in the form of Exhibit 1.01(I)(1)(A), and if the
Borrower is not successful in
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obtaining such form of Intercreditor Agreement after using best efforts, then
the Borrower shall use best efforts to obtain an Intercreditor Agreement in the
form of Exhibit 1.01(I)(1)(B). If the Borrower is not successful, after using
best efforts, in obtaining either such form of Intercreditor Agreement, then the
Borrower shall negotiate such other Intercreditor Agreement as is reasonably
satisfactory, in form and substance, to the Agent; and
(v) Cause if reasonably requested by the Agent, each Lessor
listed on Schedule 6.01(aa) to execute and deliver to the Agent a Trustee
Agreement; provided, however, that if, with respect to Leased Facilities leased
by Loan Parties prior to the Sixteenth Amendment Effective Date, following the
Sixteenth Amendment Effective Date the Loan Parties are otherwise in compliance
with all requirements under this Agreement relating to Lessor Indebtedness,
Leased Facilities and Permitted Leased Facility Liens, then no additional
Trustee Agreements will be required with respect to such Leased Facilities so
long as the lease of such facility continues following the Sixteenth Amendment
Effective Date on terms and conditions identical to those approved by the
Required Banks prior to the Sixteenth Amendment Effective Date. Each Trustee
Agreement shall be satisfactory, in form and substance to the Agent.
8.02 Negative Covenants. The Borrower covenants and agrees that until
payment in full of the Loans and interest thereon, satisfaction of all of the
Borrower's other obligations hereunder and termination of the Revolving Credit
Commitments, the Borrower shall comply with the following negative covenants:
(a) Indebtedness. Subject to Section 8.02(v), the Borrower shall
not, and shall not permit any of its Restricted Subsidiaries to, at any time
create, incur, assume or suffer to exist any Indebtedness, except:
(i) Indebtedness under the Loan Documents;
(ii) Existing Indebtedness as of the Sixteenth Amendment
Effective Date as set forth on Schedule 8.02(a) hereto (including, subject to
the other provisions of this Agreement, any extensions or renewals thereof
provided there is no increase in the amount thereof or other significant change
in the terms thereof adverse to any Loan Party or to any Bank unless otherwise
specified on Schedule 8.02(a)); provided further that the Owned Facility
Indebtedness and Lessor Indebtedness are also subject to the covenants and
limitations described in Sections 8.01(q) and (r) and any refinancing, extension
or renewal of any Owned Facility Indebtedness or Lessor Indebtedness is also
subject to satisfaction of the conditions set forth in Exhibit 1.01(C) hereto;
(iii) Capitalized leases as and to the extent permitted under
Section 8.02(p);
(iv) Indebtedness which is subordinated in accordance with
the provisions of Section 8.01(1);
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(v) Indebtedness secured by Purchase Money Security
Interests in an aggregate amount for the Borrower and its Subsidiaries on a
consolidated basis at any time not exceeding $5,000,000;
(vi) Indebtedness of a Loan Party to the Borrower or to a
wholly-owned Subsidiary of the Borrower;
(vii) the Subordinated Notes, provided that neither the
subordination provisions contained in the Indenture nor Section 1008 [Limitation
on Indebtedness] of the Indenture shall be amended after the Subordinated
Indebtedness Incurrence Date and provided further that the Indenture is not
otherwise amended after the Subordinated Indebtedness Incurrence Date if the
effect thereof would (i) accelerate the due date or increase the amount of any
payment due from the Borrower thereunder, (ii) change the rate at which interest
is charged thereunder, or (iii) impose material restrictions or obligations on
the Borrower or the other Loan Parties which are not imposed thereunder on the
Closing Date or add any term thereto which is less favorable in any material
respect to the Loan Parties than the terms of the Indenture on the Subordinated
Indebtedness Incurrence Date or which is more restrictive to any of the Loan
Parties than the terms of the Credit Agreement;
(viii) Guaranties which constitute Indebtedness as permitted
pursuant to Section 8.02(c);
(ix) Indebtedness not exceeding $500,000 of the Borrower to
CoreStates Bank, N.A. in respect of an overnight unsecured overdraft facility at
any time; and
(x) Owned Facility Indebtedness incurred after the Sixteenth
Amendment Effective Date, if the principal amount of and other terms and
conditions with respect to such Owned Facility Indebtedness are acceptable to
the Required Banks, (including, without limitation, satisfaction of all
conditions set forth on Exhibit 1.01(C)); provided, that all Owned Facility
Indebtedness is subject to the covenants and limitations set forth in Section
8.01(q).
(b) Liens. The Borrower shall not, and shall not permit any of
the other Loan Parties or Unrestricted Subsidiary which is an Excluded Entity
with respect to which Restricted Investments have been made as permitted
pursuant to Section 8.02(d)(iv) to, at any time create, incur, assume or suffer
to exist any Lien on any of its or their property or assets, tangible or
intangible, now owned or hereafter acquired, or agree or become liable to do so,
except Permitted Liens.
(c) Guaranties. Except as described in Schedule 8.02(c), the
Borrower shall not, and shall not permit any of the other Loan Parties to, at
any time, directly or indirectly, become or be liable in respect of any Guaranty
except: (i) Guaranties of any obligation or liability of another Loan Party that
is permitted under the other provisions of this Agreement, (ii) Guaranties which
are not required by GAAP to be disclosed in the Borrower's audited consolidated
financial statements (including the footnotes thereto), (iii) Guaranties of
Indebtedness incurred as part of a permitted Restricted Investment pursuant to
Section
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8.02(d)(iv), and (iv) Guaranties which are subordinated on terms reasonably
acceptable to the Agent.
(d) Loans and Investments. The Borrower shall not, and shall not
permit any of the other Loan Parties, to, at any time make or suffer to remain
outstanding any loan or advance to, or purchase, acquire or own any stock,
bonds, notes or securities of, or any partnership interest (whether general or
limited) in, or any other investment or interest in, or make any capital
contribution to, any other person, or agree, become or remain liable to do any
of the foregoing, except:
(i) trade credit extended on usual and customary terms in
the ordinary course of business;
(ii) advances to employees to meet expenses incurred by such
employees in the ordinary course of business;
(iii) Permitted Investments;
(iv) Restricted Investments not to exceed in the aggregate
for the Borrower and the other Loan Parties Seventy-Five Million Dollars
($75,000,000) outstanding at any time; provided that (i) the Excluded Entity in
which the Restricted Investment is made is engaged in a business which is
ancillary and related to the business of the Loan Parties; (ii) the Loan Party
making a Restricted Investment is either a shareholder, member or partner of the
Excluded Entity in which a Restricted Investment is made; (iii) the stock,
equity interests in a limited liability company or partnership interests owned
by a Loan Party in the Excluded Entity in which a Restricted Investment is made
are pledged to the Agent on a first priority basis for the benefit of the Banks;
(iv) to the extent that any Excluded Entity incurs Indebtedness payable to any
person other than a Loan Party (the "Third Party Lender") in excess of
$5,000,000, prior to incurring such Indebtedness, the Borrower shall cause the
Third Party Lender to enter into an intercreditor agreement with the Agent on
behalf of the Banks, in form and substance satisfactory to the Agent in its sole
discretion with respect to the Indebtedness of such Excluded Entity payable to
the Third Party Lender and any Indebtedness of such Excluded Entity payable to
either the Banks or any Loan Party; and (v) to the extent that any individual
Restricted Investment exceeds $7,500,000 or any series of related Restricted
Investments in the aggregate exceed $7,500,000 prior to making any such
Restricted Investment, the Borrower shall have obtained the written approval of
the Required Banks;
(v) loans, advances and investments in Restricted
Subsidiaries; and
(vi) loans and advances in the aggregate not to exceed
$8,000,000 at any time outstanding to officers and senior management of the Loan
Parties, so long as each such advance is on terms and conditions reasonably
satisfactory to the Agent and so long as the Borrower gives five (5) Business
Days' prior notice to the Agent of each loan or advance and the recipient of
each loan or advance is reasonably satisfactory to the Agent.
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(e) Dividends and Related Distributions. The Borrower shall not,
and shall not permit any of its Subsidiaries to, make or pay, or agree to become
or remain liable to make or pay, any dividend or other distribution of any
nature (whether in cash, property, securities or otherwise) on account of or in
respect of their respective shares of capital stock or partnership interests, as
the case may be, or on account of the purchase, redemption, retirement or
acquisition of their respective shares of capital stock (or warrants, options or
rights therefor) or partnership interests, as the case may be, except (i)
dividends or distributions in respect of a partnership interest payable by any
Subsidiary to the Borrower, (ii) dividends payable by the Borrower solely in
shares of capital stock of the Borrower, and (iii) up to the Permitted
Distribution Amount of distributions per year payable in the aggregate by any
Subsidiary of the Borrower which is a limited liability company or partnership
to non Affiliate members of such limited liability company or non Affiliate
limited partners of such partnership, so long as after giving effect thereto no
Event of Default or Potential Default has occurred and is continuing and so long
as at least five (5) Business Days prior to the making of any such distribution
the Borrower provides written notice to the Agent, together with a detailed
calculation, certified by the Chief Financial Officer of Borrower, setting forth
in detail the relevant Subsidiary's compliance with the ratio set forth in
clause (A) of the definition of Permitted Distribution Amount or, as the case
may be, such Subsidiary's compliance with clause (B) of the definition of
Permitted Distribution Amount, in either case with respect to the proposed
distribution as of the date of the making thereof. Notwithstanding the
foregoing, during the period commencing on the Sixteenth Amendment Effective
Date through, but not including the Expiration Date (the "Permitted Redemption
Period") the Borrower may purchase or redeem its stock up to an aggregate of $50
million (including in such aggregate amount all purchases or redemptions during
the Permitted Redemption Period) of such stock, provided that, after giving
effect to each such purchase or redemption, no Potential Default or Event of
Default has occurred and is continuing and, without limiting the generality of
the foregoing, that: (x) after giving effect to each such purchase or redemption
the Borrower is in compliance (and the Borrower demonstrates such compliance to
the Agent in detail satisfactory to the Agent) with the covenant set forth in
Section 8.02(r) [Maximum Leverage Ratio] and with the covenant set forth in
Section 8.02(t) [Minimum Net Worth].
For purposes of demonstrating compliance with the financial covenant
set forth in Section 8.02(r), Total Indebtedness shall be calculated as of each
date of determination (after giving effect to each purchase or redemption of the
Borrower's stock) and Consolidated Cash Flow from Operations shall be calculated
as of each date of determination (after giving effect to each purchase or
redemption of the Borrower's stock) for the four fiscal quarters then ended.
(f) Liquidations, Mergers, Consolidations, Acquisitions. The
Borrower shall not, and shall not permit any of the other Loan Parties to,
dissolve, liquidate or wind-up its affairs, or become a party to any merger or
consolidation, or acquire by purchase, lease or otherwise all or substantially
all of the assets or capital stock of any other person, provided that:
(i) any wholly owned Subsidiary may consolidate or merge
into the Borrower or any other wholly owned Subsidiary;
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(ii) a Subsidiary that is not a Material Subsidiary may be
dissolved, liquidated or wound up provided that from the date of this Agreement
through the Expiration Date, the total assets of the non-Material Subsidiaries
which so dissolve, liquidate or wind up shall not exceed $25,000,000 in the
aggregate;
(iii) the Borrower or a Restricted Subsidiary of the Borrower
may acquire all of the capital stock of another corporation so long as (u) the
Purchase Price for such acquisition shall not exceed $100,000,000, (v) the
aggregate Purchase Price for such acquisition together with all previous
acquisitions permitted under clauses (iii) and (iv) of this Section 8.02(f)
shall not exceed $200,000,000 in any fiscal year of Borrower, (v) such acquired
corporation, simultaneous with the acquisition thereof by a Loan Party, executes
and delivers to the Agent for the benefit of the Banks a Guaranty Agreement and
a Pledge Agreement substantially in the form of Exhibits 1.01(G) and 1.01(P),
respectively, and also delivers to the Agent such opinions of counsel and other
documents in connection therewith as the Agent may reasonably request, (w) all
of the issued and outstanding capital stock of such acquired corporation owned
by a Loan Party is pledged to the Agent for the benefit of the Banks pursuant to
a Pledge Agreement substantially in the form of Exhibit 1.01(P) hereto, (x)
after giving effect to such proposed acquisition, no Event of Default shall have
occurred and be continuing, (y) after giving effect to such proposed acquisition
(and without limiting the generality of the preceding clause (iii)(x)), the
Borrower is in compliance with the Leverage Ratio set forth in Section 8.02(r)
and the Borrower demonstrates such compliance pursuant to Section 8.01(m) (if
Section 8.01(m) requires such demonstration of compliance), and (z) in the case
of a merger involving the Borrower, the Borrower shall be the survivor of such
merger, and in the case of a merger involving any Restricted Subsidiary the
survivor of such merger shall be either such Restricted Subsidiary or a Person
which, effective upon consummation of such merger shall have become a Restricted
Subsidiary of the Borrower, shall have joined this Agreement and the other Loan
Documents as a Loan Party (including , without limitation, execution and
delivery of a Guaranty Agreement substantially in the form of Exhibit 1.01(G)),
shall have delivered such opinions of counsel and other documents as the Agent
may reasonably request and whose equity interests shall have been pledged to the
Agent for the benefit of the Banks on a first priority perfected basis pursuant
to a Pledge Agreement; and
(iv) the Borrower or any Restricted Subsidiary may merge or
consolidate with, or acquire all or substantially all of the assets of another
person so long as (w) the Purchase Price for such acquisition, merger or
consolidation shall not exceed $100,000,000, (x) the aggregate Purchase Price
for such acquisition together with all previous acquisitions permitted under
clauses (iii) and (iv) of this Section 8.02(f) shall not exceed $200,000,000 in
any fiscal year of Borrower, (y) after giving effect to such proposed
acquisition, merger or consolidation, no Event of Default shall have occurred
and be continuing, and (z) after giving effect to such proposed acquisition,
merger or consolidation, the Borrower is in compliance with the Leverage Ratio
set forth in Section 8.02(r) and the Borrower demonstrates such compliance
pursuant to Section 8.01(m) (if Section 8.01(m) requires such demonstration of
compliance).
For purposes of the preceding clauses (iii)(z) and (iv)(z),
the Leverage Ratio set forth in Section 8.02(r) shall be calculated as follows:
(i) Total Indebtedness
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shall be determined as of the date of the proposed acquisition, after giving
effect thereto, and (ii) Consolidated Cash Flow from Operations shall be
calculated for the twelve-month period ending on the last day of the fiscal
quarter of the Borrower which precedes such date of acquisition.
(g) Dispositions of Assets or Subsidiaries. The Borrower shall
not, and shall not permit any of the other Loan Parties to, sell, convey,
assign, lease, abandon or otherwise transfer or dispose of, voluntarily or
involuntarily, any of its properties or assets, tangible or intangible
(including but not limited to sale, assignment, discount or other disposition of
accounts, contract rights, chattel paper, equipment or general intangibles with
or without recourse or of capital stock, shares of beneficial interest or
partnership interests of a Subsidiary), except:
(i) any sale, transfer or lease of assets in the ordinary
course of business which are no longer necessary or required in, or which are
not material to, the conduct of the Borrower's or such Subsidiary's business;
(ii) any sale, transfer or lease of assets by any
wholly-owned Loan Party to the Borrower or any other wholly owned Loan Party (or
by the Borrower to a wholly owned Loan Party);
(iii) any sale, transfer or lease of assets in the ordinary
course of business which are replaced by substitute assets acquired or leased
within the parameters of Section 8.02(p) provided such substitute assets are
subject to the Banks' Prior Security Interest;
(iv) any sale or transfer of assets which are obsolete or no
longer used or useful in the business of the Borrower or its Subsidiaries;
provided that such sales, transfers or dispositions shall not exceed, in any
fiscal year, $1 million in the aggregate for the Borrower and its Subsidiaries;
or
(v) any sale, transfer or lease of assets, other than those
specifically excepted pursuant to clauses (i) through (iv) above, which is
approved by the Required Banks so long as (x) the proceeds of such sale,
transfer or lease are applied as a mandatory prepayment of the Loans to the
extent required by the provisions of Section 5.05 of this Agreement, (y) after
giving effect to such proposed disposition, no Event of Default shall have
occurred and be continuing, and (z) after giving effect to such proposed
disposition (and without limiting the generality of the foregoing clause (y)),
the Borrower is in compliance (and, with respect to sales, transfers or leases
of assets of Subsidiaries which are not Material Subsidiaries, which sales,
transfers or leases individually or in the aggregate exceed $35 million for the
period from October 1, 1997 through and including the Expiration Date, the
Borrower demonstrates such compliance to the Agent in detail reasonably
satisfactory to the Agent) with the leverage ratio set forth in Section 8.02(r).
For purposes of this Section 8.02(g)(v), the leverage ratio set forth in Section
8.02(r) shall be calculated as follows: (i) Indebtedness of the Borrower and its
Subsidiaries shall be determined as of the date of the proposed disposition,
after giving effect thereto, and (ii) Consolidated Cash Flow from Operations
shall be calculated for the twelve-month period ending on the last day of the
fiscal quarter of the Borrower which precedes
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such date of disposition but shall exclude therefrom all amounts attributable to
the assets which are sold, transferred or leased.
(h) Affiliate Transactions. The Borrower shall not, and shall not
permit any of its Subsidiaries to, enter into or carry out any transaction with
any Affiliate (including, without limitation, purchasing property or services
from or selling property or services) unless such transaction is entered into in
the ordinary course of business upon fair and reasonable arm's-length terms and
conditions and is in accordance with all applicable Law or unless such
transaction is not otherwise prohibited by this Agreement.
(i) Subsidiary, Partnerships and Joint Ventures. The Borrower
shall not, and shall not permit any Subsidiary to, own or create directly or
indirectly any Subsidiaries other than those listed in Schedule 6.01(c);
provided, however, that the Borrower or a Restricted Subsidiary may acquire a
Subsidiary pursuant to Section 8.02(f) or form a new Subsidiary so long as (A)
if such Subsidiary is a Restricted Subsidiary it executes and delivers to the
Agent for the benefit of the Banks a Guaranty Agreement substantially in the
form of Exhibit 1.01(G), and also delivers to the Agent such opinions of counsel
and other documents as the Agent may reasonably request; and (B) all of the
issued and outstanding capital stock or other equity interests of such
Subsidiary owned by a Loan Party are pledged to the Agent for the benefit of the
Banks, such pledge to be a first priority perfected pledge pursuant to a Pledge
Agreement. If Borrower is forming a new Subsidiary (as opposed to acquiring a
Subsidiary) the obligations set forth in clauses (A) and (B) of the preceding
sentence shall arise only at such time as such new Subsidiary either commences
construction of a health care facility or related health care business, acquires
a health care facility or makes another acquisition permitted under this
Agreement or has a net book value, as determined under GAAP, of at least
$250,000. Except for investments permitted under Section 8.02(d)(iv), neither
the Borrower nor any Subsidiary shall become or agree to become a general or
limited partner in any general or limited partnership or a joint venturer in any
joint venture.
(j) Continuation of or Change in Business. The Borrower shall
not, and shall not permit any Subsidiary to, engage in any business other than
(i) its existing business, substantially as conducted and operated as of the
Closing Date and (ii) related health care businesses.
(k) Plans and Benefit Arrangements. The Borrower shall not, and
shall not permit any of its Subsidiaries to:
(i) fail to satisfy the minimum funding requirements of
ERISA and the Internal Revenue Code with respect to any Plan;
(ii) request a minimum funding waiver from the Internal
Revenue Service with respect to any Plan;
(iii) engage in a Prohibited Transaction with any Plan,
Benefit Arrangement or Multiemployer Plan which, alone or in conjunction with
any other circumstances
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or set of circumstances resulting in liability under ERISA, would constitute a
Material Adverse Change;
(iv) permit the aggregate actuarial present value of all
benefit liabilities (whether or not vested) under each Plan, determined on a
plan termination basis, as disclosed in the most recent actuarial report
completed with respect to such Plan, to exceed, as of any actuarial valuation
date, the fair market value of the assets of such Plan by an amount in excess of
$250,000;
(v) fail to make when due any contribution to any
Multiemployer Plan that the Borrower or any member of the ERISA Group may be
required to make under any agreement relating to such Multiemployer Plan, or any
Law pertaining thereto;
(vi) withdraw (completely or partially) from any
Multiemployer Plan or withdraw (or be deemed under Section 4062(e) of ERISA to
withdraw) from any Multiple Employer Plan, where any such withdrawal is likely
to result in a material liability of Borrower or any member of the ERISA Group;
(vii) terminate, or institute proceedings to terminate, any
Plan, where such termination is likely to result in a material liability to the
Borrower or any member of the ERISA Group;
(viii) make any amendment to any Plan with respect to which
security is required under Section 307 of ERISA; or
(ix) fail to give any and all notices and make all
disclosures and governmental filings required under ERISA or the Internal
Revenue Code, where such failure is likely to result in a Material Adverse
Change.
(l) Fiscal Year. The Borrower shall not permit any of its
Subsidiaries to, change its fiscal year from the twelve-month period beginning
January 1 and ending December 31.
(m) Issuance of Stock. The Borrower shall not permit any of its
Subsidiaries to issue any additional shares of capital stock, partnership
interests or member interests in a limited liability company or any options,
warrants or other rights in respect thereof; provided, however, that an
Unrestricted Subsidiary which is an Excluded Entity may issue additional capital
stock, partnership interests or member interests in a limited liability company
so long as all such capital stock, partnership interests or member interests in
a limited liability company which are owned, beneficially, of record, or
otherwise, by any Loan Party are pledged to the Banks as a first priority
perfected pledge pursuant to a Pledge Agreement, and provided further that any
Restricted Subsidiary may issue additional capital stock, partnership interests
or member interests in a limited liability company so long as such capital
stock, partnership interests or member interests in a limited liability company
are pledged to the Banks as a first priority perfected pledge pursuant to a
Pledge Agreement.
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(n) [Intentionally Omitted.]
(o) [Intentionally Omitted.]
(p) Capital Expenditures and Leases. The Borrower shall not, and
shall not permit any of its Subsidiaries to make any payments on account of the
purchase of any assets which if purchased would constitute fixed assets or on
account of the lease of any assets which if leased would constitute a capital
lease, in the aggregate exceeding (i) $82,000,000 during the fiscal year of
January 1, 1997 through December 31, 1997; and (ii) $75,000,000 in each fiscal
year thereafter, and all such purchases of fixed assets or payments pursuant to
such capital leases shall be made under usual and customary terms and in the
ordinary course of business.
(q) Minimum Fixed Charge Coverage Ratio. The Borrower shall not
at any time permit the ratio of (x) the sum of Adjusted Consolidated Net Income,
interest expense, depreciation, amortization, income tax expense and operating
lease expense to (y) the sum of its interest expense, operating lease expense
and current maturities of long-term Indebtedness (other than current maturities
of obligations in respect of capital leases) in each case determined and
consolidated in accordance with GAAP to be less than 2.0 to 1.0. Such ratio
shall be calculated as of the end of each fiscal quarter. Calculations as of the
end of each fiscal quarter shall be for the four fiscal quarters then ended.
(r) Maximum Leverage Ratio. The Borrower shall not at any time
permit the ratio of Total Indebtedness to Consolidated Cash Flow from Operations
to exceed (A) 5.25 to 1.0 from October 1, 1997 through and including September
30, 1998; (B) 5.0 to 1.0 from October 1, 1998 through and including September
30, 1999; (C) 4.75 to 1.0 from October 1, 1999 through and including September
30, 2000; and (D) 4.5 to 1.0 from October 1, 2000 and thereafter. For purposes
of this Section 8.02(r), Total Indebtedness shall be calculated as of each date
of determination and Consolidated Cash Flow from Operations shall be calculated
as of each date of determination for the four fiscal quarters then ended.
(s) [Intentionally Omitted.]
(t) Minimum Net Worth. The Borrower shall not at any time after
October 1, 1997, permit Consolidated Net Worth to be less than the sum of (i)
Three Hundred Twenty Four Million Dollars ($324,000,000), (ii) seventy-five
percent (75%) of Adjusted Consolidated Net Income of the Borrower and its
Subsidiaries for each fiscal quarter in which net income was earned (as opposed
to a net loss) during the period from July 1, 1997 through (and including) the
date of determination, (iii) one hundred percent (100%) of all increases in
capital stock and additional paid-in capital from issuances for cash of equity
securities and other equity capital investments after July 1, 1997, and (iv) one
hundred percent (100%) of all increases in capital stock and additional paid-in
capital from issuances of equity securities in connection with the acquisition
of a Subsidiary after July 1, 1997 (so long as the fair market value at the time
of acquisition of the Subsidiary so acquired is at least equal to the value of
the capital stock or other equity securities so issued
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(u) Senior Indebtedness to Cash Flow From Operations Ratio. The
Borrower shall not at any time permit the ratio of (i) Total Indebtedness, other
than the outstanding principal amount of the Subordinated Notes and other than
the outstanding principal amount of Indebtedness permitted pursuant to Section
8.02(a)(iv), to (ii) Consolidated Cash Flow from Operations to exceed (A) 4.0 to
1.0 for periods prior to and including September 30, 1998; (B) 3.75 to 1.0 from
October 1, 1998 through and including September 30, 1999; (C) 3.50 to 1.0 from
October 1, 1999 through and including September 30, 2000; and (D) 3.25 to 1.0
from October 1, 2000 and thereafter. For purposes of this Section 8.02(u), Total
Indebtedness, the outstanding principal amount of the Subordinated Notes and the
outstanding principal amount of Indebtedness permitted pursuant to Section
8.02(a)(iv) shall be calculated as of each date of determination and
Consolidated Cash Flow from Operations shall be calculated as of each date of
determination for the four fiscal quarters then ended.
(v) Incurrence of Indebtedness Permitted by the Indenture. So
long as any Indebtedness or other obligations (monetary or otherwise) are
outstanding under the Indenture the Borrower shall not, and shall not permit any
of its Subsidiaries to, at any time create, incur, assume or suffer to exist any
Indebtedness unless the incurrence thereof complies with the provisions of
Section 1008. [Limitation on Indebtedness] of the Indenture as in effect on the
Ninth Amendment Effective Date without giving any effect to any grace period
under the Indenture or waiver under the Indenture of any default of such
covenant.
(w) [Intentionally Omitted.]
(x) Negative Pledges. Except as set forth on Schedule 8.02(x),
Borrower shall not and shall not permit any of its Subsidiaries to enter into
any agreement with any person which prohibits the Loan Parties from granting
Liens to the Agent or the Banks.
(y) Prohibition of Defeasance of Subordinated Notes. The Borrower
shall not and shall not permit any of its Subsidiaries to make any payments to
the trustee under the Indenture or to any holders of Subordinated Notes in
payment of the defeasance or covenant defeasance of the Subordinated Notes
pursuant to Section 402 or 403 of the Indenture or any similar provision in any
supplement to the Indenture.
8.03 Reporting Requirements. The Borrower covenants and agrees that
until payment in full of the Loans and interest thereon, satisfaction of all of
the Borrower's other obligations hereunder and termination of the Revolving
Credit Commitments, the Borrower will furnish or cause to be furnished to the
Agent and each of the Banks:
(a) [Intentionally Omitted.]
(b) Quarterly Financial Statements. As soon as available and in
any event within forty-five (45) calendar days after the end of each fiscal
quarter in each fiscal year, financial statements of the Borrower, consisting of
a consolidated balance sheet as of the end of such fiscal quarter and related
consolidated statements of income, retained earnings and cash flows for the
fiscal quarter then ended and the fiscal year through that date, all in
reasonable detail and certified by the Chief Executive Officer, President or
Chief Financial Official of the
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Borrower as having been prepared in accordance with GAAP, consistently applied
(subject to normal year-end audit adjustments), and setting forth in comparative
form the respective financial statements for the corresponding date and period
in the previous fiscal year.
(c) Annual Financial Statements. As soon as available and in any
event within ninety (90) days after the end of each fiscal year of the Borrower,
financial statements of the Borrower consisting of a consolidated balance sheet
as of the end of such fiscal year, and related consolidated statements of
income, retained earnings and cash flows for the fiscal year then ended, all in
reasonable detail and setting forth in comparative form the financial statements
as of the end of and for the preceding fiscal year, and certified by independent
certified public accountants of nationally recognized standing satisfactory to
the Agent. The certificate or report of accountants shall be free of
qualifications (other than any consistency qualification that may result from a
change in the method used to prepare the financial statements as to which such
accountants concur) and shall not include a statement which indicates the
occurrence or existence of any event, condition or contingency which would
materially impair the prospect of payment or performance of any covenant,
agreement or duty of the Borrower or any of its Subsidiaries under any of the
Loan Documents, together with a letter of such accountants substantially to the
effect that, based upon their ordinary and customary examination of the affairs
of the Borrower and its Subsidiaries, performed in connection with the
preparation of such consolidated financial statements, and in accordance with
generally accepted auditing standards, they are not aware of the existence of
any condition or event which constitutes an Event of Default or Potential
Default or, if they are aware of such condition or event, stating the nature
thereof.
(d) Certificate of the Borrower. Concurrent with the financial
statements of the Borrower furnished to the Agent and to the Banks pursuant to
Sections 8.03(b) and 8.03(c) hereof, a certificate of the Borrower signed by the
Chief Executive Officer, President or Chief Financial Officer of the Borrower or
by either Paul Remington, Vice President-Finance of the Borrower or Donna
Dooley, Vice President-Finance of the Borrower, in the form of Exhibit 8.03(d)
hereto, to the effect that, except as described pursuant to Section 8.03(e)
below, (i) the representations and warranties of the Borrower contained in
Article VI hereof are true on and as of the date of such certificate with the
same effect as though such representations and warranties had been made on and
as of such date (except representations and warranties which expressly relate
solely to an earlier date or time) and the Borrower has performed and complied
with all covenants and conditions hereof, (ii) no Event of Default or Potential
Default exists and is continuing on the date of such certificate, and (iii)
containing calculations in sufficient detail to demonstrate compliance as of the
date of the financial statements with all financial covenants contained in
Section 8.02 hereof and with the covenant contained in Section 1008 [Limitation
on Indebtedness] of the Indenture.
(e) Notice of Default. Promptly after any officer of the Borrower
has learned of the occurrence of an Event of Default or Potential Default, a
certificate signed by the Chief Executive Officer, President or Chief Financial
Officer of the Borrower or by Paul Remington, Vice President-Finance of the
Borrower, setting forth the details of such Event of
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Default or Potential Default and the action which the Borrower proposes to take
with respect thereto.
(f) Notice of Litigation. Promptly after the commencement
thereof, notice of all actions, suits, proceedings or investigations before or
by any Official Body or any other person against the Borrower which relate to
the Collateral, involve a claim or series of related claims in excess of
$1,000,000 or which if adversely determined would constitute a Material Adverse
Change.
(g) Certain Events. Written notice to the Agent (and upon the
Agent's receipt of such notice, the Agent shall provide a copy thereof to each
Bank) at least thirty (30) calendar days prior thereto, with respect to any
proposed sale or transfer of assets pursuant to Section 8.02(g)(iii) or (iv).
(h) Budgets, Forecasts, Other Reports and Information. Promptly
upon their becoming available to the Borrower:
(i) the annual budget of the Borrower, to be supplied not
later than sixty (60) days prior to commencement of the fiscal year to which
such budget relates,
(ii) any reports including management letters submitted to
the Borrower by independent accountants in connection with any annual, interim
or special audit,
(iii) any reports, notices or proxy statements generally
distributed by the Borrower to its stockholders on a date no later than the date
supplied to the stockholders,
(iv) regular or periodic reports, including Forms 10-K, 10-Q
and 8-K, registration statements and prospectuses, filed by the Borrower with
the Securities and Exchange Commission,
(v) a copy of any material order in any proceeding to which
the Borrower or any of its Subsidiaries is a party issued by any Official Body,
(vi) regular, periodic utilization reports including in
detail reasonably satisfactory to the Agent for the period of such reports the
patient census, the number of occupied beds, the payment source (Medicare,
Medicaid, private pay or otherwise) for each patient,
(vii) such other reports and information as the Banks may
from time to time reasonably request. The Borrower shall also notify the Banks
promptly of the enactment or adoption of any Law which may result in a Material
Adverse Change with respect to the Borrower after the Borrower becomes aware or
should reasonably have become aware thereof, and
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(viii) annual reports in detail satisfactory to the Agent
setting forth the real property owned, leased or managed by the Borrower or any
Subsidiary, to be supplied not later than sixty (60) days prior to commencement
of the fiscal year to which any of the foregoing may be applicable.
(i) Notices Regarding Plans and Benefit Arrangements. (i)
Promptly upon becoming aware of the occurrence thereof, notice (including the
nature of the event and, when known, any action taken or threatened by the
Internal Revenue Service or the PBGC with respect thereto) of:
(A) any Reportable Event with respect to the Borrower
or any member of the ERISA Group (regardless of whether the obligation to report
said Reportable Event to the PBGC has been waived),
(B) any Prohibited Transaction which could be subject
the Borrower or any member of the ERISA Group to a civil penalty assessed
pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the
Internal Revenue Code in connection with any Plan, Benefit Arrangement or any
trust created thereunder,
(C) any assertion of material withdrawal liability
with respect to any Multiemployer Plan,
(D) any partial or complete withdrawal from a
Multiemployer Plan by the Borrower or any member of the ERISA Group under Title
IV of ERISA (or assertion thereof), where such withdrawal is likely to result in
material withdrawal liability,
(E) any cessation of operations (by the Borrower or
any member of the ERISA Group) at a facility in the circumstances described in
Section 4063(e) of ERISA,
(F) withdrawal by the Borrower or any member of the
ERISA Group from a Multiple Employer Plan,
(G) a failure by the Borrower or any member of the
ERISA Group to make a payment to a Plan required to avoid imposition of a lien
under Section 302(f) of ERISA,
(H) the adoption of an amendment to a Plan requiring
the provision of security to such Plan pursuant to Section 307 of ERISA, or
(I) any change in the actuarial assumptions or funding
methods used for any Plan, where the effect of such change is to materially
increase or materially reduce the unfunded benefit liability or obligation to
make periodic contributions.
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(ii) Promptly after receipt thereof, copies of (a) all
notices received by the Borrower or any member of the ERISA Group of the PBGC's
intent to terminate any Plan administered or maintained by the Borrower or any
member of the ERISA Group, or to have a trustee appointed to administer any such
Plan; and (b) at the request of the Agent or any Bank each annual report (IRS
Form 5500 series) and all accompanying schedules, the most recent actuarial
reports, the most recent financial information concerning the financial status
of each Plan administered or maintained by the Borrower or any member of the
ERISA Group, and schedules showing the amounts contributed to each such Plan by
or on behalf of the Borrower or any member of the ERISA Group in which any of
their personnel participate or from which such personnel may derive a benefit,
and each Schedule B (Actuarial Information) to the annual report filed by the
Borrower or any member of the ERISA Group with the Internal Revenue Service with
respect to each such Plan.
(iii) Promptly upon the filing thereof, copies of Form 5310,
or any successor or equivalent form to Form 5310, filed with the PBGC in
connection with the termination of any Plan.
(j) Notices With Respect to Indenture. Written notice to the
Agent (and upon the Agent's receipt of each such notice, the Agent shall provide
a copy thereof to each Bank):
(i) immediately upon the occurrence of a "Default" or an
"Event of Default," as such terms are defined in the Indenture;
(ii) immediately upon a "Change of Control," as such term is
defined in the Indenture;
(iii) immediately upon receipt of a "notice of acceleration"
from either the trustee for the Subordinated Notes or the holders of the
Subordinated Notes pursuant to Section 502 of the Indenture or any similar
provision in any supplement to the Indenture;
(iv) simultaneous with the sending thereof, all notices
required to be sent to the trustee or the holders of the Subordinated Notes
under the Indenture; and
(v) immediately upon the receipt thereof, all notices
received from the trustee under the Indenture.
ARTICLE IX
DEFAULT
9.01 Events of Default. An Event of Default shall mean the occurrence
or existence of any one or more of the following events or conditions (whatever
the reason therefor and whether voluntary, involuntary or effected by operation
of Law):
(a) The Borrower shall fail to pay any principal of any Loan
(including scheduled or mandatory prepayments or the payment due at maturity) or
shall fail to pay any
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interest on any Loan or any other amount owing hereunder or under the other Loan
Documents after such principal or within three (3) Business Days after such
interest or other amount becomes due in accordance with the terms hereof or
thereof;
(b) Any representation or warranty made at any time by the
Borrower herein or by the Borrower or any of its Subsidiaries in any other Loan
Document, or in any certificate, other instrument or statement furnished
pursuant to the provisions hereof or thereof, shall prove to have been false or
misleading in any material respect as of the time it was made or furnished
regardless of whether such representation or warranty was qualified as to
Borrower's knowledge or best knowledge;
(c) The Borrower shall default in the observance or performance
of any covenant contained in Section 8.01(f) or Section 8.02 hereof;
(d) The Borrower or any of its Subsidiaries shall default in the
observance or performance of any other covenant, condition or provision hereof
or of any other Loan Document and such default shall continue unremedied for a
period of thirty (30) Business Days after any officer of the Borrower or any
Subsidiary becomes aware of the occurrence thereof (such grace period to be
applicable only in the event such default can be remedied by corrective action
of the Borrower or such Subsidiary as determined by the Agent in its sole
discretion);
(e) A default or event of default shall occur at any time under
the terms of any other agreement involving borrowed money or the extension of
credit or any other Indebtedness under which the Borrower or any of its
Subsidiaries may be obligated as borrower or guarantor in excess of $1,000,000
in aggregate principal amount, and such breach, default or event of default
consists of the failure to pay (beyond any period of grace permitted with
respect thereto, whether waived or not) any indebtedness when due (whether at
stated maturity, by acceleration or otherwise) or if such breach or default
permits or causes the acceleration of any indebtedness (whether or not such
right shall have been waived) or the termination of any commitment to lend;
(f) Any final judgments or orders for the payment of money in
excess of $1,000,000 in the aggregate (not paid or fully covered by insurance)
shall be entered against the Borrower or any of its Subsidiaries by a court
having jurisdiction in the premises which judgment is not discharged, vacated,
bonded or stayed pending appeal within a period of thirty (30) days from the
date of entry;
(g) Any of the Loan Documents shall cease to be legal, valid and
binding agreements enforceable against the party executing the same or such
party's successors and assigns (as permitted under the Loan Documents) in
accordance with the respective terms thereof or shall in any way be terminated
(except in accordance with its terms) or shall in any way be challenged or
contested or cease to give or provide the respective Liens, security interests,
rights, titles, interests, remedies, powers or privileges intended to be created
thereby;
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(h) The Collateral or any other of the Borrower's or any of its
Subsidiaries' assets are attached, seized, levied upon or subject to a writ or
distress warrant; or such come within the possession of any receiver, trustee,
custodian or assignee for the benefit of creditors and the same is not cured
within thirty (30) days thereafter;
(i) A notice of lien or assessment in excess of $1,000,000 is
filed of record with respect to all or any part of the Borrower's or any of its
Subsidiaries' assets by the United States, or any department, agency or
instrumentality thereof, or by any state, county, municipal or other
governmental agency, including, without limitation, the Pension Benefit Guaranty
Corporation, or if any taxes or debts owing at any time or times hereafter to
any one of these becomes payable and the same is not paid within thirty (30)
days after the same becomes payable unless the same is being contested in good
faith in accordance with Section 8.01(b);
(j) The Borrower or any of its Material Subsidiaries ceases to be
solvent or admits in writing its inability to pay its debts as they mature;
(k) Any of the following occurs: The Agent determines in good
faith that the amount of Borrower's liability is likely to exceed 10% of its
Consolidated Net Worth upon the occurrence of (i), (ii), (iii) or (iv) below:
(i) any Reportable Event constitutes grounds for the termination of any Plan by
the PBGC or the appointment of a trustee to administer or liquidate any Plan,
shall have occurred and be continuing; (ii) proceedings shall have been
instituted or other action taken to terminate any Plan or a termination notice
shall have been filed with respect to any Plan; (iii) a trustee shall be
appointed to administer or liquidate any Plan; or (iv) the PBGC shall give
notice of its intent to institute proceedings to terminate any Plan or Plans or
to appoint a trustee to administer or liquidate any Plan; or, with respect to
any of the events specified in (v), (vi), (vii), (viii) or (ix) below, the Agent
determines in good faith that any such occurrence could be reasonably likely to
materially and adversely affect the total enterprise represented by the Borrower
and the other members of the ERISA Group; (v) the Borrower or any member of the
ERISA Group shall fail to make any contributions when due to a Plan or a
Multiemployer Plan; (vi) the Borrower or any member of the ERISA Group shall
make any amendment to a Plan with respect to which security is required under
Section 307 of ERISA; (vii) the Borrower or any member of the ERISA Group shall
withdraw completely or partially from a Multiemployer Plan; (viii) the Borrower
or any member of the ERISA Group shall withdraw (or shall be deemed under
Section 4062(e) of ERISA to withdraw) from a Multiple Employer Plan; or (ix) any
applicable Law is adopted, changed or interpreted by any Official Body with
respect to or otherwise affecting one or more Plans, Multiemployer Plans or
Benefit Arrangements;
(l) The Borrower ceases to conduct its business as contemplated or
the Borrower or any of its Material Subsidiaries is enjoined, restrained or in
any way prevented by court order from conducting all or any material part of its
business and such injunction, restraint or other preventative order is not
dismissed within thirty (30) days after the entry thereof;
(m) A Change of Ownership occurs;
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(n) A proceeding shall have been instituted in a court having
jurisdiction in the premises seeking a decree or order for relief in respect of
the Borrower or any of its Subsidiaries in an involuntary case under any
applicable bankruptcy, insolvency, reorganization or other similar law now or
hereafter in effect, or a receiver, liquidator, assignee, custodian, trustee,
sequestrator, conservator (or similar official) of the Borrower or any of its
Subsidiaries for any substantial part of its property, or for the winding-up or
liquidation of its affairs, and such proceeding shall remain undismissed or
unstayed and in effect for a period of sixty (60) consecutive days or such court
shall enter a decree or order granting any of the relief sought in such
proceeding; or
(o) The Borrower or any of its Subsidiaries shall commence a
voluntary case under any applicable bankruptcy, insolvency, reorganization or
other similar law now or hereafter in effect, shall consent to the entry of an
order for relief in an involuntary case under any such law, or shall consent to
the appointment or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator, conservator (or other similar official) of
itself or for any substantial part of its property or shall make a general
assignment for the benefit of creditors, or shall fail generally to pay its
debts as they become due, or shall take any action in furtherance of any of the
foregoing.
9.02 Consequences of Event of Default
(a) If an Event of Default specified under subsections (a) through
(m) of Section 9.01 hereof shall occur and be continuing, the Banks shall be
under no further obligation to make Loans hereunder and the Agent upon the
request of the Required Banks, shall (i) by written notice to the Borrower,
declare the unpaid principal amount of the Notes then outstanding and all
interest accrued thereon, any unpaid fees and all other Indebtedness of the
Borrower to the Banks hereunder and thereunder to be forthwith due and payable,
and the same shall thereupon become and be immediately due and payable to the
Agent for the benefit of each Bank without presentment, demand, protest or any
other notice of any kind, all of which are hereby expressly waived, and (ii)
require the Borrower to, and the Borrower shall thereupon, deposit in a
non-interest bearing account with the Agent, as cash collateral for its
obligations under the Loan Documents, an amount equal to the maximum amount
currently or at any time thereafter available to be drawn on all outstanding
Letters of Credit, and the Borrower hereby pledges to the Agent and the Banks,
and grants to the Agent and the Banks a security interest in, all such cash as
security for such obligations. Upon the curing of all existing Events of Default
to the satisfaction of the Required Banks, the Agent shall return such cash
collateral to the Borrower; and
(b) If an Event of Default specified under subsections (n) or (o)
of Section 9.01 hereof shall occur, the Banks shall be under no further
obligations to make Loans hereunder and the unpaid principal amount of the Notes
then outstanding and all interest accrued thereon, any unpaid fees and all other
Indebtedness of the Borrower to the Banks hereunder and thereunder shall be
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which are hereby expressly waived; and
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(c) If an Event of Default shall occur and be continuing, any
Bank to whom any obligation is owed by any Loan Party hereunder or under any
other Loan Document or any participant of such Bank which has agreed in writing
to be bound by the provisions of Section 10.13 hereof and any branch, subsidiary
or affiliate of such Bank or participant anywhere in the world shall have the
right, in addition to all other rights and remedies available to it, without
notice to such Loan party, to set-off against and apply to the then unpaid
balance of all the Loans and all other obligations of such Loan party hereunder
or under any other Loan Document any debt owing to, and any other funds held in
any manner for the account of, such Loan Party by such Bank or participant or by
such branch, subsidiary or affiliate, including, without limitation, all funds
in all deposit accounts (whether time or demand, general or special,
provisionally credited or finally credited, or otherwise) now or hereafter
maintained by such Loan Party for its own account (but not including funds held
in custodian or trust accounts) with such Bank or participant or such branch,
subsidiary or affiliate. Such right shall exist whether or not any Bank or the
Agent shall have made any demand under this Agreement or any other Loan
Document, whether or not such debt owing to or funds held for the account of
such Loan Party is or are matured or unmatured and regardless of the existence
or adequacy of any Collateral, Guaranty or any other security, right or remedy
available to any Bank or the Agent; and
(d) If an Event of Default shall occur and be continuing, and
whether or not the Agent shall have accelerated the maturity of Loans of the
Borrower pursuant to any of the foregoing provisions of this Section 9.02, the
Agent or any Bank, if owed any amount with respect to the Notes, may proceed to
protect and enforce its rights by suit in equity, action at law and/or other
appropriate proceeding, whether for the specific performance of any covenant or
agreement contained in this Agreement or the Notes, including as permitted by
applicable Law the obtaining of the ex parte appointment of a receiver, and, if
such amount shall have become due, by declaration or otherwise, proceed to
enforce the payment thereof or any other legal or equitable right of the agent
or such Bank; and
(e) From and after the date on which the Agent has taken any
action pursuant to this Section 9.02 and until all obligations of the Loan
Parties have been paid in full, any and all proceeds received by the Agent from
any sale or other disposition of the Collateral, or any part thereof, or the
exercise of any other remedy by the Agent, shall be applied as follows:
(i) first, to reimburse the Agent and the Banks for
reasonable out-of-pocket costs, expenses and disbursements, including without
limitation reasonable attorneys' fees and legal expenses, incurred by the Agent
or the Banks in connection with realizing on the Collateral or collection of any
obligations of the Loan Parties under any of the Loan Documents, including
advances made by the Banks or any one of them or the Agent for the reasonable
maintenance, preservation, protection or enforcement of, or realization upon,
the Collateral, including without limitation, advances for taxes, insurance,
repairs and the like and reasonable expenses incurred to sell or otherwise
realize on, or prepare for sale or other realization on, any of the Collateral;
(ii) second, to the repayment of all Indebtedness then due
and unpaid of the Loan Parties to the Banks incurred under this Agreement or any
of the Loan
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Documents, whether of principal, interest, fees, expenses or otherwise, in such
manner as the Agent may reasonably determine in its discretion and with respect
to principal, interest, and fees, shall be made in proportion to the Ratable
Share of each Bank; and
(iii) the balance, if any, as required by Law.
(f) In addition to all of the rights and remedies contained in
this Agreement or in any of the other Loan Documents, the Agent shall have all
of the rights and remedies with respect to the Collateral of a secured party
under the Uniform Commercial Code or other applicable Law, all of which rights
and remedies shall be cumulative and non-exclusive, to the extent permitted by
Law. The Agent may, and upon the request of the Required Banks shall, exercise
all post-default rights granted to the Agent and the Banks under the Loan
Documents or applicable Law.
(g) Following the occurrence and continuance of an Event of
Default, the Borrower, at its cost and expense (including the cost and expense
of obtaining any of the following referenced consents, approvals, etc.) will
promptly execute and deliver or cause the execution and delivery of all
applications, certificates, instruments, registration statements, and all other
documents and papers the Agent may request in connection with the obtaining of
any consent, approval, registration, qualification, permit, license,
accreditation, or authorization of any other Official Body or other person
necessary or appropriate for the effective exercise of any rights hereunder or
under the other Loan Documents. Without limiting the generality of the
foregoing, the Borrower agrees that in the event the Agent on behalf of the
Banks shall exercise its rights, hereunder or pursuant to the other Loan
Documents, to sell, transfer, or otherwise dispose of, or vote, consent,
operate, or take any other action in connection with any of the Collateral, the
Borrower shall execute and deliver (or cause to be executed and delivered) all
applications, certificates, assignments, and other documents that the Agent
requests to facilitate such actions and shall otherwise promptly, fully, and
diligently cooperate with the Agent and any other necessary persons in making
any application for the prior consent or approval of any Official Body or any
other person to the exercise by the Agent on behalf of the Banks of any of such
rights relating to all or any of the Collateral. Furthermore, because the
Borrower agrees that the remedies at law, of the Agent on behalf of the Banks,
for failure of the Borrower to comply with the provisions of Section 8.01(f) and
of this Section 9.02(g) would be inadequate and that any such failure would not
be adequately compensable in damages, the Borrower agrees that the covenants of
Sections 8.01(f) and 9.02(g) may be specifically enforced.
(h) Upon the occurrence and continuance of an Event of Default,
the Agent may request, without limiting the rights and remedies of the Agent on
behalf of the Banks otherwise provided hereunder and under the other Loan
Documents, that the Borrower do any of the following: (i) give the Agent on
behalf of the Banks specific assignments of the accounts receivable of the
Borrower and each Subsidiary after such accounts receivable come into existence,
and schedules of such accounts receivable, the form and content of such
assignment and schedules to be satisfactory to the Agent, (ii) immediately
notify the Agent if any of such accounts receivable arise out of contracts with
the U.S. Government or any department, agency or instrumentality thereof, and
execute any instruments and take any steps required by the Agent
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in order that all moneys due and to become due under such contract shall be
assigned (to the extent permitted by law) to the Agent on behalf of the Banks
and notice thereof given to the government under the Federal Assignment of
Claims Act, if applicable, or any other applicable law or regulation; and in
order to better secure the Agent on behalf of the Banks, in relation to such
accounts receivable, and (iii) to the extent permitted by Law, enter into such
lockbox agreements and establish such lockbox accounts as the Agent may require,
with the local banks in areas in which the Borrower and its Subsidiaries may be
operating (in such cases, all local lockbox accounts shall be depository
transfer accounts entitled "In trust for PNC Bank, National Association, as
Agent") which shall have agreed in writing to the Agent's requirements for the
handling of such accounts and the transfer of account funds to the Agent on
behalf of the Banks, all at the Borrower's sole expense, and shall direct all
payments from Medicare, Medicaid, Blue Cross and Blue Shield, private payors,
health maintenance organizations, all commercial payors and all other payors due
to the Borrower or any Subsidiary, to such lockbox accounts.
9.03 Notice of Sale. Any notice required to be given by the Agent of a
sale, lease, or other disposition of the Collateral or any other intended action
by the Agent, if given ten (10) days prior to such proposed action, shall
constitute commercially reasonable and fair notice thereof to the relevant Loan
Party.
ARTICLE X
THE AGENT
10.01 Appointment. Each Bank hereby irrevocably designates, appoints
and authorizes PNC Bank to act as Agent for such Bank under this Agreement to
execute and deliver or accept on behalf of each of the Banks the other Loan
Documents. Each Bank hereby irrevocably authorizes, and each holder of any Note
by the acceptance of a Note shall be deemed irrevocably to authorize, the Agent
to take such action on its behalf under the provisions of this Agreement and the
other Loan Documents and any other instruments and agreements referred to
herein, and to exercise such powers and to perform such duties hereunder as are
specifically delegated to or required of the Agent by the terms hereof, together
with such powers as are reasonably incidental thereto. PNC Bank agrees to act as
the Agent on behalf of the Banks to the extent provided in this Agreement.
10.02 Delegation of Duties. The Agent may perform any of its duties
hereunder by or through agents or employees (provided such delegation does not
constitute a relinquishment of its duties as Agent) and, subject to Sections
10.05 and 10.06 hereof, shall be entitled to engage and pay for the advice or
services of any attorneys, accountants or other experts concerning all matters
pertaining to its duties hereunder and to rely upon any advice so obtained.
10.03 Nature of Duties; Independent Credit Investigation. The Agent
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 Agreement or otherwise
exist. The duties of the Agent shall be mechanical and administrative in nature;
the Agent shall not have by reason of this Agreement a fiduciary or trust
relationship in
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respect of any Bank; and nothing in this Agreement, expressed or implied, is
intended to or shall be so construed as to impose upon the Agent any obligation
in respect of this Agreement except as expressly set forth herein. Each Bank
expressly acknowledges (i) that the Agent has not made any representations or
warranties to it and that no act by the Agent hereafter taken, including any
review of the affairs of the Loan Parties, shall be deemed to constitute any
representation or warranty by the Agent to any Bank; (ii) that it has made and
will continue to make, without reliance upon the Agent, its own independent
investigation of the financial condition and affairs and its own appraisal of
the creditworthiness of the Loan Parties is connection with this Agreement and
the making and continuance of the Loans hereunder; and (iii) except as expressly
provided herein, that the Agent shall have no duty or responsibility, either
initially or on a continuing basis, to provide any Bank with any credit or other
information with respect thereto, whether coming into its possession before the
making of any Loan or at any time or times thereafter.
10.04 Actions in Discretion of Agent; Instructions From the Banks. The
Agent agrees, upon the written request of the Required Banks, to take or refrain
from taking any action of the type specified as being within the Agent's rights,
powers or discretion herein, provided that the Agent shall not be required to
take any action which exposes the Agent to personal liability or which is
contrary to this Agreement or any other Loan Document or applicable Law. In the
absence of a request by the Required Banks, the Agent shall have authority, in
its sole discretion, to take or not to take any such action, unless this
Agreement specifically requires the consent of the Required Banks or all of the
Banks. Any action taken or failure to act pursuant to such instructions or
discretion shall be binding on the Banks, subject to Section 10.06 hereof.
Subject to the provisions of Section 10.06, no Bank shall have any right of
action whatsoever against the Agent as a result of the Agent acting or
refraining from acting hereunder in accordance with the instructions of the
Required Banks, or in the absence of such instructions, in the absolute
discretion of the Agent so long as the Agent is otherwise authorized to act
within its rights and powers as provided in this Agreement.
10.05 Reimbursement and Indemnification of Agent by the Borrower. The
Borrower unconditionally agrees to pay or reimburse the Agent and save the Agent
harmless against (a) liability for the payment of all reasonable out-of-pocket
costs, expenses and disbursements, including but not limited to reasonable fees
and expenses of counsel, appraisers and environmental consultants, incurred by
the Agent (i) in connection with the development, negotiation, preparation,
execution, performance by a Loan Party or an Excluded Entity and interpretation
of this Agreement and the other Loan Documents, (ii) relating to any requested
amendments, waivers or consents pursuant to the provisions hereof, (iii) in
connection with the enforcement of this Agreement or any other Loan Document or
collection of amounts due hereunder or thereunder or the proof and allowability
of any claim arising under this Agreement or any other Loan Document, whether in
bankruptcy or receivership proceedings or otherwise, and (iv) in any workout,
restructuring or in connection with the protection, preservation, exercise or
enforcement of any of the terms hereof or of any rights hereunder or under any
other Loan Document or in connection with any foreclosure, collection or
bankruptcy proceedings, and (b) 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
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asserted against the Agent, in its capacity as such, in any way relating to or
arising out of this Agreement or any other Loan Documents or any action taken or
omitted by the Agent hereunder or thereunder, provided that the Borrower shall
not be liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements if the
same results from the Agent's gross negligence or willful misconduct, or if the
Borrower was not given notice of the subject claim and the opportunity to
participate in the defense thereof, at its expense, or if the same results from
a compromise or settlement agreement entered into without the consent of the
Borrower. In addition, upon the occurrence of an Event of Default, the Borrower
agrees to reimburse and pay all reasonable out-of-pocket expenses of the Agent's
regular employees and agents engaged periodically to perform audits of the
Borrower's books, records and business properties.
10.06 Exculpatory Provisions. Neither the Agent nor any of its
directors, officers, employees, agents, attorneys or affiliates shall (a) be
liable to any Bank for any action taken or omitted to be taken by it or them
hereunder, or in connection herewith including without limitation pursuant to
any Loan Document, unless caused by its or their own gross negligence or willful
misconduct, (b) be responsible in any manner to any of the Banks for the
effectiveness, enforceability, genuineness, validity or the due execution of
this Agreement or any other Loan Documents or for any recital, representation,
warranty, document, certificate, report or statement herein or made or furnished
under or in connection with this Agreement or any other Loan Documents, unless
caused by its or their own gross negligence or willful misconduct, or (c) be
under any obligation to any of the Banks to ascertain or to inquire as to the
performance or observance of any of the terms, covenants or conditions hereof or
thereof on the part of the Loan Parties or any Excluded Entity, or the financial
condition of the Loan Parties or any Excluded Entity, or the existence or
possible existence of any Event of Default or Potential Default, unless caused
by its or their own gross negligence or willful misconduct. Neither the Agent
nor any Bank nor any of their respective directors, officers, employees, agents,
attorneys or affiliates shall be liable to the Loan Parties or any Excluded
Entity for consequential damages resulting from any breach of contract, tort or
other wrong in connection with the negotiation, documentation, administration or
collection of the Loans or any of the Loan Documents.
10.07 Reimbursement and Indemnification of Agent by Banks. Each Bank
agrees to reimburse and indemnify the Agent (to the extent not reimbursed by the
Borrower and without limiting the obligation of the Borrower to do so) in
proportion to its Ratable Share from and against 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 the Agent, in its capacity as such, in any way relating
to or arising out of this Agreement or any other Loan Documents or any action
taken or omitted by the Agent hereunder or thereunder, provided that no Bank
shall be liable for any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
(a) if the same results from the Agent's gross negligence or willful misconduct,
or (b) if such Bank was not given notice of the subject claim and the
opportunity to participate in the defense thereof, at its expense, or (c) if the
same results from a compromise and settlement agreement entered into without the
consent of such Bank. In addition, each Bank agrees promptly to reimburse the
Agent (to the extent not reimbursed by the Borrower and without
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limiting the obligation of the Borrower to do so) in proportion to its Ratable
Share for all amounts due and payable by the Borrower to the Agent in connection
with the Agent's periodic audit of the Borrower's books, records and business
properties. In the event the Banks reimburse or indemnify the Agent pursuant to
this Section 10.07 and subsequent thereto the Agent is reimbursed or indemnified
by the Borrower with respect to the same matter for which indemnification or
reimbursement was previously made by the Banks, the Agent will promptly refund
to the Banks, in accordance with each Bank's Ratable Share, the duplicative
amount.
10.08 Reliance by Agent. The Agent shall be entitled to rely upon any
writing, telegram, telex or teletype message, resolution, notice, consent,
certificate, letter, cablegram, statement, order or other document or
conversation by telephone or otherwise believed by it to be genuine and correct
and to have been signed, sent or made by the proper person or persons, and upon
the advice and opinions of counsel and other professional advisers selected by
the Agent. The Agent shall be fully justified in failing or refusing to take any
action hereunder unless it shall first be indemnified to its satisfaction by the
Banks against any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action.
10.09 Notice of Default. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Potential Default or Event of
Default unless the Agent has received written notice from a Bank or the Borrower
referring to this Agreement, describing such Potential Default or Event of
Default and stating that such notice is a "notice of default."
10.10 Notices. The Agent shall promptly send to each Bank a copy of all
notices received from any Loan Party pursuant to the provisions of this
Agreement or the other Loan Documents promptly upon receipt thereof. The Agent
shall promptly notify the Borrower and the other Banks of each change in the
Base Rate and the effective date thereof.
10.11 Banks in Their Individual Capacities. With respect to its
Revolving Credit Commitments and the Revolving Credit Loans made by it, the
Agent shall have the same rights and powers hereunder as any other Bank and may
exercise the same as though it were not the Agent, and the term "Banks" shall,
unless the context otherwise indicates, include the Agent in its individual
capacity. PNC Bank and its affiliates and each of the Banks and their respective
affiliates may, without liability to account, except as prohibited herein, make
Loans to, accept deposits from, discount drafts for, act as trustee under
indentures of, and generally engage in any kind of banking or trust business
with, the Borrower and its affiliates, in the case of the Agent, as though it
were not acting as Agent hereunder and in the case of each Bank, as though such
Bank were not a Bank hereunder.
10.12 Holders of Notes. The Agent may deem and treat any payee of any
Note as the owner thereof for all purposes hereof unless and until written
notice of the assignment or transfer thereof shall have been filed with the
Agent. Any request, authority or consent of any person who at the time of making
such request or giving such authority or consent is the holder of any Note shall
be conclusive and binding on any subsequent holder, transferee or assignee of
such Note or of any Note or Notes issued in exchange therefor.
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10.13 Equalization of Banks. The Banks and the holders of any
participations in any Notes agree among themselves that, with respect to all
amounts received by any Bank or any such holder for application on any
obligation hereunder or under any Note or under any such participation, whether
received by voluntary payment, by realization upon security, by the exercise of
the right of set-off or banker's lien, by counterclaim or by any other non-pro
rata source, equitable adjustment will be made in the manner stated in the
following sentence so that, in effect, all such excess amounts will be shared
ratably among the Banks and such holders in proportion to their interests in
payments under the Notes, except as otherwise provided in Sections [4.04(b),
5.04(b) or 5.06(a)] hereof. The Banks or any such holder receiving any such
amount shall purchase for cash from each of the other Banks an interest in such
Bank's Loans in such amount as shall result in a ratable participation by the
Banks and each such holder in the aggregate unpaid amount under the Notes,
provided that if all or any portion of such excess amount is thereafter
recovered from the Bank or the holder making such purchase, such purchase shall
be rescinded and the purchase price restored to the extent of such recovery,
together with interest or other amounts, if any, required by law (including
court order) to be paid by the Bank or the holder making such purchase.
10.14 Successor Agent. The Agent (i) may resign as Agent, or (ii) shall
resign if such resignation is requested by the Required Banks, in the case of
either (i) or (ii) upon not less than thirty (30) days' prior written notice to
the Borrower and the Banks. If the Agent shall resign under this Agreement, then
either (a) the Required Banks shall appoint from among the Banks a successor
Agent for the Banks, or (b) if a successor agent shall not be so appointed and
approved within the thirty (30) day period following the Agent's notice to the
Banks of its resignation, then the Agent shall appoint, with the consent of the
Borrower, such consent not to be unreasonably withheld, a successor agent who
shall serve as Agent until such time as the Required Banks appoint a successor
agent. Upon its appointment pursuant to either clause (a) or (b) above, such
successor agent shall succeed to the rights, powers and duties of the agent and
the term "Agent" shall mean such successor agent, effective upon its
appointment, and the former Agent's rights, powers and duties as Agent shall be
terminated without any other or further act or deed on the part of such former
Agent or any of the parties to this Agreement. After the resignation of any
Agent hereunder, the provisions of this Article X shall inure to the benefit of
such former Agent and such former Agent shall not by reason of such resignation
be deemed to be released from liability for any actions taken or not taken by it
while it was an Agent under this Agreement.
10.15 Agent's Fee. The Borrower shall pay to the Agent a non
refundable, annual fee (the "Agent's Fee") as set forth in the agreement dated
September 8, 1997 between the Borrower and the Agent, such fee to be payable in
the manner and on the dates set forth in such letter agreement.
10.16 Availability of Funds. Unless the Agent shall have been notified
by a Bank prior to the date upon which a Loan is to be made that such Bank does
not intend to make available to the Agent such Bank's portion of such Loan, the
Agent may assume that such Bank has made or will make such proceeds available to
the Agent on such date and the Agent may, in reliance upon such assumption (but
shall not be required to), make available to the Borrower a
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corresponding amount. If such corresponding amount is not in fact made available
to the Agent by such Bank, the Agent shall be entitled to recover such amount on
demand from such Bank (or, if such Bank fails to pay such amount forthwith upon
such demand from the Borrower) together with interest thereon, in respect of
each day during the period commencing on the date such amount was made available
to the Borrower and ending on the date the Agent recovers such amount, at a rate
per annum equal to the Federal Funds Effective Rate in respect of the Loan.
10.17 Calculations. In the absence of gross negligence or willful
misconduct, the Agent shall not be liable for any error in computing the amount
payable to any Bank whether in respect of the Loans, fees or any other amounts
due to the Banks under this Agreement. In the event an error in computing any
amount payable to any Bank is made, the Agent, the Borrower and each affected
Bank shall, forthwith upon discovery of such error, make such adjustments as
shall be required to correct such error, and any compensation therefor will be
calculated at the Federal Funds Effective Rate.
10.18 Beneficiaries. Except as expressly provided herein, the
provisions of this Article X are solely for the benefit of the Agent and the
Banks, and the Borrower shall not have any rights to rely on or enforce any of
the provisions hereof. In performing its functions and duties under this
Agreement, the Agent shall act solely as agent of the Banks and does not assume
and shall not be deemed to have assumed any obligation toward or relationship of
agency or trust with or for the Borrower.
10.19 Holding of Loan Documents. Agent agrees that all original Loan
Documents retained by it shall be retained for the benefit of the Banks, and
Agent shall make available copies of such documents retained by it upon the
reasonable request of any of the Banks.
ARTICLE XI
MISCELLANEOUS
11.01 Modifications, Amendments or Waivers. With the written consent of
the Required Banks, the Agent, acting on behalf of all the Banks, and the
Borrower or the other applicable Loan Party may from time to time enter into
written agreements amending or changing any provision of this Agreement or any
other Loan Document or the rights of the Banks or the Borrower or such Loan
Party hereunder or thereunder, or may grant written waivers or consents to a
departure from the due performance of the obligations of the Borrower or such
Loan Party hereunder or thereunder. Any such agreement, waiver or consent made
with such written consent shall be effective to bind all the Banks; provided
that, without the written consent of all the Banks, no such agreement, waiver or
consent may be made which will:
(a) Reduce the amount of the Commitment Fee or any other fees
payable to any Bank hereunder, or amend Sections 5.02 [Pro Rata Treatment of
Banks], 10.06 [Exculpatory Provisions] and 10.13 [Equalization of Banks] hereof;
(b) Whether or not any Loans are outstanding, extend the time for
payment of principal or interest of any Loan, or reduce the principal amount of
or the rate of
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interest borne by any Loan, or otherwise affect the terms of payment of the
principal of or interest of any Loan;
(c) Except for sales of assets permitted by Section 8.02(g),
release any Collateral or other security, if any, for the Borrower's obligations
hereunder;
(d) Release or terminate any Guaranty Agreement of any Loan party;
(e) Amend Sections 2.01(c), 4.01(a), 8.02(r), or 11.01, change the
definitions or the method of computing the ratios contained within such
foregoing sections, change the definition of Required Banks, or change any
requirement providing for the Banks or the Required Banks to authorize the
taking of any action hereunder; or
(f) Extend the Expiration Date or increase the amount of the
Revolving Credit Commitment of any Bank hereunder.
11.02 No Implied Waivers; Cumulative Remedies; Writing Required. No
course of dealing and no delay or failure of the Agent or any Bank in exercising
any right, power, remedy or privilege under this Agreement or any other Loan
Document shall affect any other or future exercise thereof or operate as a
waiver thereof; nor shall any single or partial exercise thereof or any
abandonment or discontinuance of steps to enforce such a right, power, remedy or
privilege preclude any further exercise thereof or of any other right, power,
remedy or privilege. The rights and remedies of the Agent and the Banks under
this Agreement and any other Loan Documents are cumulative and not exclusive of
any rights or remedies which they would otherwise have. Any waiver, permit,
consent or approval of any kind or character on the part of any Bank of any
breach or default under this Agreement or any such waiver of any provision or
condition of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in such writing.
11.03 Reimbursement and Indemnification of Banks by the Borrower;
Taxes. The Borrower agrees unconditionally upon demand to pay or reimburse to
each Bank (other than the Agent, as to which the Borrower's obligations are set
forth in Section 9.05) and to save such Bank harmless against (i) liability for
the payment of all reasonable out-of-pocket costs, expenses and disbursements
(including reasonable fees and expenses of counsel for each Bank except with
respect to (a) and (b) below), incurred by such Bank (a) in connection with the
interpretation of this Agreement, and other instruments and documents to be
delivered hereunder, (b) relating to any requested amendments, waivers or
consents pursuant to the provisions hereof, (c) in connection with the
enforcement of this Agreement or any other Loan Document, or collection of
amounts due hereunder or thereunder or the proof and allowability of any claim
arising under this Agreement or any other Loan Document, whether in bankruptcy
or receivership proceedings or otherwise, and (d) in any workout, restructuring
or in connection with the protection, preservation, exercise or enforcement of
any of the terms hereof or of any rights hereunder or under any other Loan
Document or in connection with any foreclosure, collection or bankruptcy
proceedings, or (ii) 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 such
Bank, in its capacity as such, in any way relating to or
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arising out of this Agreement or any other Loan Documents or any action taken or
omitted by such Bank hereunder or thereunder, provided that the Borrower shall
not be liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements (A) if
the same results from such Bank's gross negligence or willful misconduct, or (B)
if the Borrower was not given notice of the subject claim and the opportunity to
participate in the defense thereof, at its expense, or (C) if the same results
from a compromise or settlement agreement entered into without the consent of
the Borrower. The Banks will attempt to minimize the fees and expenses of legal
counsel for the Banks which are subject to reimbursement by the Borrower
hereunder by considering the usage of one law firm to represent the Banks and
the Agent if appropriate under the circumstances. The Borrower agrees
unconditionally to pay all stamp, document, transfer, recording or filing taxes
or fees and similar impositions now or hereafter determined by the Agent or any
Bank to be payable in connection with this Agreement or any other Loan Document,
and the Borrower agrees unconditionally to save the Agent and the Banks harmless
from and against any and all present or future claims, liabilities or losses
with respect to or resulting from any omission to pay or delay in paying any
such taxes, fees or impositions.
11.04 Holidays. Whenever any payment or action to be made or taken
hereunder shall be stated to be due on a day which is not a Business Day, such
payment or action shall be made or taken on the next following Business Day
(except as provided in Section 4.02(a) with respect to Euro-Rate Interest
Periods), and such extension of time shall be included in computing interest or
fees, if any, in connection with such payment or action.
11.05 Funding by Branch, Subsidiary or Affiliate.
(a) Notional Funding. Each Bank shall have the right from time to
time, without notice to the Borrower, to deem any branch, subsidiary or
affiliate (which for the purposes of this Section 11.05 shall mean any
corporation or association which is directly or indirectly controlled by or is
under direct or indirect common control with any corporation or association
which directly or indirectly controls such Bank) of such Bank to have made,
maintained or funded any Loan to which the Euro-Rate Option applies at any time,
provided that immediately following (on the assumption that a payment were then
due from the Borrower to such other office) and as a result of such change the
Borrower would not be under any greater financial obligation pursuant to Section
5.06 hereof than it would have been in the absence of such change. Notional
funding offices may be selected by each Bank without regard to the Bank's actual
methods of making, maintaining or funding the Loans or any sources of funding
actually used by or available to such Bank.
(b) Actual Funding. Each Bank shall have the right from time to
time to make or maintain any Loan by arranging for a branch, subsidiary or
affiliate of such Bank to make or maintain such Loan subject to the last
sentence of this Section 11.05(b). If any Bank causes a branch, subsidiary or
affiliate to make or maintain any part of the Loans hereunder, all terms and
conditions of this Agreement shall, except where the context clearly requires
otherwise, be applicable to such part of the Loans to the same extent as if such
Loans were made or maintained by such Banks but in no event shall any Bank's use
of such a branch, subsidiary or
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affiliate to make or maintain any part of the Loans hereunder cause such Bank or
such branch, subsidiary or affiliate to incur any cost or expenses payable by
the Borrower hereunder or require the Borrower to pay any other compensation to
any Bank (including, without limitation, any expenses incurred or payable
pursuant to Section 5.06 hereof) which would otherwise not be incurred.
11.06 Notices. All notices, requests, demands, directions and other
communications (collectively "notices") given to or made upon any party hereto
under the provisions of this Agreement shall be by telephone or in writing
(including telex or facsimile communication) unless otherwise expressly
permitted hereunder and shall be delivered or sent by telex or facsimile to the
respective parties at the addresses and numbers set forth under their respective
names on the signature pages hereof or in accordance with any subsequent
unrevoked written direction from any party to the others. All notices shall,
except as otherwise expressly herein provided, be effective (a) in the case of
telex or facsimile, when received, (b) in the case of hand-delivered notice,
when hand delivered, (c) in the case of telephone, when telephoned, provided,
however, that in order to be effective, telephonic notices must be confirmed in
writing no later than the next day by letter, facsimile or telex, (d) if given
by mail, four (4) days after such communication is deposited in the mails with
first class postage prepaid, return receipt requested, and (e) if given by any
other means (including by air courier), when delivered; provided, that notices
to the Agent shall not be effective until received. Any Bank giving any notice
to the Borrower shall simultaneously send a copy thereof to the Agent, and the
Agent shall promptly notify the other Banks of the receipt by it of any such
notice.
11.07 Severability. The provisions of this Agreement are intended to be
severable. If any provision of this Agreement shall be held invalid or
unenforceable in whole or in part in any jurisdiction such provision shall, as
to such jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without in any manner affecting the validity or enforceability
thereof in any other jurisdiction or the remaining provisions hereof in any
jurisdiction.
11.08 Governing Law. This Agreement 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 laws of the
Commonwealth of Pennsylvania without regard to its conflict of laws principles.
11.09 Prior Understanding. This Agreement supersedes all prior
understandings and agreements, whether written or oral, between the parties
hereto and thereto relating to the transactions provided for herein and therein,
including any prior confidentiality agreements and commitments.
11.10 Duration; Survival. All representations and warranties of the
Borrower contained herein or made in connection herewith shall survive the
making of Loans and shall not be waived by the execution and delivery of this
Agreement, any investigation by the Agent or the Banks, the making of Loans, or
payment in full of the Loans. All covenants and agreements of the Borrower
contained in Sections 8.01, 8.02 and 8.03 herein shall continue in full force
and
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effect from and after the date hereof so long as the Borrower may borrow
hereunder and until termination of the Revolving Credit Commitments and payment
in full of the Loans. All covenants and agreements of the Borrower contained
herein relating to the payment of principal, interest, premiums, additional
compensation or expenses and indemnification, including those set forth in the
Notes, Article V and Sections 10.05, 10.07 and 11.03 hereof, shall survive
payment in full of the Loans and termination of the Revolving Credit
Commitments.
11.11 Successors and Assigns.
(i) This Agreement shall be binding upon and shall inure to the
benefit of the Banks, the Agent, the Borrower and their respective successors
and assigns, except that the Borrower may not assign or transfer any of its
rights and obligations hereunder or any interest herein. Each Bank may, at its
own cost, make assignments of or sell participations in all or any part of its
Revolving Credit Commitment and the Loans made by it to one or more banks or
other entities, subject in the case of assignments prior to the occurrence of an
Event of Default to the consent of the Borrower and the Agent with respect to
any assignee, such consent not to be unreasonably withheld, and provided that
assignments may not be made in amounts less than $1,000,000. It is expressly
agreed that upon and after the occurrence and during the continuation of an
Event of Default the consent of the Agent shall be required, however the consent
of the Borrower shall not be required for a Bank to make an assignment of all or
any part of its Revolving Credit Commitment. In order for a Bank, at any time to
sell a participation in all or any part of its Revolving Credit Commitment, the
consent of the Agent shall be required, however the consent of the Borrower
shall not be required. In the case of an assignment, upon receipt by the Agent
of the Assignment and Assumption Agreement and payment to the Agent of a fee in
the amount of $3,500, the assignee shall have, to the extent of such assignment
(unless otherwise provided therein), the same rights, benefits and obligations
as it would have if it had been a signatory Bank hereunder, the Commitments in
Section 2.01 shall be adjusted accordingly, and upon surrender of any Note
subject to such assignment, the Borrower shall execute and deliver a new Note to
the assignee in an amount equal to the amount of the Revolving Credit Commitment
or Loan assumed by it and a new Revolving Credit Note to the assigning Bank in
an amount equal to the Revolving Credit Commitment or Loan retained by it
hereunder. In the case of a participation, the participant shall only have the
rights specified in Section 9.02(c) (the participant's rights against such Bank
in respect of such participation to be those set forth in the agreement executed
by such Bank in favor of the participant relating thereto and not to include any
voting rights except with respect to changes of the type referenced in clauses
(a), (b), or (c) under Section 11.01 hereof), all of such Bank's obligations
under this Agreement or any other Loan Document shall remain unchanged and all
amounts payable by any Loan party hereunder or thereunder shall be determined as
if such Bank had not sold such participation. Each Bank may furnish any publicly
available information concerning any Loan Party and any other information
concerning any Loan Party in the possession of such Bank from time to time to
assignees and participants (including prospective assignees or participants)
provided such assignees and participants agree to be bound by the provisions of
Section 11.12 hereof.
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(ii) Notwithstanding any other provision in this Agreement,
any Bank may at any time pledge or grant a security interest in all or any
portion of its rights under this Agreement, its Note and the other Loan
Documents to any Federal Reserve Bank in accordance with Regulation A of the FRB
or U.S. Treasury Regulation 31 CFR Section 203.14 without notice to or consent
of the Borrower or the Agent. No such pledge or grant of a security interest
shall release the transferor Bank of its obligations hereunder or under any
other Loan Document.
11.12 Confidentiality. The Agent and the Banks each agree to keep
confidential all information obtained from any Loan party which is nonpublic and
confidential or proprietary in nature (including any information any Loan Party
specifically designates as confidential), except as provided below, and to use
such information only in connection with their respective capacities under this
Agreement and for the purposes contemplated hereby. The Agent and the Banks
shall be permitted to disclose such information (i) to outside legal counsel,
accountants and other professional advisors who need to know such information in
connection with the administration and enforcement of this Agreement, subject to
agreement of such persons to maintain the confidentiality, (ii) assignees and
participants as contemplated by Section 11.11, (iii) to the extent requested by
any bank regulatory authority or, with notice to the Borrower, as otherwise
required by applicable Law or by any subpoena or similar legal process, or in
connection with any investigation or proceeding arising out of the transactions
contemplated by this Agreement, (iv) if it becomes publicly available other than
as a result of a breach of this Agreement or becomes available from a source not
subject to confidentiality restrictions, or (v) the Borrower shall have
consented to such disclosure.
11.13 Counterparts. This Agreement may be executed by different parties
hereto on any number of separate counterparts, each of which, when so executed
and delivered, shall be an original, and all such counterparts shall together
constitute one and the same instrument.
11.14 Agent's or Bank's Consent. Whenever the Agent's or any Bank's
consent is required to be obtained under this Agreement or any of the other Loan
Documents as a condition to any action, inaction, condition or event, the Agent
and each Bank shall be authorized to give or withhold such consent in its sole
and absolute discretion and to condition its consent upon the giving of
additional collateral, the payment of money or any other matter.
11.15 Exceptions. The representations, warranties and covenants
contained herein shall be independent of each other and no exception to any
representation, warranty or covenant shall be deemed to be an exception to any
other representation, warranty or covenant contained herein unless expressly
provided, nor shall any such exceptions be deemed to permit any action or
omission that would be in contravention of applicable Law.
11.16 Consent to Forum; Waiver of Jury Trial. The Borrower hereby
irrevocably consents to the nonexclusive jurisdiction of the Court of Common
Pleas of Allegheny County and the United States District Court for the Western
District of Pennsylvania, and waives personal service of any and all process
upon it and consents that all such service of process be made by certified or
registered mail directed to the Borrower at the addresses provided for in
Section 11.06 hereof and service so made shall be deemed to be completed upon
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actual receipt thereof. The Borrower waives any objection to jurisdiction and
venue of any action instituted against it as provided herein and agrees not to
assert any defense based on lack of jurisdiction or venue. The Borrower, the
Agent and the Banks hereby waive trial by jury in any action, suit, proceeding
or counterclaim of any kind arising out of or related to this Agreement, any
other Loan Document or the Collateral to the full extent permitted by Law.
11.17 Tax Withholding Clause. At least five (5) Business Days prior to
the first date on which interest or fees are payable hereunder for the account
of any Bank, each Bank that is not incorporated under the laws of the United
States of America or a state thereof agrees that it will deliver to each of the
Borrower and the Agent two (2) duly completed copies of (i) Internal Revenue
Service Form W-9, 4224 or 1001, or other applicable form prescribed by the
Internal Revenue Service, certifying in either case that such Bank is entitled
to receive payments under this Agreement and the other Loan Documents without
deduction or withholding of any United States federal income taxes, or is
subject to such tax at a reduced rate under an applicable tax treaty, or (ii)
Form W-8 or other applicable form or a certificate of the Bank indicating that
no such exemption or reduced rate is allowable with respect to such payments.
Each Bank which so delivers a Form W-8, W-9, 4224 or 1001 further undertakes to
deliver to each of the Borrower and the Agent two (2) additional copies of such
form (or a successor form) on or before the date that such form expires or
becomes obsolete or after the occurrence of any event requiring a change in the
most recent form so delivered by it, and such amendments thereto or extensions
or renewals thereof as may be reasonably requested by the Borrower or the Agent,
either certifying that such Bank is entitled to receive payments under this
Agreement and the other Loan Documents without deduction or withholding of any
United States federal income taxes or is subject to such tax at a reduced rate
under an applicable tax treaty or stating that no such exemption or reduced rate
is allowable. The Agent shall be entitled to withhold United States federal
income taxes at the full withholding rate unless the Bank establishes an
exemption or at the applicable reduced rate as established pursuant to the above
provisions.
11.18 Effect on Prior Credit Agreement; Continuing Effectiveness of
Certain Provisions Regarding Interest Rates and Fees. This Agreement amends and
restates the Prior Credit Agreement effective on the Closing Date except that
(i) the Loan Parties shall comply with the representations, warranties and
covenants contained in the Prior Credit Agreement applicable to periods prior to
the Closing Date, (ii) prior to the Sixteenth Amendment Effective Date, the Loan
Parties shall comply with the representations, warranties and covenants
contained in this Agreement without regard to Amendment No. 16 and (iii) the
interest rate, Commitment Fees, Letter of Credit Fees and other fees applicable
to the Loans or otherwise applicable for periods prior to the Sixteenth
Amendment Effective Date shall be determined as provided in this Agreement
without regard to Amendment No. 16 to this Agreement. Without limiting the
generality of the foregoing clause (iii), it is expressly agreed that for the
period October 1, 1997 through and including December 31, 1997, the applicable
Commitment Fees, interest rates, Letter of Credit Fees and other fees applicable
to the Loans shall be as set forth in this Agreement as amended through and
including Amendment No. 15.
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<PAGE> 98
EXHIBIT 1
AMENDED AND RESTATED RECITALS AND ARTICLES I THROUGH XI
OF THE REVOLVING CREDIT AGREEMENT
(Cover Page, table of contents and first
paragraph are also attached for convenience)
<PAGE> 1
Exhibit 10.25
Execution Copy
Building Lease
by and between
FRAMINGHAM - 1881 ASSOCIATES,
As Landlord
and
MARINER HEALTH GROUP, INC., as Tenant
DATED August 26, 1997
<PAGE> 2
DATE OF LEASE EXECUTION: August 26, 1997
(To be completed by Landlord)
ARTICLE I
REFERENCE DATA
1.1 SUBJECTS REFERRED TO.
Each reference in this Lease to any of the following subjects shall be
construed to incorporate the data stated for that subject in this Section 1.1:
<TABLE>
<CAPTION>
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ANNUAL FIXED RENT RATE: $18.00 p.r.s.f. for each year during the initial Term.
BROKER(S): Cushman & Wakefield of Massachusetts, Inc. and Boston
Real Estate Partners
BUILDING ADDRESS: 1881 Worcester Road
Framingham, MA 01701
ELECTRICITY CHARGE: Actual cost for electricity for lights and plugs used
or consumed for the Premises.
INITIAL FISCAL YEAR FOR
OPERATING EXPENSES: Calendar Year 1997
INITIAL TAX YEAR FOR
REAL ESTATE TAXES: Tax Year 1997
LANDLORD: FRAMINGHAM - 1881 ASSOCIATES, a Massachusetts general
partnership comprised of Paine Webber Equity Partners One
Limited Partnership, Furrose Associates Limited
Partnership and Spaulding and Slye Properties Limited
Partnership (formerly known as Spaulding and Slye
Company).
LANDLORD'S ADDRESS: c/o Paine Webber Equity Partners I
Limited Partnership
265 Franklin Street, 16th Floor
Boston, MA
Attn: Richard Coomber
LANDLORD'S REPRESENTATIVE: Richard Coomber
</TABLE>
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<TABLE>
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LEASE YEAR: Each consecutive period of twelve (12) months commencing
on the Commencement Date if it occurs on the first day of
a calendar month and otherwise commencing on the first
day of the month immediately following the month in which
the Commencement Date occurs, and each anniversary of
such date, except that the first Lease Year shall also
include the period from the Commencement Date until the
first day of the following month in the event that the
Commencement Date does not occur on the first day of a
calendar month.
LAND: The parcel of land shown on Site Development Plan SD-1
dated July 6, 1983 by T&M Engineering Associates, Inc.,
attached hereto as Exhibit B.
MANAGING AGENT: Spaulding and Slye Services Limited Partnership
MANAGING AGENT'S ADDRESS: c/o Spaulding and Slye Services Limited Partnership 125
High Street, 16th Floor
Boston, MA 02110
Attn: Richard Horgan
OPTIONS TO EXTEND: Two (2) Options to Extend the Term for successive periods
of five (5) years each, subject to and in accordance with
the provisions of Section 2.2.2 hereof.
PARKING FACILITIES: Tenant, its employees, customers, and visitors shall have
the right to use an allocable share of such parking
facilities as may adjoin or be available to the Building
in common with others entitled thereto provided such use
does not exceed 3.28 parking spaces per 1,000 r.s.f. of
Rentable Floor Area of the Premises.
PERMITTED USES: General Office Use
PREMISES: Approximately 31,402 r.s.f, located on the first (1st)
floor of the Building, as shown on Exhibit A.
PUBLIC LIABILITY
INSURANCE LIMITS
(per occurrence) Bodily Injury: $2,000,000, or such greater amount as
may be reasonably required by Landlord.
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Property Damage: $1,000,000, or such greater amount as
may be reasonably required by Landlord.
RENTABLE FLOOR AREA
OF THE BUILDING: 64,339 rentable square feet
RIGHT OF FIRST OFFER: See Section 2.1.2 hereof
SECURITY DEPOSIT: N/A
SPECIAL PROVISIONS:
TENANT: Mariner Health Group, Inc., a Delaware corporation
TENANT'S ADDRESS
(FOR NOTICE AND BILLING): Prior to the Commencement Date (as defined below), at:
125 Eugene O'Neil Drive, New London, Connecticut 06320,
Attn: Peter Grogan, Director Property Management, and
from and after the Commencement Date, at the Premises.
TENANT ALLOWANCE: As defined in Section 3.1 hereof.
TENANT'S PROPORTIONATE
FRACTION: 48.8%, such percentage being equal to a fraction, the
numerator of which is the rentable floor area of the
Premises (31,402 r.s.f.) and the denominator of which is
the Rentable Floor Area of the Building (64,339 r.s.f.).
TENANT'S REPRESENTATIVE: Peter Grogan, Director of Property Management
TERM COMMENCEMENT DATE: The Substantial Completion Date, subject to the
provisions of Article III hereof.
TERM EXPIRATION DATE: The date which is the last day of the month in which the
fifth (5th) anniversary of the Term Commencement Date
occurs.
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1.2 EXHIBITS.
The Exhibits listed below in this Section are incorporated in this
Lease by reference and are to be construed as a part of this Lease:
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EXHIBIT A. Plan showing the Premises.
EXHIBIT B. Plan showing the Land.
EXHIBIT C. Rules and Regulations.
EXHIBIT D. Landlord's Services.
</TABLE>
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<TABLE>
<CAPTION>
1.3 TABLE OF CONTENTS.
<S> <C>
ARTICLE I - REFERENCE DATA........................................................................................2
1.1 SUBJECTS REFERRED TO.......................................................................................2
1.2 EXHIBITS...................................................................................................5
ARTICLE II - PREMISES AND TERM....................................................................................8
2.1 PREMISES...................................................................................................8
2.1.1 Premises...............................................................................................8
2.1.2 Right of First Offer to Lease..........................................................................8
2.1.3 Access................................................................................................11
2.2 TERM......................................................................................................11
2.2.1 Initial Term..........................................................................................11
2.2.2 Extension Options.....................................................................................11
ARTICLE III - IMPROVEMENTS.......................................................................................13
3.1 INITIAL CONSTRUCTION......................................................................................13
3.2 GENERAL PROVISIONS APPLICABLE TO CONSTRUCTION.............................................................15
3.3 REPRESENTATIVES...........................................................................................17
ARTICLE IV - RENT................................................................................................17
4.1 RENT......................................................................................................17
4.2 ANNUAL FIXED RENT.........................................................................................17
4.3 ADDITIONAL RENT - ESCALATION OF OPERATING EXPENSES........................................................17
4.4 ESCALATION OF REAL ESTATE TAXES...........................................................................21
4.5 UTILITIES.................................................................................................22
4.6 LATE PAYMENT OF RENT......................................................................................22
ARTICLE V - LANDLORD'S COVENANTS.................................................................................23
5.1 COVENANTS.................................................................................................23
5.1.1 Building Services.....................................................................................23
5.1.2 Additional Building Services..........................................................................23
5.1.3 Insurance.............................................................................................23
5.1.4 Maintenance; Repairs..................................................................................23
ARTICLE VI - TENANT'S ADDITIONAL COVENANTS.......................................................................23
6.1 COVENANTS.................................................................................................23
6.1.1 Perform Obligations...................................................................................23
6.1.2 Occupancy and Use.....................................................................................24
6.1.3 Repair and Maintenance................................................................................24
6.1.4 Compliance with Law...................................................................................24
6.1.5 Tenant's Work.........................................................................................25
6.1.6 Indemnity.............................................................................................25
6.1.7 Landlord's Right to Enter.............................................................................26
6.1.8 Personal Property at Tenant's Risk....................................................................26
6.1.9 Payment of Landlord's Cost of Enforcement.............................................................26
6.1.10 Yield Up............................................................................................26
6.1.11 Estoppel Certificate.................................................................................27
6.1.12 Landlord's Expenses Re Consents......................................................................27
6.1.13 Rules and Regulations................................................................................27
6.1.14 Loading..............................................................................................27
6.1.15 Holdover.............................................................................................27
6.1.16 Assignment and Subletting............................................................................28
6.1.17 Nuisance.............................................................................................29
6.1.18 Installation, Alterations or Additions...............................................................30
6.1.19 Insurance............................................................................................30
6.1.20 Insurance Policies...................................................................................30
6.1.21 Labor or Materialmen's Liens.........................................................................31
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<TABLE>
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ARTICLE VII - CASUALTY OR TAKING.................................................................................31
7.1 TERMINATION...............................................................................................31
7.2 RESTORATION...............................................................................................31
7.3 AWARD.....................................................................................................32
ARTICLE VIII - DEFAULTS..........................................................................................32
8.1 EVENTS OF DEFAULT.........................................................................................32
8.2 REMEDIES..................................................................................................33
8.3 REMEDIES CUMULATIVE.......................................................................................34
8.4 LANDLORD'S RIGHT TO CURE DEFAULTS.........................................................................34
8.5 EFFECT OF WAIVERS OF DEFAULT..............................................................................34
8.6 NO ACCORD AND SATISFACTION................................................................................35
ARTICLE IX - MORTGAGES...........................................................................................35
9.1 RIGHTS OF MORTGAGE HOLDERS................................................................................35
9.2 SUPERIORITY OF LEASE; OPTION TO SUBORDINATE...............................................................36
ARTICLE X - MISCELLANEOUS PROVISIONS.............................................................................37
10.1 NOTICES FROM ONE PARTY TO THE OTHER......................................................................37
10.2 QUIET ENJOYMENT..........................................................................................37
10.3 EASEMENTS; CHANGES TO LOT LINES..........................................................................37
10.4 WAIVER OF SUBROGATION....................................................................................37
10.5 LEASE NOT TO BE RECORDED.................................................................................37
10.6 BIND AND INURE; LIMITATION OF LANDLORD'S LIABILITY.......................................................38
10.7 UNAVOIDABLE DELAYS.......................................................................................38
10.8 LANDLORD'S DEFAULT.......................................................................................38
10.9 BROKERAGE................................................................................................39
10.10 APPLICABLE LAW AND CONSTRUCTION.........................................................................39
10.11 SUBMISSION NOT AN OFFER.................................................................................39
10.12 INTENTIONALLY OMITTED...................................................................................39
10.13 SIGNAGE.................................................................................................40
</TABLE>
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ARTICLE II
PREMISES AND TERM
2.1 PREMISES.
2.1.1 Premises.
(a) Landlord hereby leases and demises to Tenant and Tenant hereby
leases from Landlord, subject to and with the benefit of the terms, covenants,
conditions and provisions of this Lease, the Premises.
(b) Tenant shall have, as appurtenant to the Premises, the right to use
in common with others entitled thereto: (i) the common facilities included in
the Building or on the Land, including the parking spaces in the parking area
(subject to the limitations set forth in Section 1.1 hereof), and two (2) common
tailboard loading docks, all on an unreserved, first-come, first-served basis,
and in the locations from time to time designated by Landlord, and (ii) the
building service fixtures and equipment serving the Premises.
(c) Landlord reserves the right from time to time, without unreasonable
interference with Tenant's use, to: (i) install, repair, replace, use, maintain
and relocate for service to the Premises and to other parts of the Building or
either, building service fixtures and equipment wherever located in the Building
and (ii) alter or relocate any common facilities, including, without limitation,
parking and loading facilities, provided that in all events substitutions are
substantially equivalent.
(d) Notwithstanding the foregoing provisions of this Section 2.1.1,
Landlord hereby agrees not to (i) materially reduce the number of parking spaces
existing in the parking area on the Land as of the date hereof, except as may be
necessary to comply with any applicable law, code, rule or regulation
(including, without limitation, any such law, code, rule or regulation regarding
handicap accessibility), or as may be necessary on a temporary basis in
connection with any emergency or any maintenance, repair, replacement or
construction activity on the Land, or (ii) grant any other tenant of the
Building any reserved parking spaces in such parking area unless Landlord also
grants to Tenant a proportionate number of reserved parking spaces (based upon
the rentable area in the Building occupied by each such tenant) in a
substantially equivalent location.
2.1.2 Right of First Offer to Lease.
(a) Subject to the terms and conditions hereof, Tenant shall
have the right to add to the Premises some or all of the space located on the
second floor of the Building (the "Available Space"). Whenever during the term
hereof, Landlord determines to lease all or any part of the Additional Space
(the phrase "Available Space" shall mean that portion of the Additional Space
which Landlord has so determined, in its sole and absolute discretion, to
lease), Landlord shall first offer to lease to Tenant the Available Space in an
"As Is" condition at the Available Space Annual Fixed Rent Rate (as hereinafter
defined). Such offer shall be in writing
<PAGE> 9
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(the "Offer Notice") and shall specify the date on which the Available Space
shall be included in the Premises (the "Available Space Commencement Date").
Tenant shall notify Landlord in writing whether Tenant elects to lease the
Available Space upon the terms set forth in the Offer Notice within seven (7)
business days after Landlord delivers to Tenant the Offer Notice.
(b) If Tenant timely elects to lease the Available Space as
aforesaid, then Landlord and Tenant shall execute an amendment to this Lease no
later than fourteen (14) days after Tenant notifies Landlord of Tenant's
election to lease the Available Space, effective as of the date the Available
Space Commencement Date, on the same terms as this Lease except that (i) the
Rentable Floor Area of the Premises shall be increased by the Rentable Floor
Area of the Available Space (and Tenant's Proportionate Fraction shall be
adjusted accordingly), (ii) the Annual Fixed Rent shall be equal to the sum of
the Annual Fixed Rent Rate with respect to the then current Premises plus the
Available Space Annual Fixed Rent Rate with respect to the Available Space,
(iii) the Initial Fiscal Year for Operating Expenses and the Initial Tax Year
for Real Estate Taxes with respect to the Available Space shall be as specified
in the Offer Notice, and (iv) Landlord shall not provide to Tenant any
allowances (e.g., moving allowance, construction allowance or the like) or other
tenant inducements.
(c) If Tenant fails or is unable to timely exercise its rights
under this Section 2.1.2 then such rights shall lapse, time being of the essence
with respect to the exercise thereof, and, subject to the next two (2)
sentences, Landlord may lease the Available Space to third parties on such terms
as Landlord may elect. If Landlord fails to enter into any such third party
lease within six (6) months after Tenant has elected (or is deemed to have
elected) not to lease the Available Space, then the Available Space shall again
be subject to Tenant's rights under this Section.
(d) Notwithstanding any of the foregoing to the contrary,
Landlord shall have no obligation to first offer to lease to Tenant any
Available Space in accordance with this Section if at the time Landlord would
have sent to Tenant the Offer Notice Tenant is then in default of any of its
obligations under this Lease or shall have previously assigned this Lease or
sublet fifty percent (50%) or more of the rentable floor area of the Premises
(or shall have agreed to so assign this Lease or sublet the Premises) to any
party other than an Affiliate of Tenant (as defined in Section 6.1.1.6 hereof).
If Tenant is so then in default or shall have so assigned this Lease or sublet
the Premises (or shall have agreed to so assign this Lease or sublet the
Premises), Landlord may proceed to lease the Available Space to any third party
without Tenant having any prior right to lease the Available Space under this
Lease.
(e) Any person dealing with the Building may, without further
inquiry, conclusively rely upon a representation in a certificate of Landlord as
to whether or not the provisions of this Section have been satisfied or whether
Tenant has waived (or been deemed to have waived) its rights hereunder with
respect to each Available Space offered to Tenant in accordance with the
provisions of the foregoing Section 2.1.2(a) or 2.1.2(c). Landlord shall deliver
a copy of such certificate to Tenant at least ten (10) days prior to the first
occasion that Landlord delivers such a certificate to any prospective tenant,
purchaser or mortgagee with respect to each particular Available Space. The
parties hereby agree that a separate certificate
<PAGE> 10
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shall apply with respect to each Available Space separately offered to Tenant
under Section 2.1.2(a) or 2.1.2(c); provided, however, that Landlord shall not
be required to deliver a copy to Tenant or otherwise notify Tenant of the
delivery by Landlord to any prospective tenant, purchaser or mortgagee of any
certificate for any particular Available Space after the first occasion that
Landlord delivers such a certificate with respect to the particular Available
Space.
(f) The rights of Tenant under this Section 2.1.2 shall not
apply to (i) the sale or conveyance of the Building or the Lot (or both), or
(ii) the granting of a mortgage on the Building or Lot (or both) or the
foreclosure of or the granting of a deed in lieu of foreclosure of any such
mortgage.
(g) Landlord's failure to notify Tenant of the availability of
any Offer Space shall not relieve Tenant of any of its obligations under this
Lease; provided, however, that the foregoing provisions of this Subsection (g)
shall not limit or impair Tenant's right to bring any action at law or in
equity, including, without limitation, any action for specific performance,
against Landlord in the event Landlord shall fail to notify Tenant of the
availability of any Offer Space as and to the extent required under this Section
2.1.1.
(h) As used term, the term "Available Space Annual Fixed Rent
Rate" shall mean the greater of (i) the Annual Fixed Rent Rate at the time the
applicable Available Space is included in the Premises under this Section 2.1.1,
or (ii) ninety-five percent (95%) of the fair market rent for the Available
Space, determined in accordance with the procedures set forth in Subsection (i)
below (the "Available Space Fair Market Rent").
(i) The Available Space Fair Market Rent for any Available
Space shall be determined as follows: within twenty (20) days after Tenant gives
Landlord notice of its election to lease any Available Space under this Section
2.1.1, Landlord shall give Tenant notice of Landlord's determination of the
Available Space Fair Market Rent for the applicable Available Space. Within
fifteen (15) days after such notice from Landlord, Tenant shall notify Landlord
of its agreement with or objection to Landlord's determination of the Available
Space Fair Market Rent, whereupon the Available Space Fair Market Rent shall be
determined by arbitration conducted in a manner set forth below. If Tenant does
not notify Landlord within such fifteen (15) days of Tenant's agreement with or
objection to Landlord's determination of the Available Space Fair Market Rent,
then the Available Space Fair Market Rent for the applicable Available Space
shall be deemed to be Landlord's determination of the Available Space Fair
Market Rent as set forth in the notice from Landlord described in this
Subsection (i).
(j) If Tenant notifies Landlord of Tenant's objection to
Landlord's determination of the Available Space Fair Market Rent under the
preceding Subsection (i), such notice shall also set forth a request for
arbitration and Tenant's appointment of a commercial real estate appraiser
having at least ten (10) years of experience in the commercial leasing market in
Framingham, Massachusetts ("Arbitrator"). Within ten (10) days thereafter,
Landlord shall, by notice to Tenant, appoint a second Arbitrator. Each
Arbitrator shall be advised to determine the Available Space Fair Market Rent
for the applicable Available Space within thirty (30) days after Landlord's
appointment of the second Arbitrator. On or before the expiration of such thirty
(30)
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day period, the two Arbitrators shall confer and compare their respective
determinations of the Available Space Fair Market Rent. If the difference
between the amounts so determined by the two Arbitrators is less than or equal
to ten percent (10% ) of the lower of said amounts, then the final determination
of the Available Space Fair Market Rent shall be equal to the average of said
amounts. If such difference between said amount is greater than ten percent
(10%) of the lower of said amounts, then the two Arbitrators shall have ten (10)
days thereafter to appoint a third Arbitrator (the "Third Arbitrator"), who
shall be instructed to determine the Available Space Fair Market Rent for the
applicable Available Space within ten (10) days after its appointment by
selecting one of the amounts determined by the other two Arbitrators. Each party
shall bear the cost of the Arbitrator selected by such party. The cost of the
Third Arbitrator, if any, shall be shared equally by Landlord and Tenant.
(k) In the event that the term of the Lease for the Available
Space shall commence prior to the date of determination of the Available Space
Annual Fixed Rent Rate, Tenant shall pay Landlord rent for such Available Space
based upon the then applicable Annual Fixed Rent Rate for the Premises. Upon
such time as the Available Space Annual Fixed Rent Rate shall be determined,
such rate shall be effective retroactive to the date that the Available Space
was included in the Premises. Tenant shall, within thirty (30) days after the
date of determination of the Available Space Annual Fixed Rent Rate, pay
Landlord for any underpayment of rent applicable to the Available Space.
2.1.3 Access. Tenant shall have access to the Premises, including,
without limitation, the Data Center (as defined in Section 3.1 hereof) 24 hours
per day, seven days per week, 52 weeks per year, subject to the Rules and
Regulations, including, without limitation, the provisions of Paragraph 11,
Paragraph 13, and Paragraph 20 of the Rules and Regulations attached hereto.
2.2 TERM.
2.2.1 Initial Term. To have and to hold for a period (the "Term")
commencing on the Term Commencement Date and continuing through the Term
Expiration Date, unless sooner terminated as provided in Article VII or in
Article VIII.
2.2.2 Extension Options.
(a) Subject to the terms and conditions hereof, Tenant shall have two
(2) options to extend the Term of this Lease (each an "Option to Extend") for
successive periods of five (5) years (each an "Extension Period"). Tenant may
only exercise an Option to Extend with respect to the entire Premises (as the
same exists as of the commencement of the applicable Extension Period). If
Tenant elects to exercise an Option to Extend, it shall give Landlord a notice
(an "Exercise Notice") of such election not later than nine (9) months prior to
the expiration of the then current Term of this Lease. If Tenant fails or is
unable to timely give any Exercise Notice to Landlord, Tenant shall be
conclusively deemed to have waived all of its Options to Extend hereunder, time
being of the essence hereof.
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(b) Notwithstanding any contrary provision of this Lease, each Option
to Extend and any exercise by Tenant thereof shall be void and of no force or
effect unless on the date Tenant gives Landlord its Exercise Notice for each
Option to Extend and on the date of commencement of each Extension Period: (i)
this Lease is in full force and effect, (ii) there is no default of Tenant under
this Lease, and (iii) Tenant has not assigned this Lease or subleased fifty
percent (50%) or more of the rentable floor area of the Premises (or agreed to
so assign or sublease the Premises).
(c) All of the terms, provisions, covenants and conditions of this
Lease shall continue to apply during each Extension Period, except that the
Annual Fixed Rent Rate during each applicable Extension Period (the "Extension
Rent") shall be equal to the greater of (i) the Annual-Fixed Rent Rate payable
during the last year of the then current Term of this Lease, or (ii) the fair
market rent for the Premises for the applicable Extension Period, determined in
accordance with the procedure set forth in Subsection (d) below (the "Extension
Period Fair Market Rent").
(d) The Extension Period Fair Market Rent for each Extension Period
shall be determined as follows: within twenty (20) days after Tenant gives
Landlord its Exercise Notice, Landlord shall give Tenant notice of Landlord's
determination of the Fair Market Rent for the applicable Extension Period.
Within fifteen (15) days after such notice from Landlord, Tenant shall notify
Landlord of its agreement with or objection to Landlord's determination of the
Extension Period Fair Market Rent, whereupon the Extension Period Fair Market
Rent shall be determined by arbitration conducted in the manner set forth below.
If Tenant does not notify Landlord within such fifteen (15) day period of
Tenant's agreement with or objection to Landlord's determination of the
Extension Period Fair Market Rent, then the Extension Period Fair Market Rent
for the applicable Extension Period shall be deemed to be Landlord's
determination of the Extension Period Fair Market Rent as set forth in the
notice from Landlord described in this Subsection (d).
(e) If Tenant notifies Landlord of Tenant's objection to Landlord's
determination of the Extension Period Fair Market Rent under the preceding
subsection, such notice shall also set forth a request for arbitration and
Tenant's appointment of an Arbitrator. Within ten (10) days thereafter, Landlord
shall, by notice to Tenant, appoint a second Arbitrator. Each Arbitrator shall
be advised to determine the Extension Period Fair Market Rent for the applicable
Extension Period within thirty (30) days after Landlord's appointment of the
second Arbitrator. On or before the expiration of such thirty (30) day period,
the two Arbitrators shall confer and compare their respective determinations of
the Extension Period Fair Market Rent. If the difference between the amounts so
determined by the two Arbitrators is less than or equal to ten percent (10%) of
the lower of said amounts, then the final determination of the Extension Period
Fair Market Rent shall be equal to the average of said amounts. If such
difference between said amounts is greater than ten percent (10%) of the lower
of said amounts then the two Arbitrators shall have ten (10) days thereafter to
appoint a Third Arbitrator, who shall be instructed to determine the Extension
Period Fair Market Rent for the applicable Extension Period within ten (10) days
after its appointment by selecting one of the amounts determined by the other
two
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Arbitrators. Each party shall bear the cost of the Arbitrator selected by such
party. The cost of the Third Arbitrator, if any, shall be shared equally by
Landlord and Tenant.
ARTICLE III
IMPROVEMENTS
3.1 INITIAL CONSTRUCTION.
(a) Plans. Tenant hereby acknowledges that Tenant has delivered its
preliminary plans and specifications for the Premises to Landlord prior to the
date hereof. On or before the Design Completion Date (as hereinafter defined),
Landlord shall provide to Tenant Complete Plans (as hereinafter defined) for the
Premises based upon such preliminary plans and specifications. As used herein,
the term "Design Completion Date" shall mean the date which is thirty (30) days
after the date of full execution and delivery of this Lease by Landlord and
Tenant. Tenant shall reasonably review and approve the Complete Plans within
seven (7) days after delivery thereof by Landlord. Landlord and Tenant shall
initial two (2) sets of Complete Plans after the same have been so delivered by
Landlord and reasonably approved by Tenant.
As used herein, the term "Complete Plans" shall mean and refer
to complete sets of construction drawings and specifications prepared at
Tenant's expense by Landlord's architect or an architect approved by Landlord
and Landlord's engineer, as the same may be modified by changes approved by
Landlord and Tenant before or during the construction process. Complete Plans
shall include, but not be limited to:
a. Dimensioned Electrical and Telephone Outlet Plans
b. Reflected Ceiling Plans
c. Door and Hardware Schedules
d. Room Finish Schedules including wall, carpet and
floor tile colors
e. Electrical, mechanical and structural engineering
plans
Complete plans shall also include all necessary plans in connection with a data
center containing approximately 2,000 - 2,500 square feet to be located within
the Premises (the "Data Center"). The initial requirements for the Data Center
shall include the following:
(1) an emergency generator with battery backup, to be located
at the exterior of the Premises in a location mutually
agreed upon by Landlord and Tenant; and
(2) fifteen (15) Tl lines and five (5) 56kb lines.
Tenant shall have the right to install additional Tl lines at its sole cost and
expense, provided that (i) there is adequate conduit capacity at the Building
for such installation, as reasonably determined by Landlord, and (ii) such
installation shall be conducted in accordance with plans and specifications
approved by Landlord in writing in advance.
<PAGE> 14
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All of Tenant's construction, installation of furnishings and
later changes or additions shall be coordinated with any work being performed by
Landlord in such manner as to maintain harmonious labor relations and not to
damage the Building or Land or adversely interfere with Building operations.
Except for installation of furnishings and the installation of telephone outlets
which must be performed by the local telephone company at Tenant's direction and
expense, all work described in the Complete Plans, including, without
limitation, the Data Center (the "Leasehold Improvements"), shall be performed
by a licensed and qualified general contractor selected by Tenant, subject to
Landlord's reasonable approval ("Landlord's Contractor"). Without limitation of
the foregoing, the Leasehold Improvements shall include all materials and labor
required to: (A) achieve compliance with all applicable laws, codes, rules and
regulations, including the American's with Disabilities Act and other handicap
accessibility laws, codes, rules and regulations, and (B) upgrade any HVAC,
electrical or other mechanical systems specifically servicing the Premises as
required for Tenant's use and occupancy thereof.
Landlord will not approve any construction, alterations, or
additions requiring unusual expense to readapt the Premises to normal office use
on lease termination or increasing the cost of construction, insurance or taxes
on the Building or of Landlord's services called for by Section 5.1 unless
Tenant first gives assurances acceptable to Landlord that such readaptation will
be made prior to such termination without expense to Landlord and makes
provisions acceptable to Landlord for payment of such increased cost. All
changes and additions shall be part of the Building except such items as
Landlord shall require Tenant to remove in writing on termination of this Lease.
Notwithstanding the foregoing, Tenant shall not be required to remove the
initial improvements to be made to the Premises by Tenant or Landlord or any
other improvements made by Tenant or Landlord in accordance with any Complete
Plans approved by Landlord and Tenant (or any other improvements consistent
therewith provided the same are approved by Landlord, such approval not to be
unreasonably withheld or delayed), nor shall any such improvements be removed by
Tenant on termination of this Lease.
(b) Tenant Improvement Costs. Tenant shall pay to Landlord as
additional rent a sum equal to all costs incurred by Landlord on account of the
Leasehold Improvements in excess of the Tenant Allowance (as hereinafter
defined), including in the costs so incurred the cost of Landlord's Contractor's
overhead and profit (hereinafter called "Tenant Improvement Reimbursement to
Landlord" or "TIR"). Notwithstanding the foregoing, TIR shall not include, and
Landlord shall be responsible for, the cost to (i) separately meter electrical
service and HVAC service for the Premises, (ii) deliver the base building
systems, including the roof and all mechanical, electrical, plumbing HVAC and
fire alarm systems servicing the Building (other than any new HVAC system to be
located within the Data Center and the emergency generator described above, the
costs of which shall be included in TIR) in good, serviceable condition and in
compliance with all applicable laws, codes, rules and regulations, including,
without limitation the Americans with Disabilities Act, (iii) repair the
handicapped entrance ramp located at the entrance to the Building nearest the
parking lot, and (iv) install one handicapped accessible stall in the common
area bathroom on the first (1st) floor of the Building (except to the extent
that such a handicapped accessible stall already exists). Notwithstanding the
foregoing or any other provision of this Lease, TIR shall include all costs for
the relocation of any component of any base building system or the addition (as
opposed to replacement) of any base building system
<PAGE> 15
-15-
component located in or exclusively servicing the Premises, including, without
limitation, the relocation of any fire alarm horns or strobes, or the addition
of any new fire alarm horns or strobes (as opposed to replacement of existing
horns or strobes), to the extent same is required in connection with Tenant's
use or occupancy of the Premises. TIR shall also include the cost to install the
Off Hours Switch and meter described in Paragraph 20 of Exhibit C attached
hereto with respect to Tenant's Off Hours HVAC Service. Prior to commencement of
construction, Landlord shall deliver to Tenant a good faith estimate of the TIR
Tenant shall pay to Landlord the TIR (which may be greater or less than the
amount so estimated by Landlord) as construction of the Leasehold Improvements
progresses, within thirty (30) days after submission by Landlord to Tenant of a
statement on or about the first day of each month showing construction and
design costs incurred; provided, however, that Tenant and Landlord shall each be
responsible for fifty percent (50%) of the construction and design costs shown
on such statement (except for costs of change orders, for which Tenant shall be
solely responsible) until such time as the Tenant Allowance shall have been
fully applied, after which time Tenant shall be responsible for one hundred
percent (100%) of the TIR, Such statement shall be accompanied by a certificate
of Landlord's Contractor that all payments then due to laborers, materialmen and
subcontractors have been made, less the aggregate amount of prior monthly
progress payments made by Tenant or Landlord. On the earlier of occupancy or the
Substantial Completion Date, Tenant shall pay to Landlord a sum equal to the
unpaid balance of TIR. In addition to paying TIR as above provided, Tenant shall
pay an amount equal to all costs incurred by Landlord as a result of any change
orders approved by Tenant and Landlord affecting the Complete Plans, including
the cost to Landlord of Landlord's Contractor's overhead and profit in
connection therewith. Amounts due and payable on account of such change orders
shall be included in the monthly statements relating to TIR provided for above,
and Tenant shall pay therefor in accordance with each such statement within
thirty (30) days, and in all events by the Substantial Completion Date.
The term "Tenant Allowance" as used herein with respect to the
Premises shall mean $10.00 p.r.s.f., multiplied by the number of rentable square
feet contained in the Premises.
Subject to the provisions of this Article III, and to the
extent of Landlord's ongoing maintenance, repair and service obligations as
expressly set forth in this Lease, Tenant hereby agrees that Landlord shall
deliver, and Tenant shall accept, the Premises "as is", "where is", with all
faults and without any representation, warranty or guaranty of any kind by
Landlord to Tenant.
3.2 GENERAL PROVISIONS APPLICABLE TO CONSTRUCTION.
Landlord agrees to use reasonable efforts to have the Premises ready
for occupancy within one hundred twenty (120) days after the date that Landlord
and Tenant shall have initiated the Complete Plans as described in Section 3.1
above, subject to extensions for any Unavoidable Delays or any Tenant Delays (as
hereinafter defined). As used herein, the term "Tenant Delays" shall mean and
refer to any delays caused by any: (A) negligent act or omission or willful
misconduct of Tenant or any of its agents, contractors or employees, (B) default
or breach by Tenant or any of such parties of the provisions of this Article III
or any other provision of the Lease, (C) delays relating to any change order
requested by Tenant (including, without
<PAGE> 16
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limitation, any delay in connection with reviewing any change order request,
notwithstanding that Landlord and Tenant shall thereafter fail to execute a
change order with respect thereto), or (D) delays by Tenant caused in connection
with furnishing or equipping the Data Center or any other portion of the
Premises, or in connection with any other work of Tenant or Tenant's separate
contractors. The Premises shall be deemed ready for occupancy on the Substantial
Completion Date (as hereinafter defined). As used herein, the term "Substantial
Completion Date" shall mean and refer to the date on which (i) the Leasehold
Improvements have been constructed in accordance with the Complete Plans and are
ready for occupancy as reasonably certified by Landlord's architect with the
exception of minor items which can be fully completed without material
interference with Tenant, provided that none of said items is necessary to make
the Premises tenantable for the Permitted Uses (collectively "Punch List
Items"), and (ii) a Certificate of Occupancy from the Town of Framingham for the
Premises shall have been obtained; provided, however, that if Landlord is unable
to complete construction due to any Tenant Delay, then the Premises shall be
deemed ready for occupancy no later than the date by which Landlord could have
substantially completed the Leasehold Improvements but for such Tenant Delay, in
which case the Annual Fixed Rent, Additional Rent and all other charges due
hereunder shall be deemed to be due and payable upon such date as though the
Substantial Completion Date had actually occurred on such date. Substantial
Completion shall not require the furnishing or equipping of the Data Center or
any other portion of the Premises, or the completion of any other work by Tenant
or any of Tenant's separate contractors.
Landlord shall complete Punch List Items within thirty (30) days after
the Substantial Completion Date (or such longer period as may be reasonably
required to complete such Punch List Items, provided that Landlord has commenced
completion of such items within said thirty (30) day period and thereafter
diligently pursues completion of the same).
Notwithstanding any other provisions of this Lease to the contrary,
Landlord shall permit Tenant reasonable access for installing equipment and
furnishings in the Premises prior to the Substantial Completion Date (at no
charge to Tenant) if it can be done without material interference with
completion of the remaining portions of the Leasehold Improvements.
All construction work required or permitted by this Lease, whether by
Landlord or by Tenant, shall be done in a good and workmanlike manner and in
compliance with all applicable laws and all lawful ordinances, regulations and
orders of governmental authority and insurers of the Building and shall be
consistent with Building standard finishes, except as otherwise agreed to by
Landlord in writing. Either party may inspect the work of the other at
reasonable times and promptly shall give notice of observed defects. Landlord
shall not be responsible for any loss, damage, or injury resulting from the
installation of any components, fixtures, or equipment provided they were
appropriately specified and installed in accordance with the manufacturer's or
supplier's instructions, and provided that Landlord shall assign any and all
manufacturers' and suppliers' warranties with respect thereto to Tenant for the
Term of this Lease, upon the expiration or sooner termination of which Term such
warranties shall automatically revert to Landlord. Landlord's obligations under
Section 3.1 shall be deemed to have been performed when Tenant commences to
occupy any portion of the Premises for the Permitted Uses except for Punch List
Items and any other items which are incomplete or do not conform with the
<PAGE> 17
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requirements of Section 3.1 and as to which Tenant shall in either case have
given written notice to Landlord within thirty (30) days after such
commencement. If Tenant shall not have commenced to occupy the Premises for the
Permitted Uses within 30 days after the Premises are deemed ready for occupancy
as provided in Section 3.2, a certificate of completion by a licensed architect
or registered engineer shall be conclusive evidence that Landlord has performed
all such obligations except for items stated in such certificate to be
incomplete or not in conformity with such requirements.
3.3 REPRESENTATIVES.
Each party authorizes the other to rely in connection with their
respective rights and obligations under this Article III upon approval and other
actions on the party's behalf by Landlord's Representative in the case of
Landlord or Tenant's Representative in the case of Tenant or by any person
designated in substitution or addition by notice to the party relying.
ARTICLE IV
RENT
4.1 RENT. Tenant agrees to pay to Landlord as rent for the Premises, without any
offset or reduction whatsoever (except as made in accordance with the express
provisions of this Lease), Annual Fixed Rent, Additional Rent, the Electricity
Charge and all other additional rent or charges required of Tenant under this
Lease, at the Original Address of Landlord or at such other place or to such
other person or entity as Landlord may by notice to Tenant from time to time
direct.
4.2 ANNUAL FIXED RENT. The Annual Fixed Rent for the Premises shall be payable
in equal installments equal to 1/12th of the product of the Annual Fixed Rent
Rate multiplied by the rentable floor area of the Premises from time to time, in
advance on the first day of each calendar month included in the Term from and
after the Rent Commencement Date; and for any portion of a calendar month at the
beginning or end of the Term, at the proportionate rate payable for such
portion, in advance.
4.3 ADDITIONAL RENT - ESCALATION OF OPERATING EXPENSES.
4.3.1 For purposes of this paragraph 4.3, the following definitions
apply:
"Fiscal Year" shall mean each separate calendar year falling
wholly or partly within the Term.
"Initial Base Cost" shall mean all Operating Expenses (as
hereinafter defined) of the Building for the Initial Fiscal Year.
"Operating Expenses" shall mean all expenses, costs and
disbursements (but no replacement of capital investment items except as provided
below or specific costs especially billed to and paid by specific tenants) of
every kind and nature which Landlord shall pay or
<PAGE> 18
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become obligated to pay because of or in connection with ownership, insurance,
maintenance, security (to the extent provided by Landlord) and operation of the
Building and Land, computed on an accrual basis, and including, but not limited
to, the following:
(i) Wages and salaries of all employees engaged in
operating, maintenance or security of the Building, including
taxes, insurance and benefits relating thereto.
(ii) All supplies and materials used in operation and
maintenance of the Building.
(iii) Cost of all utilities and any surcharges for
the Building, including cost of water, sewer, power, heat,
light, air conditioning and ventilation for the Building, to
the extent not separately metered to Tenant or any other
tenant of the Building. Tenant expressly acknowledges that
Operating Expenses include the cost of electricity for the
Building notwithstanding that Tenant is paying, and other
tenants may be paying, Landlord the Electricity Charge.
(iv) Cost of all maintenance and service agreements
for the Building and the equipment therein, including, but not
limited to, security and energy management services, window
cleaning, elevator maintenance and janitorial service.
(v) Cost of all insurance relating to the Building
and Land, and Landlord's personal property used in connection
therewith.
(vi) Cost of repairs and general maintenance
(excluding repairs and general maintenance paid by the
proceeds of insurance or by Tenant or other third parties, and
alterations attributable solely to tenants of the Building
other than Tenant).
(vii) Management fee for the manager of the Building
comparable to the management fee paid to managers of
comparable buildings in the suburban Boston office market.
(viii) The cost of any additional, commercially
reasonable services not provided to the Building at the
commencement of the Lease Term but thereafter provided by
Landlord in the prudent management of the Building, consistent
with the management of similar first class office buildings in
the area in which the Building is located.
(ix) The cost of any capital improvements made to the
Building after the commencement of the Term that are intended
to reduce other operating expenses or are required under
governmental law or regulation, such cost thereof to be
amortized over said capital improvements' useful life with
interest on the unamortized balance at a floating rate equal
to the so-called prime rate published
<PAGE> 19
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from time to time in the Wall Street Journal (or, if such rate
is no longer published, a comparable rate selected by
Landlord) (the "Prime Rate") plus two (2) percentage points
per annum, or such higher rate as may have been paid by
Landlord on funds borrowed for the purposes of constructing or
installing said capital improvements.
4.3.2 For and with respect to each Fiscal Year, Tenant shall pay as
Additional Rent (as defined herein) for the Premises Tenant's Proportionate
Share of the increase in Operating Expenses over the Initial Base Cost, on the
following terms and conditions:
(i) After the end of the first Fiscal Year immediately
following the Initial Fiscal Year (the "First Full Fiscal Lease Year"),
if Operating Expenses for such First Full Fiscal Year exceed the
Initial Base Cost, Landlord shall submit a notice to Tenant reasonably
detailing such excess, and Tenant shall pay Tenant's Proportionate
share of such excess within thirty (30) days after such notice.
(ii) During each Fiscal Year following the First Full Fiscal
Year, Tenant shall pay to Landlord, in monthly installments together
with monthly Fixed Rent, an amount estimated by Landlord as one-twelfth
of the Tenant's Proportionate Share of the excess of Operating Expenses
for such Fiscal Year over the Initial Base Cost.
(iii) Within one hundred twenty (120) days (or as soon
thereafter as possible) following the end of each Fiscal Year following
the First Full Fiscal Year, Landlord shall provide Tenant a statement
of such year's actual Operating Expenses, showing the actual increase
in Operating Expenses over the Initial Base Cost (the "Annual Operating
Expense Statement"). If such Annual Operating Expense Statement shows
that Tenant's monthly payments exceed Tenant's Proportionate Share of
the actual increase incurred for the applicable Fiscal Year, then
Tenant may deduct such overpayments from its next payment or payments
of monthly rent unless the Term has expired, in which case Landlord
shall refund such overpayment to Tenant within thirty (30) days after
such Annual Operating Expense Statement. If such Annual Operating
Expense Statement shows that Tenant's Proportionate Share of the actual
increase incurred for the applicable Fiscal Year exceeds Tenant's
monthly payments for the applicable Fiscal Year, then Tenant shall
within thirty (30) days after such statement pay the total amount of
such deficiency to Landlord.
(iv) Each and every of the aforesaid projected escalation
amounts, as well as any other amounts which are owed by Tenant to
Landlord under this Lease other than Annual Fixed Rent, whether or
not identified as "Additional Rent" hereunder, and whether requiring
lump sum payment or constituting projected monthly amounts payable
with the Annual Fixed Rent, shall for all purposes be treated and
considered as Additional Rent and the failure of Tenant to pay the
same as and when. due in advance and without demand shall have
the same effect as failure to pay any installment of the Annual Fixed
Rent, and shall afford Landlord all remedies provided in this Lease
therefor.
<PAGE> 20
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(v) Tenant shall have the right, exercisable within (30) days
after delivery by Landlord of each Annual Operating Expense Statement,
to review the books and records of Landlord with respect to Operating
Expenses for the Fiscal Year covered by the applicable Annual Operating
Expense Statement. Any such audit shall be conducted by a qualified
real estate professional at the office of Landlord's property manager,
during normal business hours, upon not less than five (5) days' prior
written notice to Landlord. Any such audit shall be conducted at
Tenant's sole cost and expense, unless a certified public accountant
engaged by Tenant shall establish that the applicable Annual Operating
Expense Statement has overstated Operating Expenses for the applicable
Fiscal Year by ten percent (10%) or more of the actual Operating
Expenses for such Fiscal Year, in which case Landlord shall reimburse
Tenant for Tenant's reasonable out-of-pocket costs and expenses in
connection with such audit (including the reasonable cost of such
certified public accountant). In the event that such audit shall
establish that Tenant's monthly payments with respect to Operating
Expenses for the applicable Fiscal Year exceeded Tenant's Proportionate
Share of the actual increase in Operating Expenses incurred for the
applicable Fiscal Year, then Tenant may deduct such overpayments from
its next payment or payments of monthly rent, unless the Term has
expired, in which case Landlord shall refund such overpayment to Tenant
within thirty (30) days after written demand by Tenant. If such audit
shall establish that Tenant's Proportionate Share of the actual
increase in Operating Expenses for the applicable Fiscal Year exceeded
Tenant's monthly payments for the applicable Fiscal Year, then Tenant
shall with thirty (30) days after written demand from Landlord pay the
total amount of such deficiency to Landlord. If Tenant fails or is
unable to timely exercise its rights under this Section with respect to
the audit of Operating Expenses for any Fiscal Year, then such rights
shall lapse with respect to such Fiscal Year, time being of the essence
with respect to the exercise thereof, and Tenant shall be conclusively
deemed to have consented to the amount shown on such Annual Operating
Expense Statement as the actual Operating Expenses for such Fiscal
Year.
4.3.3 Tenant's obligation for payment of Additional Rent shall survive
any termination of this Lease by the lapse of time or otherwise.
4.3.4 Should this Lease terminate at any time other than the first day
of a calendar year, the Additional Rent referred to in this paragraph 4.3 shall
be calculated for the Fiscal Year in which the expiration of the Term occurs
only by the following formula:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Days Under Lease x Additional Rent = Adjusted Additional Rent for the
365 Fiscal Year which termination occurred
</TABLE>
4.3.5 In any Fiscal Year when the Building has an average annual
occupancy rate of less than 95% then, for the purpose of this Section 4.3, the
Operating Expenses will be extrapolated as though the Building were 95%
occupied; and the Tenant's Proportionate Share shall mean the same proportion of
the Operating Expenses as the rentable floor area of the Premises bears to 95%
of the Rentable Floor Area of the Building. In any Fiscal Year when the
<PAGE> 21
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Building has an average annual occupancy rate of 95% or more then the Operating
Expenses shall be the actual Operating Expenses; and the Tenant's Proportionate
Share shall mean the same proportion of the Operating Expenses as the rentable
floor area of the Premises bears to the Rentable Floor Area of the Building
actually leased on an average annual basis for said Fiscal Year. In the case of
any services which are not rendered to all areas on a comparable basis, the
proportion allocable to the Premises shall be in the same proportion which the
floor area of the Premises bears to the total floor area to which such service
is rendered.
4.4 ESCALATION OF REAL ESTATE TAXES.
4.4.1 For purposes of this paragraph 4.4, the following definitions
apply:
"Tax Year" shall mean each separate tax fiscal year falling
wholly or partly within the Term (currently the period commencing July 1 and
ending June 30).
"Initial Tax Cost" shall mean all Real Estate Taxes (as
hereinafter defined) assessed against the Building and the Land for the Initial
Tax Year.
"Real Estate Taxes" shall mean all real estate taxes
(including special assessments, if any and any other taxes now or hereinafter
imposed which are in the nature of or in substitution for real estate taxes)
levied on the Building and the Land. For purposes of the preceding sentence, if
Landlord can lawfully pay any assessment in installments without any fine,
penalty or lien against the Land or Building, the amount of such assessment
shall be limited to the installments lawfully payable from time to time during
the Term plus any accrued interest on the unpaid balance of such assessment.
4.4.2 For and with respect to each Tax Year, Tenant shall pay as
Additional Rent for the Premises Tenant's Proportionate Share of the increase in
Real Estate Taxes over the Initial Tax Cost, on the following terms and
conditions:
(i) After the end of the Initial Tax Year, if Real Estate
Taxes exceed the Initial Tax Cost, Landlord shall submit a notice to
Tenant reasonably detailing such excess, and Tenant shall pay Tenant's
Proportionate share of such excess within thirty (30) days after such
notice.
(ii) During each Tax Year following the Initial Tax Year,
Tenant shall pay to Landlord, in monthly installments together with
monthly Fixed Rent, an amount estimated by Landlord as one-twelfth of
the Tenant's Proportionate Share of the excess of Real Estate Taxes for
such Tax Year over the Initial Tax Cost.
(iii) Within one hundred twenty (120) days (or as soon
thereafter as possible) following the end of each Tax Year, Landlord
shall provide Tenant a statement of such year's actual Real Estate
Taxes, showing the actual increase in Real Estate Taxes over the
Initial Tax Cost. If such statement shows that Tenant's monthly
payments exceed Tenant's Proportionate Share of the actual increase
incurred for the applicable Tax Year, then Tenant may deduct such
overpayments from its next payment or payments of
<PAGE> 22
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monthly rent unless the Term has expired, in which case Landlord shall
refund such overpayment to Tenant within thirty (30) days after such
statement. If such statement shows that Tenant's Proportionate Share of
the actual increase incurred for the applicable Tax Year exceeds
Tenant's monthly payments for the applicable Tax Year, then Tenant
shall within thirty (30) days after such statement pay the total amount
of such deficiency to Landlord.
(iv) Each and every of the aforesaid projected escalation
amounts shall for all purposes be treated and considered as
Additional Rent.
4.4.3 Should this Lease terminate at any time other than the first day
of a tax year, the Additional Rent referred to in this paragraph 4.4 shall be
calculated for the Tax Year in which the expiration of the Term occurs only by
the following formula:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Days Under Lease x Additional Rent = Adjusted Additional Rent for the
365 Tax Year which termination occurred
</TABLE>
4.4.4 In any Fiscal Year when the Building has an average annual
occupancy rate of less than 95% then, for the purpose of this Section 4.4, the
Real Estate Taxes will be extrapolated as though the Building were 95% occupied;
and the Tenant's Proportionate Share shall mean the same proportion of the Real
Estate Expenses as the rentable floor area of the Premises bears to 95% of the
Rentable Floor Area of the Building. In any Fiscal Year when the Building has an
average annual occupancy rate of 95% or more then the Real Estate Taxes shall be
the actual Real Estate Taxes and the Tenant's Proportionate Share shall mean the
same proportion of the Real Estate Taxes as the rentable floor area of the
Premises bears to the Rentable Floor Area of the Building actually leased on an
average annual basis for said Fiscal Year.
4.5 UTILITIES. Tenant shall pay directly to the proper authorities charged with
the collection thereof all charges for any utilities or services separately
metered to Tenant used or consumed on the Premises. It is understood and agreed
that Landlord shall not be liable for any interruption or failure in the supply
of any such utilities to the Premises. Landlord reserves the right to install
separate subcheck meters to measure Tenant's use and consumption of any utility
(including electricity) furnished to the Premises but which is not separately
metered to Tenant by the applicable utility as of the Term Commencement Date, at
Tenant's sole cost and expense.
4.6 LATE PAYMENT OF RENT. If any installment of rent is paid ten (10) days after
the date the same was due, at Landlord's election, it shall bear interest from
the due date at the Prime Rate, as it may be adjusted from time to time, plus 4%
per annum, but in no event more than the highest rate of interest allowed by
applicable law, which interest shall be immediately due and payable as further
additional rent. The foregoing provisions of this Section 4.6 shall not apply to
the first installment of rent paid after the date the same was due during each
twelve (12) consecutive month period during the Term.
ARTICLE V
LANDLORD'S COVENANTS
<PAGE> 23
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5.1 COVENANTS. Landlord covenants during the Term:
5.1.1 Building Services. To furnish, through Landlord's employees or
independent contractors, the services listed in Exhibit D.
5.1.2 Additional Building Services. To furnish, through Landlord's
employees or independent contractors, reasonable additional Building operation
services upon reasonable advance request of Tenant at equitable rates from time
to time established by Landlord to be paid by Tenant.
5.1.3 Insurance. To maintain all risk fire and casualty insurance on a
replacement value, agreed amount basis, for the Building in such amounts as
Landlord may consider reasonably appropriate. Landlord shall have no obligation
to insure Tenant's personal property or chattels, including without limitation,
Tenant's trade fixtures.
5.1.4 Maintenance; Repairs. Except as otherwise provided in Article VI,
to make such repairs to the roof, exterior walls, floor slabs and other
structural components and common areas and facilities of the Building as may be
necessary to keep them in good, serviceable condition. Without limitation of the
foregoing, Landlord shall be responsible for the maintenance and repair of the
mechanical, electrical, plumbing and heating and air conditioning systems
serving the Building, (except for the HVAC system located in the Data Center and
Tenant's back-up generator located outside the Premises, the maintenance of
which shall be the responsibility of Tenant).
ARTICLE VI
TENANT'S ADDITIONAL COVENANTS
6.1 COVENANTS. Tenant covenants at its expense at all times during the Term and
for such further time as Tenant occupies the Premises or any part thereof:
6.1.1 Perform Obligations. To perform promptly all of the obligations
of Tenant set forth in this Lease; and to pay when due the Fixed Rent and
Additional Rent and all charges, rates and other sums which by the terms of this
Lease are to be paid by Tenant.
6.1.2 Occupancy and Use. Continuously from the Commencement Date, to
use and occupy the Premises only for the Permitted Uses, and to timely procure
and maintain all licenses and permits necessary therefor at Tenant's sole
expense.
6.1.3 Repair and Maintenance. Except as otherwise provided in Article
VII, to keep the Premises, including, without limitation, the HVAC system
located in the Data Center and Tenant's back-up generator located outside the
Premises (but excluding the exterior of the Premises, (exclusive of glass and
doors), the structural elements of the Building, the grounds, the parking lot
and such building systems as Landlord has agreed to maintain pursuant to Section
5.1.4 hereof, which Landlord shall maintain and repair unless such repairs are
required because of Tenant's misconduct or negligence) in good order, condition
and repair and in at least as good
<PAGE> 24
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order, condition and repair as they are in on the Commencement Date or may be
put in during the Term, reasonable use and wear and tear and damage by fire or
other casualty not caused by Tenant's misconduct or negligence; to maintain the
Premises in a clean, orderly and sanitary condition, including, without
limitation, cleaning, repairing or replacing as needed all floor covering within
the Premises; to keep in a safe, secure and sanitary condition all trash and
rubbish temporarily stored at the Premises; and to make all repairs and
replacements and to do all other work necessary for the foregoing purposes
whether the same may be ordinary or extraordinary, foreseen or unforeseen.
Tenant shall secure, pay for and keep in force contracts with appropriate and
reputable service companies approved by Landlord providing for the regular
maintenance of the heating, ventilation and air-conditioning systems located in
the Data Center, and copies of all such contracts for the Premises shall be
furnished to Landlord not later than the Substantial Completion Date and a
replacement or extension thereof shall be furnished to Landlord prior to
expiration of such preceding contract (and if Tenant shall fail to do so,
Landlord may (but shall not be obligated to) arrange for such contracts and the
cost thereof shall be reimbursed by Tenant to Landlord upon demand and shall be
deemed Additional Rent under this Lease). It is further agreed that the
exception of reasonable use and wear shall not apply so as to permit Tenant to
keep the Premises in anything less than suitable, tenant-like, and efficient and
usable condition considering the nature of the Premises and the use reasonably
made thereof, or in less than good and tenantlike repair.
6.1.4 Compliance with Law. To make all repairs, alterations, additions or
replacements to the Premises required by any law or ordinance or any order or
regulation of any public authority other than major capital repairs,
alterations, additions or replacements to the foundations and structural
elements of the building which are not required because of Tenant's failure to
comply with the provisions of Article 6.1.3 hereof; to keep the Premises
equipped with all safety appliances so required; to pay all municipal, county,
or state taxes assessed against the leasehold interest hereunder, or against
personal property of any kind on or about the Premises; not to dump, flush, or
in any way introduce any hazardous substances or any other toxic substances into
the septic, sewage or other waste disposal system serving the Premises or the
Building, not to generate, store or dispose of hazardous substances in or on the
Premises, the Building or the Land or dispose of hazardous substances from the
Premises, the Building or the Land to any other location without the prior
written consent of Landlord and then only in compliance with the Resource
Conservation and Recovery Act of 1976, as amended, 42 U.S.C. ss.6901 et seq.,
and all other applicable laws, ordinances and regulations; to notify Landlord of
any incident which would require the filing of a notice under applicable
federal, state, or local law; not to store or dispose of hazardous substances on
the Premises without first submitting to Landlord a list of all such hazardous
substances and all permits required therefor and thereafter providing to
Landlord on an annual basis Tenant's certification that all such permits have
been renewed with copies of such renewed permits; and to comply with the orders
and regulations of an governmental authorities with respect to zoning, building,
fire, health and other codes, regulations, ordinances or laws applicable to the
Premises. "Hazardous substances" as used in this paragraph shall mean "hazardous
substances" as defined in the Comprehensive Environmental Response Compensation
and Liability Act of 1980, as amended, 42 U.S.C. ss.9601 and regulations adopted
pursuant to said Act.
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6.1.5 Tenant's Work. To procure at Tenant's sole expense all necessary
permits and licenses before undertaking any work on the Premises; to do all such
work in compliance with the applicable provisions of this Lease, including,
without limitation, Sections 3.2; to do all such work in a good and workmanlike
manner employing materials of good quality and so as to conform with all
applicable zoning, environmental, building, fire, health and other codes,
regulations, ordinances and laws; to furnish to Landlord prior to the
commencement of any such work a bond or other security acceptable to Landlord
assuring that any Work commenced or continued by Tenant will be completed in
accordance with specifications approved in advance in writing by Landlord; to
keep the Premises at all times free of liens for labor and materials; to employ
for such work one or more responsible contractors whose labor will work without
interference with other labor working on the Building; to require such
contractors employed by Tenant to carry worker's compensation insurance in
accordance with statutory requirements and comprehensive public liability
insurance covering such contractors on or about the Premises in amounts that at
least equal the limits set forth in Section 1.1 and to submit certificates
evidencing such coverage to Landlord prior to the commencement of such work; and
to save Landlord harmless and indemnified from all injury, loss, claims or
damage to any person or property occasioned by or growing out of such work.
6.1.6 Indemnity. To defend, with counsel reasonably approved by
Landlord, all actions against Landlord, any partner, trustee, stockholder,
officer, director, employee or beneficiary of Landlord, holders of mortgages
secured by the Premises or the Building and Land and any other party having an
interest in the Premises ("Indemnified Parties") with respect to, and to pay,
protect, indemnify and save harmless, to the extent permitted by law, all
Indemnified Parties from and against, any and all liabilities, losses, damages,
costs, expenses (including reasonable attorneys' fees and expenses), causes of
action, suits, claims, demands or judgments of any nature (collectively,
"Claims") arising from any (i) injury to or death of any person, or damage to or
loss of property, on the Premises or on adjoining sidewalks, streets or ways,
connected in any way with the use or occupancy of any thereof by Tenant or any
of Tenant's agents, contractors, licensees, sublessees or invitees, (ii)
violation of this Lease, or (iii) act, fault, omission or misconduct of Tenant
or its agents, contractors, licensees, sublessees or invitees; provided,
however, that the foregoing indemnity shall not include any Claims to the extent
same arise from any negligent act or omission or intentional misconduct of
Landlord or any of Landlord's Indemnified Parties or their respective
contractors, licensees, agents, servants or employees.
6.1.7 Landlord's Right to Enter. To permit Landlord and its agents to
enter into the Premises at reasonable times, and upon at least twenty-four
hours' notice (except in case of emergency, in which event prior notice shall
not be required but Landlord shall give Tenant notice after such entry promptly
thereafter), to examine the Premises, make such repairs and replacements as
Landlord may elect, without however, any obligation to do so, and show the
Premises to prospective purchasers and to lenders, and, during the last nine (9)
months of the Term, to show the Premises to prospective tenants and to keep
affixed in suitable places notices of availability of the Premises.
6.1.8 Personal Property at Tenant's Risk. All of the furnishings,
fixtures, equipment, effects and property of every kind, nature and description
of Tenant and of all persons claiming
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by, through or under Tenant which, during the continuance of this Lease or any
occupancy of the Premises by Tenant or anyone claiming by, through or under
Tenant, may be on the Premises (collectively "Tenant's Property"), shall, as
between the parties, be at the sole risk and hazard of Tenant and if the whole
or any part thereof shall be destroyed or damaged by fire, water or otherwise,
or by the leakage or bursting of water pipes, steam pipes, or other pipes, by
theft or from any other cause, no part of said loss or damage is to be charged
to or to be borne by Landlord, except that Landlord shall in no event be
indemnified or held harmless or exonerated from any liability to Tenant or to
any other person, for any injury, loss, damage or liability to the extent
prohibited by law.
6.1.9 Payment of Landlord's Cost of Enforcement. To pay on. demand
Landlord's expenses, including reasonable attorney's fees, incurred in enforcing
any obligation of Tenant under this Lease or in curing any default by Tenant
under this Lease as provided in Section 8.4.
6.1.10 Yield Up. At the expiration of the Term or earlier termination
of this Lease: to surrender all keys to the Premises, to remove all of its trade
fixtures and personal property in the Premises, to remove such installations and
improvements made by Tenant as Landlord may request and all Tenant's signs
wherever located, to repair all damage caused by such removal and to yield up
the Premises (including all installations and improvements made by Tenant except
for trade fixtures and such of said installations or improvements as Landlord
shall request Tenant to remove), broom-clean and in the same good order and
repair in which Tenant is obliged to keep and maintain the Premises by the
provisions of this Lease. Any property not so removed shall be deemed abandoned
and may be removed and disposed of by Landlord in such manner as Landlord shall
determine and Tenant shall pay Landlord the entire cost and expense incurred by
Landlord in effecting such removal and disposition and in making any incidental
repairs and replacements to the Premises and for use and occupancy during the
period after the expiration of the Term and prior to Tenant's performance of its
obligations under this Section 6.1.10. Tenant shall further indemnify Landlord
against all loss, cost and damage resulting from Tenant's failure and delay in
surrendering the Premises as above provided.
6.1.11 Estoppel Certificate. Upon not less than ten (10) days' prior
notice by Landlord, to execute, acknowledge and deliver to Landlord a statement
in writing certifying that this Lease is unmodified and in full force and effect
and that except as stated therein Tenant has no knowledge of any defenses,
offsets or counterclaims against its obligations to pay the Fixed Rent and
Additional Rent and any other charges and to perform its other covenants under
this Lease (or, if there have been any modifications, that the Lease is in full
force and effect as modified and stating the modifications and, if there are any
defenses, offsets or counterclaims, setting them forth in reasonable detail),
the dates to which the Fixed Rent and Additional Rent and other charges have
been paid and a statement that Landlord is not in default hereunder (or if in
default, the nature of such default, in reasonable detail) and such other
matters reasonably required by Landlord or any prospective purchaser. or
mortgagee of the Building. Any such statement delivered pursuant to this Section
6.1.11 may be relied upon by any prospective purchaser or mortgagee of the
Building, or any prospective assignee of any such mortgage.
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6.1.12 Landlord's Expenses Re Consents. To reimburse Landlord promptly
on demand for all reasonable legal expenses incurred by Landlord in connection
with all requests by Tenant for consent or approval under this Lease for any
proposed assignment or sublease.
6.1.13 Rules and Regulations. To comply with the Rules and Regulations
set forth in Exhibit C, as the same may be amended from time to time by Landlord
to provide for the care and use of the Building and Land and their facilities
and approaches, it being understood that Landlord shall not be liable to Tenant
for the failure of other tenants of the Building to conform to such Rules and
Regulations.
6.1.14 Loading. Not to move any safe, vault or other heavy equipment
in, about or out of the Premises except in such manner and at such times as
Landlord shall in each instance approve; Tenant's business machines and
mechanical equipment which cause vibration or noise that may be transmitted to
the Building structure or to any other leased space in the Building shall be
placed or maintained by Tenant in settings of cork, rubber, spring, or other
types of vibration eliminators sufficient to eliminate such vibration or noise.
In addition, in the event that Tenant shall lease any Available Space pursuant
to the terms of Section 2.1.2 hereof, Tenant agrees not to place any Tenant's
property, as defined in Section 6.1.8 hereof, within the Available Space so as
to exceed a rate of 50 pounds of live load per square foot.
6.1.15 Holdover. To pay to Landlord one hundred fifty percent (150%) of
the total of the Fixed Rent, Additional Rent, and all other payments then
payable hereunder, for each month or portion thereof Tenant shall retain
possession of the Premises or any part thereof after the termination of this
Lease, whether by lapse of time or otherwise, and also to pay all damages
sustained by Landlord on account thereof; the provisions of this subsection
shall not operate as a waiver by Landlord of the right of re-entry provided in
this Lease; at the option of Landlord exercised by notice given to Tenant while
such holding over continues, such holding over shall constitute an extension of
this Lease for a period of one year.
6.1.16 Assignment and Subletting.
(a) Not without the prior written consent of Landlord to
assign this Lease, to make any sublease, or to permit occupancy of the Premises
or any part thereof by anyone other than Tenant, voluntarily or by operation of
law; as Additional Rent, to reimburse Landlord promptly for reasonable legal and
other expenses incurred by Landlord in connection with any request by Tenant for
consent to assignment or subletting; no assignment or subletting shall affect
the continuing primary liability of Tenant (which, following assignment, shall
be joint and several with the assignee); no consent to any of the foregoing in a
specified instance shall operate as a waiver in any subsequent instance. Subject
to the provisions of Subsection 6.1.16(b) and Subsection 6.1.16(c) hereof,
Landlord's consent to assignment or subletting by Tenant shall not be
unreasonably withheld or delayed, provided that Tenant is not then in default
under this Lease and provided further that Landlord shall not be deemed
unreasonable for withholding its consent (i) to any assignment or subletting the
arrangements for which are to be made through any broker other than Landlord or
its affiliates for a period of not less than 30 days from the date Tenant
authorizes Landlord or its affiliates of commence brokerage activity on behalf
of Tenant, or (ii)
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to any assignment or subletting if the same is on terms more favorable to the
successor occupant than to the then occupant. In the event that any assignee or
subtenant pays to Tenant any amounts in excess of the Fixed Rent, Additional
Rent, and all other payments then payable hereunder, or pro rata portion thereof
on a square footage basis for any portion of the Premises, Tenant shall promptly
pay fifty percent (50%) of such excess to Landlord as and when received by
Tenant, such excess being determined after deducting Tenant's reasonable
out-of-pocket costs and expenses for brokerage commissions and leasehold
improvements in connection with the applicable assignment or sublease, amortized
on a straight line basis over the term of such assignment or sublease.
(b) Notwithstanding any other provision of this Section
6.1.16, in the event that Tenant requests Landlord's consent to any sublease of
any portion of the Premises (said portion of the Premises being hereinafter
referred to as the "Proposed Sublease Premises"), Landlord shall have the
option, exercisable by notice given to Tenant within thirty (30) days after
receipt of Tenant's request for consent to the proposed sublease, to terminate
this Lease with respect to the Proposed Sublease Premises as of a date specified
in such notice, which shall be not less than thirty (30) nor more than one
hundred twenty (120) days after such notice, in which event: (i) this Lease
shall continue in full force and effect with respect to the remainder of the
Premises not included in the Proposed Sublease Premises, (ii) Tenant shall
remove all of Tenant's trade fixtures and personal property in the Proposed
Sublease Premises, all of such installations and improvements made by Tenant
therein as Landlord may request and all of Tenant's signs therein, and Tenant
shall repair all damage caused by such removal and yield up the Proposed
Sublease Premises (including all installations and improvements made by Tenant
except for trade fixtures and such of said installations and improvements as
Landlord may request Tenant to remove), broom clean and in the same good order
and repair which Tenant is obligated to keep and maintain the Premises by the
provisions of this Lease.
(c) Notwithstanding any other provision of this Section
6.1.16, if Tenant requests Landlord's consent to (i) assign this Lease, (ii)
sublease fifty percent (50%) or more of the rentable floor area of the Premises,
or (iii) sublease any portion of the rentable floor area of the Premises if the
amount to be paid to Tenant with respect thereto exceeds the Fixed Rate,
Additional Rent and other payments payable hereunder to Landlord, or pro rata
portion thereof on a square footage basis for any portion of the Premises, then,
in any such case, Landlord shall have the option, exercisable by notice to
Tenant given within thirty (30) days after receipt of such request, to terminate
this Lease as of a date specified in such notice which shall be not less than
thirty (30) nor more than sixty (60) days after the date of such notice.
(d) Without limitation of any other provision of this Section
6.1.16, if, at any time during the Term of this Lease, Tenant is:
(i) a corporation or a trust (whether or not having
shares of beneficial interest) and there shall occur any change or transfer of
the ownership or control of fifty percent (50%) or more of the persons then
having power to participate in the election or appointment of the directors,
trustees or other persons exercising like functions and managing the affairs of
Tenant; or
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(ii) a partnership or association or otherwise not a
natural person (and is not a corporation or a trust) and there shall occur any
change or transfer of the ownership or control of fifty percent (50%) or more of
the persons who then are members of such partnership or association or who
comprise Tenant;
Tenant shall so notify Landlord and Landlord may terminate this Lease by notice
to Tenant given within 90 days thereafter. This subsection (d) shall not apply
to the Tenant named herein if such Tenant is a corporation and the outstanding
voting stock thereof is listed on a recognized securities exchange.
(e) Landlord's consent to any assignment or subletting by
Tenant, or to any occupancy of the Premises by anyone other than Tenant,
voluntarily or by operation of law, in any specific instance shall not operate
as a waiver in any subsequent instance.
(f) Notwithstanding any other provision of this Section
6.1.16, Landlord's consent shall not be required with respect to any assignment
of this Lease or sublease of the Premises by Tenant to any entity controlling,
controlled by or under common control with Tenant (each, an "Affiliate"),
provided that Tenant shall send prior written notice of such assignment or
sublease and provided further, that, without limitation of any other provision
of this Lease, any use or occupancy of the Premises by any such Affiliate shall
be subject to all of the terms and conditions of this Lease.
6.1.17 Nuisance. Not to injure, deface or otherwise harm the Premises;
nor commit any nuisance; nor permit the emission of any objectionable noise,
vibration or odor; nor make, allow or suffer any waste; nor make any use of the
Premises which is improper, offensive or contrary to any law or ordinance or
which will invalidate or increase the premiums for any insurance on the Building
or its contents.
6.1.18 Installation, Alterations or Additions. Not to make any
installations, alterations or additions in, to or on the Premises (including,
without limitation, buildings, lawns, planted areas, walks, roadways, parking
and loading areas) nor to permit the making of any apertures in the walls,
partitions, ceilings or floors without on each occasion obtaining the prior
written consent of Landlord and then only pursuant to plans and specifications
approved by Landlord in advance in each instance. Landlord will not approve any
construction, alterations, or additions requiring unusual expense to readapt the
Premises to normal office use on lease expiration or termination or increasing
the cost of construction, insurance or taxes on the Premises or the Building or
of Landlord's Services called for by Section 5.1 unless Tenant first gives
assurances acceptable to Landlord that such readaptation will be made prior to
such expiration or termination without expense to Landlord and makes provisions
acceptable to Landlord for payment of such increased cost. Notwithstanding the
foregoing, Landlord's consent shall not be required with respect to any
non-structural installation, alteration or addition within the Premises;
provided that (i) the cost of any such installation, alteration or addition,
shall not exceed $10,000 individually or $30,000 in the aggregate when added to
the cost of all other installations, alterations or additions made during the
twelve (12) month period immediately preceding the date of such installation,
alteration or addition, (ii) such installation, alteration or addition shall not
require unusual
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expense to re-adapt the Premises to normal office use on Lease expiration or
termination, (iii) any such installation, alteration or addition does not
adversely effect any mechanical, electrical, plumbing, HVAC or other building
systems, or (iv) all such installations, alterations or additions shall be
performed in accordance with all of the requirements of this Lease. All changes
and additions shall be part of the Building except such items as by writing at
the time of approval the parties agree either shall be removed by Tenant on
expiration or termination of this Lease, or shall be removed or left at Tenant's
election.
6.1.19 Insurance. To maintain:
(a) Public liability insurance including contractual liability
on the Premises indemnifying Landlord and Tenant against all claims and demands
for (i) injury to or death of any person, or damage to or loss of property, on
the Premises or adjoining walks, streets or ways, or connected with the use,
condition or occupancy of any thereof unless caused by the negligence of
Landlord or its servants or agents, (ii) violation of this Lease, or (iii) any
act, fault or omission, or other misconduct of Tenant or its agents,
contractors, licensees, sublessees or invitees, in amounts which shall, at the
beginning of the Term, be at least equal to the limits set forth in Section 1.1,
and from time to time during the Term, shall be for such higher limits, if any,
as are customarily carried in the area in which the Premises are located on
property similar to the Premises and used for similar purposes, and shall be
written on the "Occurrence Basis" and include Host Liquor liability insurance.
(b) Worker's compensation insurance in statutory amounts
covering all of Tenant's employees working in the Premises.
6.1.20 Insurance Policies. To obtain all policies for insurance
required under the provisions of Section 6.1.19 from responsible companies
qualified to do business in the state in which the Premises are located and in
good standing therein, which companies and the amount of insurance allocated
thereto shall be subject to Landlord's approval. Tenant agrees to furnish
Landlord with certificates of all such insurance which Tenant is obligated to
obtain pursuant to Section 6.1.19 prior to the beginning of the Term and each
renewal policy at least 30 days' prior to the expiration of the policy it
renews. Each such policy shall prohibit cancellation and reduction of coverage
without at least 30 days' prior written notice to Landlord and to the holders of
any mortgages on the Building and/or Land.
6.1.21 Labor or Materialmen's Liens. To pay promptly when due the
entire cost of any work done on the Premises by Tenant, its agents, employees,
or independent contractors; not to cause or permit any liens for labor or
materials performed or furnished in connection therewith to attach to the
Premises; and to discharge any such liens which may so attach within fifteen
(15) days after notice of the same.
ARTICLE VII
CASUALTY OR TAKING
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7.1 TERMINATION. In case during the Term all or any substantial part of the
Premises or of the Building or of the Land or any one or more of them shall be
taken by any public authority or for any public use, or shall be destroyed or
damaged by fire or casualty, or by the action of any public authority, or
Landlord receives compensable damage by reason of anything lawfully done in
pursuance of public or other authority, then this Lease may be terminated at the
election of Landlord. Such election, which may be made notwithstanding the fact
that Landlord's entire interest may have been divested, shall be made by the
giving of notice by Landlord to Tenant within thirty (30) days after such
destruction or damage or taking.
If during the Term the whole or more than fifty percent (50%) of the
Premises is damaged or destroyed by fire or other casualty, or if the Building
shall be damaged or destroyed by fire or other casualty in such manner that
Tenant is deprived of access to the Premises, unless, in either case, such
damage or destruction can, in Landlord's reasonable opinion asserted in a notice
("Landlord's Notice") delivered within 90 days of such casualty, be fully
repaired within 12 months after such fire or other casualty, or if, once
commenced, such damage or destruction is not in fact repaired within 12 months
of such casualty (plus up to an additional 90 days required by reason of
Unavoidable Delays or Tenant Delays); Tenant shall have the right, by notice to
Landlord given within 30 days after Landlord's Notice, or as the case may be,
within 30 days after the expiration of said 12-month construction period (as so
extended) if the repairs are not so completed, to terminate this Lease,
effective as of the date of such casualty as if that date were the date set
forth in this Lease for the expiration of the Term, and the Fixed Rent and
Additional Rent payable hereunder shall abate. If Tenant shall fail to give
timely notice of the exercise of its right to terminate, Tenant shall have no
right to so terminate this Lease, time being of the essence of the foregoing
provisions.
7.2 RESTORATION. If neither Landlord or Tenant exercises their respective right
to terminate pursuant to Section 7.1, this Lease shall continue in force and a
just proportion of the rent reserved, according to the nature and extent of the
damages sustained by the Premises, shall be abated from the date of such
casualty or taking until the Premises, or what may remain thereof, shall be put
by Landlord in proper condition for use subject to zoning and building laws or
ordinances then in existence, which, unless Landlord or Tenant has exercised its
right to terminate pursuant to Section 7.1, Landlord covenants to do with
reasonable diligence at Landlord's expense, provided that Landlord's obligations
with respect to restoration shall not require Landlord to expend more than the
net proceeds of insurance recovered or damages awarded for such casualty or
taking. The term "net proceeds of insurance recovered or damages awarded" refers
to the gross amount of such insurance or damages less the expenses of Landlord
in connection with the collection of the same, including, without limitation,
fees and expenses for legal and appraisal services.
7.3 AWARD. Landlord reserves to itself any and all rights to receive awards made
for damages to the Premises, Building or Land and the leasehold hereby created,
or any one or more of them, accruing by reason of exercise of eminent domain or
by reason of anything lawfully done in pursuance of public or other authority.
Tenant hereby releases and assigns to Landlord all Tenant's rights to such
awards, and covenants to deliver such further assignments and assurances thereof
as Landlord may from time to time request, and hereby irrevocably designates
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and appoints Landlord its attorney-in-fact to execute and deliver in Tenant's
name and behalf all such further assignments thereof. It is agreed and
understood however, that Landlord does not reserve to itself, and Tenant does
not assign to Landlord, any damages payable for (a) movable trade fixtures
installed by Tenant or anybody claiming under Tenant, at its own expense or (b)
relocation expenses recoverable by Tenant from such authority in a separate
action.
ARTICLE VIII
DEFAULTS
8.1 EVENTS OF DEFAULT. (a) If any default by Tenant continues after notice, in
case of Fixed Rent, Additional Rent or any other monetary obligation to Landlord
for more than 10 days, or in any other case for more than 30 days and such
additional time, if any, as is reasonably necessary to cure the default if the
default is of such a nature that it cannot reasonably be cured in 30 days and
Tenant diligently endeavors to cure such default, or (b) if any assignment for
the benefit of creditors shall be made by Tenant, or by any guarantor of Tenant,
or (c) if Tenant's leasehold interest shall be taken on execution or other
process of law in any action against Tenant, or (d) if a lien or other
involuntary encumbrance is filed against Tenant's leasehold interest, and is not
discharged within 30 days thereafter (or, in the event that such lien or
encumbrance may not be reasonably discharged within said 30-day period, such
additional period of time, not to exceed an additional 30 days, as may be
reasonably necessary to discharge such lien or encumbrance, provided that Tenant
shall have commenced such action as may be necessary to discharge such lien or
encumbrance within said initial 30-day period and shall thereafter diligently
pursue such discharge to completion within said additional 30-day period) or (e)
if a petition is filed by Tenant or any guarantor of Tenant for liquidation, or
for reorganization or an arrangement or any other relief under any provision of
the Bankruptcy Code as then in force and effect, or (f) if an involuntary
petition. under any of the provisions of said Bankruptcy Code is filed against
Tenant or any guarantor of Tenant and such involuntary petition is not dismissed
within 30 days thereafter, then, and in any of such cases, Landlord and the
agents and servants of Landlord may, in addition to and not in derogation of any
remedies for any preceding breach of covenant, immediately or at any time
thereafter and without further demand or notice, at Landlord's election, do any
one or more of the following: (i) give Tenant notice stating that this Lease is
terminated, effective upon the giving of such notice or upon a date stated in
such notice, as Landlord may elect, in which event this Lease shall be
irrevocably extinguished and terminated as stated in such notice without any
further action, or (ii) with or without process of law, in a lawful manner enter
and repossess the Premises as of Landlord's former estate, and expel Tenant and
those claiming through or under Tenant, and remove its and their effects,
without being guilty of trespass, in which event this Lease shall be irrevocably
extinguished and terminated at the time of such entry, or (iii) pursue any other
rights or remedies permitted by law. Any such termination of this Lease shall be
without prejudice to any remedies which might otherwise be used for arrears of
rent or prior breach of covenant, and in the event of such termination Tenant
shall remain liable under this Lease as hereinafter provided. Tenant hereby
waives all statutory rights (including without limitation rights of redemption,
if any) to the extent such rights may be lawfully waived, and Landlord, without
notice to Tenant, may store Tenant's effects and those of any person claiming
through or under Tenant, at the expense and risk of
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Tenant, and, if Landlord so elects, may sell such effects at public auction or
private sale and apply the net proceeds to the payment of all sums due to
Landlord from Tenant, if any, and pay over the balance, if any, to Tenant.
8.2 REMEDIES. In the event that this Lease is terminated under any of the
provisions contained in Section 8.1 or shall be otherwise terminated for breach
of any obligation of Tenant, Tenant covenants to pay forthwith to Landlord, as
compensation, the excess of the total rent reserved for the residue of the Term
over the rental value of the Premises for said residue of the Term. In
calculating the rent reserved, there shall be included, in addition to the Fixed
Rent and Additional Rent, the value of all other consideration agreed to be paid
or performed by Tenant for said residue. Tenant further covenants as an
additional and cumulative obligation after any such ending to pay punctually to
Landlord all the sums and to perform all the obligations which Tenant covenants
in this Lease to pay and to perform in the same manner and to the same extent
and at the same time as if this Lease had not been terminated. In calculating
the amounts to be paid by Tenant pursuant to the next preceding covenant, Tenant
shall be credited with any amount paid to Landlord as compensation as provided
in the first sentence of this Section 8.2 and also with the net proceeds of any
rent obtained by Landlord by reletting the Premises, after deducting all of
Landlord's expenses in connection with such reletting, including, without
limitation, all repossession costs, brokerage commissions, fees for legal
services and expenses of preparing the Premises for such reletting, it being
agreed by Tenant that Landlord may (i) relet the Premises or any part or parts
thereof for a term or terms which may at Landlord's option be equal to or less
than or exceed the period which would otherwise have constituted the balance of
the Term and may grant such concessions and free rent as Landlord in its sole
judgment considers advisable or necessary to relet the same and (ii) make such
alterations, repairs and decorations in the Premises as Landlord in its sole
judgment considers advisable or necessary to relet the same, and no action of
Landlord in accordance with the foregoing or failure to relet or to collect rent
under relenting shall operate or be construed to release or reduce Tenant's
liability as aforesaid.
In lieu of any other damages or indemnity and in lieu of full recovery
by Landlord of all sums payable under all the foregoing provisions of this
Section 8.2, Landlord may by notice to Tenant, at any time after this Lease is
terminated under any of the provisions contained in Section 8.1 or is otherwise
terminated for breach of any obligation of Tenant and before such full recovery,
elect to recover, and Tenant shall thereupon pay, as liquidated damages, an
amount equal to the aggregate of the Fixed Rent and Additional Rent accrued in
the 12 months ended next prior to such termination (if there is less than 12
months remaining in the Term, then such amount shall be prorated upon the number
of months and partial months remaining in the Term), plus the amount of rent of
any kind accrued and unpaid at the time of termination and less the amount of
any recovery by Landlord under the foregoing provisions of this Section 8.2 up
to the time of payment of such liquidated damages.
Nothing contained in this Lease shall, however, limit or prejudice the
right of Landlord to prove for and obtain in proceedings for bankruptcy or
insolvency by reason of the termination of this Lease, an amount equal to the
maximum allowed by any statute or rule of law in effect at the time when, and
governing the proceedings in which, the damages are to be proved, whether or
<PAGE> 34
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not the amount be greater than, equal to, or less than the amount of the loss or
damages referred to above.
8.3 REMEDIES CUMULATIVE. Any and all rights and remedies which Landlord may have
under this Lease, and at law and equity, shall be cumulative and shall not be
deemed inconsistent with each other, and any two or more of all such rights and
remedies may be exercised at the same time insofar as permitted by law.
8.4 LANDLORD'S RIGHT TO CURE DEFAULTS. Landlord may, but shall not be obligated
to, cure, at any time, following ten (10) days' prior notice to Tenant, except
in cases of emergency when no notice shall be required, any default by Tenant
under this Lease; and whenever Landlord so elects, all costs and expenses
incurred by Landlord, including reasonable attorneys' fees, in curing a default
shall be paid by Tenant to Landlord as Additional Rent on demand, together with
interest thereon at the Default Rate from the date of payment by Landlord to the
date of payment by Tenant.
8.5 EFFECT OF WAIVERS OF DEFAULT. Any consent or permission by Landlord to any
act or omission which otherwise would be a breach of any covenant or condition
herein, or any waiver by Landlord of the breach of any covenant or condition
herein, shall not in any way be held or construed (unless expressly so declared)
to operate so as to impair the continuing obligation of any covenant or
condition herein, or otherwise, except as to the specific instance, operate to
permit similar acts or omissions.
The failure of Landlord to seek redress for violation of, or to insist
upon the strict performance of, any covenant or condition of this Lease shall
not be deemed a waiver of such violation nor prevent a subsequent act, which
would have Originally constituted a violation, from having all the force and
effect of an original violation. The receipt by Landlord of rent with knowledge
of the breach of any covenant of this Lease shall not be deemed to have been a
waiver of such breach by Landlord. No consent or waiver, express or implied, by
Landlord to or of any breach of any agreement of duty shall be construed as a
waiver or consent to or of any other breach of the same or any other agreement
or duty.
8.6 NO ACCORD AND SATISFACTION. No acceptance by Landlord of a lesser sum than
the Fixed Rent, Additional Rent or any other charge then due shall be deemed to
be other than on account of the earliest installment of such rent or charge due,
unless Landlord elects by notice to Tenant to credit such sum against the most
recent installment due, nor shall any endorsement or statement on any check or
any letter accompanying any check or payment as rent or other charge be deemed
an accord and satisfaction, and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such installment
or pursue any other remedy in this Lease provided.
ARTICLE IX
MORTGAGES
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9.1 RIGHTS OF MORTGAGE HOLDERS. The word "mortgage" as used herein includes
mortgages, deeds of trust or other similar instruments evidencing other
voluntary liens or encumbrances and modifications, consolidations, extensions,
renewals, replacements and substitutes thereof. The word "holder" shall mean a
mortgagee, and any subsequent holder or holders of a mortgage. Until the holder
of a mortgage shall enter and take possession of the Premises for the purpose of
foreclosure, such holder shall have only such rights of Landlord as are
necessary to preserve the integrity of this Lease as security. Upon entry and
taking possession of the Premises for the purpose of foreclosure, such holder
shall have all the rights of Landlord. Notwithstanding any other provision of
this Lease to the contrary, including without limitation Section 10.5, no such
holder of a mortgage shall be liable either as mortgagee or as assignee, to
perform, or be liable in damages for failure to perform, any of the obligations
of Landlord unless and until such holder shall enter and take possession of the
Premises for the purpose of foreclosure. Upon entry for the purpose of
foreclosure, such holder shall be liable to perform all of the obligations of
Landlord, subject to and with the benefit of the provisions of Section 10.6,
provided that a discontinuance of any foreclosure proceeding shall be deemed a
conveyance under said provisions to the owner of the equity of the Premises
(such that from and after the date of such discontinuance, the owner of such
equity (and not the holder) shall be liable to perform all of the obligations of
Landlord, subject to and with the benefit of the provisions of Section 10.6).
Tenant shall not pay Fixed Rent, Additional Rent or any other charge
more than 10 days prior to the due date thereof. No prepayment of Fixed Rent,
Additional Rent or other charge, no assignment of this Lease and no agreement to
modify so as to reduce the rent, change the Term, or otherwise materially change
the rights of Landlord under this Lease, or to relieve Tenant of any obligations
or liability under this Lease, shall be valid unless consented to in writing by
Landlord's mortgagees of record, if any.
No act or failure to act on the part of Landlord which would entitle
Tenant under the terms of this Lease, or by law, to be relieved of Tenant's
obligations hereunder or to terminate this Lease, shall result in a release or
termination of such obligations or a termination of this Lease unless (a) Tenant
shall have first given written notice of Landlord's act or failure to act to
each of Landlord's mortgagees of record, if any, that has delivered a
non-disturbance agreement to Tenant, specifying the act or failure to act on the
part of Landlord which could or would give basis to Tenant's rights and (b) such
mortgagees, after receipt of such notice, have failed or refused to correct or
cure the condition complained of within a reasonable time thereafter, but
nothing contained in this Section 9.1 shall be deemed to impose any obligation
on any such mortgagee to correct or cure any such condition. "Reasonable time"
as used above means and includes a reasonable time to obtain possession of the
mortgaged premises, if the mortgagee elects to do so, and a reasonable time to
correct or cure the condition if such condition is determined to exist.
The covenants and agreements contained in this Lease with respect to
the rights, powers and benefits of a holder of a mortgage (including, without
limitation, the covenants and agreements contained in this Section 9.1)
constitute a continuing offer to any person, corporation or other entity, which
by accepting or requiring an assignment of this Lease or by entry or
<PAGE> 36
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foreclosure assumes the obligations herein set forth with respect to such
holder; such holder is hereby constituted a party of this Lease as an obligee
hereunder to the same extent as though its name were written hereon as such; and
such holder shall be entitled to enforce such provisions in its own name. Tenant
agrees on request of Landlord to execute and deliver from time to time any
agreement which may be necessary to implement the provisions of this Section
9.1.
9.2 SUPERIORITY OF LEASE; OPTION TO SUBORDINATE. Unless the option set forth
below in this Section 9.2 shall be exercised, this Lease shall be superior to
and shall not be subordinate to any mortgage or other voluntary lien or other
encumbrance hereafter placed on the mortgaged premises of which the Premises are
a part. The holder of any such mortgage or other voluntary lien or other
encumbrance shall have the option to subordinate this Lease to the same,
provided that such holder enters into an agreement with Tenant by the terms of
which such holder will agree (a) to recognize the rights of Tenant under this
Lease, (b) to perform Landlord's obligations hereunder arising after the date of
such holder's acquisition of title as hereinafter described, expressly
excluding, however, Landlord's obligations under Article III of this Lease, and
(c) to accept Tenant as tenant of the Premises under the terms and conditions of
this Lease in the event of acquisition of title by such holder through
foreclosure proceedings or otherwise and Tenant will agree to recognize the
holder of such mortgage as Landlord in such event, which agreement shall be made
expressly to bind and inure to the benefit of the successors and assigns of
Tenant and of the holder and upon anyone purchasing the mortgaged premises at
any foreclosure sale. Tenant and Landlord agree to execute and deliver any
appropriate instruments necessary to carry out the agreements contained in this
Section 9.2. Any such mortgage to which this Lease shall be subordinated may
contain such terms, provisions and conditions as the holder deems usual or
customary.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 NOTICES FROM ONE PARTY TO THE OTHER. All notices required or permitted
hereunder shall be in writing and addressed, if to the Tenant, at the Original
Address of Tenant or such other address as Tenant shall have last designated by
notice in writing to Landlord and, if to Landlord, at the Original Address of
Landlord or such other address Landlord shall have last designated by notice in
writing to Tenant. Any notice shall be deemed duly given if mailed to such
address postage prepaid, registered or certified mail, return receipt requested,
when deposited with the U.S. Postal Service, or if delivered to such address by
hand, when so delivered.
10.2 QUIET ENJOYMENT. Landlord agrees that upon Tenant's paying the rent and
performing and observing the terms, covenants, conditions and provisions on its
part to be performed and observed, Tenant shall and may peaceably and quietly
have, hold and enjoy the Premises during the Term without any manner of
hindrance or molestation from Landlord or anyone claiming under Landlord,
subject, however, to the terms of this Lease.
10.3 EASEMENTS; CHANGES TO LOT LINES. Landlord reserves the right, from time to
time, to grant easements affecting the Premises or the Building or the Land and
to change or alter
<PAGE> 37
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existing boundaries of the Land so long as such easements or such changes or
alterations to existing boundaries of the Land do not unreasonably interfere
with Tenant's use of the Premises, and to enter upon the Premises at reasonable
times for purposes of constructing and maintaining any pipes, wires and other
facilities serving any portion of the Land or of the Building.
10.4 WAIVER OF SUBROGATION. Any casualty insurance carried by either party with
respect to the Premises, the Building or property therein or occurrences thereon
shall include a clause or endorsement denying to the insurer rights of
subrogation against the other party to the extent rights have been waived by the
insured prior to occurrence of injury or loss, provided that such clause or
endorsement is obtainable without payment of an additional premium. If such
clause or endorsement is obtainable upon payment of an additional premium, then
the party benefiting from such clause or endorsement may request the other party
to obtain it and shall reimburse the other party for the cost of such additional
premium. Each party, notwithstanding any provisions of this Lease to the
contrary, hereby waives any rights of recovery against the other for injury or
loss due to hazards covered by such insurance to the extent such party's policy
permits such waiver of subrogation and then only with respect to sums which are
collectible thereunder.
10.5 LEASE NOT TO BE RECORDED. Tenant agrees that it will not record this Lease.
Both parties shall, upon the request of either, execute and deliver a notice of
this Lease in such form, if any, as may be permitted by applicable statute. If
this Lease is terminated before the scheduled expiration date of the Term of
this Lease, the parties shall execute, deliver and record an instrument
acknowledging such fact and the actual date of termination of this Lease, and
Tenant hereby appoints Landlord its attorney-in-fact, coupled with an interest,
with full power of substitution to execute such instrument.
10.6 BIND AND INURE; LIMITATION OF LANDLORD'S LIABILITY. The obligations of this
Lease shall run with the land, and this Lease shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns.
No owner of the Premises shall be liable under this Lease except for breaches of
Landlord's obligations occurring while owner of the Premises. The obligations of
Landlord shall be binding upon the assets of Landlord which comprise the
Premises but not upon other assets of Landlord. No partner, trustee,
stockholder, member, officer, director, employee or beneficiary (or the
partners, trustees, stockholders, officers, directors or employees of any such
beneficiary) of Landlord shall be personally liable under this Lease and Tenant
shall look solely to Landlord's interest in the Premises in pursuit of its
remedies upon an event of default hereunder, and the general assets of the
partners, trustees, stockholders, members, officers, employees or beneficiaries
(and the partners, trustees, stockholders, members, officers, directors or
employees of any such beneficiary) of Landlord shall not be subject to levy,
execution or other enforcement procedure for the satisfaction of the remedies of
Tenant; provided that the foregoing provisions of this sentence shall not
constitute a waiver of any obligation evidenced by this Lease and provided
further that the foregoing provisions of this sentence shall not limit the right
of Tenant to name Landlord or any individual partner or trustee thereof as party
defendant in any action or suit in connection with this Lease so long as no
personal money judgment shall be asked for or taken against any individual
partner, trustee, stockholder, member, officer, employee or beneficiary of
Landlord.
<PAGE> 38
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10.7 UNAVOIDABLE DELAYS. In any case where either party hereto is required to do
any act, delays caused by or resulting from Acts of God, war, civil commotion,
fire, flood or other casualty, labor difficulties, shortages of labor, materials
or equipment, government regulations, unusually severe weather, or other causes
beyond such party's reasonable control (collectively, "Unavoidable Delays")
shall not be counted in determining the time during which work shall be
completed, whether such time be designated by a fixed date, a fixed time or a
"reasonable time," and such time shall be deemed to be extended by the period of
such delay.
10.8 LANDLORD'S DEFAULT. Landlord shall not be deemed to be in default in the
performance of any of its obligations hereunder unless it shall fail to perform
such obligations and such failure shall continue for a period of 30 days or such
additional time as is reasonably required to correct any such default after
notice has been given by Tenant to Landlord specifying the nature of Landlord's
alleged default. Tenant shall have no right for any such default to offset or
counterclaim against any rent due hereunder. The foregoing provisions of this
Section 10.8 shall not limit or impair the right of Tenant to bring any action
at law or at equity, including, without limitation, any action for specific
performance, in connection with any default by Landlord in the performance of
any of its obligations hereunder beyond any applicable grace and cure period.
10.9 BROKERAGE. Landlord shall be responsible for payment of the brokerage fee
to the Brokers pursuant to a separate agreement between Landlord and the
Brokers. Tenant warrants and represents that it has had no dealings with any
broker or agent in connection with this Lease other than the Brokers set forth
in Article I and covenants to defend with counsel approved by Landlord, hold
harmless and indemnify Landlord from and against any and all cost, expense or
liability for any compensation, commissions and charges claimed by any broker or
agent other than the Brokers set forth in Article I with respect to Tenant's
dealings in connection with this Lease or the negotiation thereof.
10.10 APPLICABLE LAW AND CONSTRUCTION. This Lease shall be governed by and
construed in accordance with the laws of the state in which the Premises are
located. If any term, covenant, condition or provision of this Lease or the
application thereof to any person or circumstances shall be declared invalid, or
unenforceable by the final ruling of a court of competent jurisdiction having
final review, the remaining terms, covenants, conditions and provisions of this
Lease and their application to persons or circumstances shall not be affected
thereby and shall continue to be enforced and recognized as valid agreements of
the parties, and in the place of such invalid or unenforceable provision, there
shall be substituted a like, but valid and enforceable provision which comports
to the findings of the aforesaid court and most nearly accomplishes the original
intention of the parties.
There are no prior oral or written agreements between Landlord and
Tenant affecting this Lease. This Lease may be amended, and the provisions
hereof may be waived or modified, only by instruments in writing executed by
Landlord and Tenant.
The titles of the several Articles and Sections contained herein are
for convenience only and shall not be considered in construing this Lease.
<PAGE> 39
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Unless repugnant to the context, the words "Landlord" and "Tenant"
appearing in this Lease shall be construed to mean those named above and their
respective heirs, executors, administrators, successors and assigns, and those
claiming through or under them respectively. If there be more than one tenant
the obligations imposed by this Lease upon Tenant shall be joint and several.
10.11 SUBMISSION NOT AN OFFER. The submission of a draft of this Lease or a
summary of some or all of its provisions does not constitute an offer to lease
or demise the Premises, it being understood and agreed that neither Landlord nor
Tenant shall be legally bound with respect to the leasing of the Premises unless
and until this Lease has been executed by both Landlord and Tenant and a fully
executed copy delivered to each of them.
10.12 Intentionally Omitted
10.13 SIGNAGE. The name and location of Tenant shall be listed in building
standard format on the building directory furnished by Landlord in the main
lobby of the Building. In addition, the name of Tenant shall be placed by
Landlord in building standard format on Tenant's main entrance door to the
Premises, subject to Landlord's prior written approval, such approval not to be
unreasonably withheld or delayed. In addition, the name of the Tenant may be
placed on a monument sign for the Building, at Tenant's sole cost and expense.
The location, size, color and style of the monument sign shall be subject to
Landlord's prior written approval, such approval not to be unreasonably withheld
or delayed. In the event that Landlord shall hereafter grant the right to any
other tenant of the Building to place signage on the facade of the Building
identifying such tenant, Landlord shall also grant Tenant the right to place a
sign on the facade of the Building, the size of which shall be proportionate to
the size of such other tenant's sign (based upon the relative rentable area
occupied by each such tenant in the Building); provided, however, that (i)
Landlord shall not be obligated to grant Tenant any such right (notwithstanding
that such rights may be granted to any other tenant) in the event that Tenant
shall have previously assigned this Lease or subleased fifty percent (50%) or
more of the rentable floor area of the Premises (or entered into any agreement
to so assign the Lease or sublease the Premises), and (ii) the location, size,
color and style of any such signage shall be subject to Landlord's prior written
approval, such approval not to be unreasonably withheld or delayed.
[This Space Intentionally Left Blank]
<PAGE> 40
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WITNESS the execution hereof under seal on the day and year first above
written.
Landlord:
FRAMINGHAM - 1881 ASSOCIATES by its agent,
SPAULDING AND SLYE SERVICES LIMITED
PARTNERSHIP
By: /s/ Peter A. Bailey
---------------------------------------
Name: Peter A. Bailey
Title: Vice President
Tenant:
MARINER HEALTH GROUP, INC.
By: /s/ Arthur W. Stratton, Jr.
---------------------------------------
Name: Arthur W. Stratton, Jr. M.D.
Its: President
Hereunto duly authorized
<PAGE> 41
EXHIBIT A
"Map of Floor Plan Layout"
<PAGE> 42
EXHIBIT B
"Map of Floor Plan Layout"
<PAGE> 43
EXHIBIT C
RULES AND REGULATIONS
1. The entrances, lobbies, passages, corridors, elevators, halls, courts,
sidewalks, vestibules, and stairways shall not be encumbered or
obstructed by Tenant, Tenant's agents, servants, employees, licensees
or visitors or used by them for any purposes other than ingress or
egress to and from the Premises.
2. The moving in or out of all safes, freight, furniture, or bulky matter
of any description shall take place during the hours which Landlord may
determine from time to time. Landlord reserves the right to inspect all
freight and bulky matter to be brought into the Building and to exclude
from the Building all freight and bulky matter which violates any of
these Rules and Regulations or the Lease of which these Rules and
Regulations are a part. Landlord reserves the right to have Landlord's
structural engineer review Tenant's floor loads on the Premises. Such
review shall be at Landlord's expense, unless Landlord's structural
engineer finds that Tenant has violated the floor load requirements of
this Lease, in which case such review shall be at Tenant's expense.
3. Tenant, or the employees, agents, servants, visitors or licensees of
Tenant shall not at any time place, leave or discard any rubbish,
paper, articles, or objects of any kind whatsoever outside the doors of
the Premises or in the corridors or passageways of the Building. No
animals or birds shall be brought or kept in or about the Building.
Bicycles shall not be permitted in the Building.
4. Tenant shall not place objects against glass partitions or doors or
windows or adjacent to any common space which would be unsightly from
the Building corridors or from the exterior of the Building and will
promptly remove the same upon notice from Landlord.
5. Tenant shall not make noises, cause disturbances, create vibrations,
odors or noxious fumes or use or operate any electric or electrical
devices or other devices that emit sound waves or are dangerous to
other tenants and occupants of the Building or that would interfere
with the operation of any device or equipment or radio or television
broadcasting or reception from or within the Building or elsewhere, or
with the operation of roads or highways in the vicinity of the
Building, and shall not place or install any projections, antennae,
aerials, or similar devices inside or outside of the Premises, without
the prior written approval of Landlord.
6. Tenant may not (without Landlord's approval therefor, which approval
will be signified on Tenant's Plans submitted pursuant to the Lease)
and Tenant shall not permit or suffer anyone to: (a) cook in the
Premises; or (b) at any time sell, purchase or give away, or permit the
sale, purchase, or gift of food in any form. Notwithstanding the
foregoing, Tenant shall be permitted to use microwave ovens, toaster
ovens and coffee machines in the Premises.
C-1
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7. Tenant shall not: (a) use the Premises for lodging, manufacturing or
for any immoral or illegal purposes; (b) use the Premises to engage in
the manufacture or sale of, or permit the use of spirituous, fermented,
intoxicating or alcoholic beverages on the Premises; (c) use the
Premises to engage in the manufacture or sale of, or permit the use of,
any illegal drugs on the Premises.
8. No awning or other projections shall be attached to the outside walls
or windows. No curtains, blinds, shades, screens or signs other than
those furnished by Landlord shall be attached to, hung in, or used in
connection with any window or door of the Premises without prior
written consent of Landlord.
9. No signs, advertisement, object, notice or other lettering shall be
exhibited, inscribed, painted or affixed on any part of the outside or
inside of the Premises if visible from outside of the Premises.
Interior signs on doors shall be painted or affixed for Tenant by
Landlord.
10. Tenant shall not use the name of the Building or use pictures or
illustrations of the Building in advertising or other publicity without
prior written consent of Landlord. Landlord shall have the right to
prohibit any advertising by Tenant which, in Landlord's opinion, tends
to impair the reputation of the Building or its desirability for
offices, and upon written notice from Landlord, Tenant will refrain
from or discontinue such advertising.
11. Door keys for doors in the Premises will be furnished at the
Commencement of the Lease by Landlord. Tenant shall not affix
additional locks on doors and shall purchase duplicate keys only from
Landlord and will provide to Landlord the means of opening of safes,
cabinets, or vaults left on the Premises upon the expiration or sooner
termination of the Term of this Lease. In the event of the loss of any
keys so furnished by Landlord, Tenant shall pay to Landlord the cost
thereof.
12. Tenant shall cooperate and participate in all security programs
affecting the Building.
13. Tenant assumes full responsibility for protecting its space from theft,
robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed and secured.
14. Tenant shall not make any room-to-room canvass to solicit business from
other tenants in the Building, and shall not exhibit, sell or offer to
sell, use, rent or exchange any item or services in or from the
Premises unless ordinarily embraced within Tenant's use of the Premises
as specified in its Lease. Canvassing, soliciting and peddling in the
Building are prohibited and Tenant shall cooperate to prevent the same.
Peddlers, solicitors and beggars shall be reported to the Management
Office.
15. Tenant shall not mark, paint, drill into, or in any way deface any part
of the Building or Premises. No boring, driving of nails, or screws,
cutting or stringing of wires shall be permitted, except with the prior
written consent of Landlord, and as Landlord may direct.
C-2
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Tenant shall not install any resilient tile or similar floor covering
the Premises except with the prior written approval of Landlord. The
use of cement or other similar adhesive material is expressly
prohibited.
16. Tenant shall not waste electricity or water and agrees to cooperate
fully with Landlord to assure the most effective operation of the
Building's heating and air conditioning and shall refrain from
attempting to adjust controls. Tenant shall keep corridor doors closed
except when being used for access.
17. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed,
and no sweepings, rubbish, rags, or other substances shall be thrown
therein.
18. Building employees shall not be required to perform, and shall not be
requested by any tenant or occupant to perform, any work outside of
their regular duties, unless under specific instructions from the
office of the Managing Agent of the Building.
19. Tenant covenants and agrees that its use of the Premises shall not
cause a discharge of more than the gallonage per foot of Premises
Design Floor Area per day of sanitary (non-industrial) sewage allowed
under the sewage discharge permit for the Building. Discharges in
excess of that amount, and any discharge of industrial sewage, shall
only be permitted if Tenant, at its sole expense, shall have obtained
all necessary permits and licenses therefor, including without
limitation permits from state and local authorities having jurisdiction
thereof. Tenant shall submit to Landlord on December 31 of each year of
the Term of this Lease a statement, certified by an authorized officer
of Tenant, which contains the following information: name of all
chemicals, gases, and hazardous substances, used, generated, or stored
on the Premises; type of substance (liquid, gas or granular); quantity
used, stored or generated per year; method of disposal; permit number,
if any, attributable to each substance, together with copies of all
permits for such substances; and permit expiration date for each
substance.
20. Tenant may obtain heating and/or air conditioning service during other
periods in addition to normal operating hours (Monday through Friday
from 8:00 a.m. to 6:00 p.m., except on holidays recognized by the
federal, state or local government, and Saturdays from 8:00 a.m. to
1:00 p.m.) ("Off Hours HVAC Service") subject to and upon the terms set
forth herein and in the Lease. Tenant shall be responsible for
activating Off Hours HVAC Service by means of a switch or similar
mechanism to be installed in the Building in a location determined by
Landlord (the "Off Hours HVAC Switch"). The Tenant shall be charged for
such operation (which shall be separately measured by Landlord) in the
form of additional rent. Such charges are currently $25 per hour per
floor, but may be adjusted on a fair and reasonable basis from time to
time by the Managing Agent to reflect the additional operating costs
involved.
21. Smoking is prohibited in all common areas of the Building.
C-3
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EXHIBIT D
LANDLORD'S SERVICES
I. CLEANING
A. General
1. All cleaning work will be performed between 6 p.m. and 12
midnight, Monday through Friday, unless otherwise necessary for stripping,
waxing, etc.
2. Abnormal waste removal (e.g. bulk packaging, wood or
cardboard crates, refuse from food operations, etc.) shall be Tenant's
responsibility.
B. Daily Operations (5 times per week)
1. Lavatories
a. Sweep and wash floors with disinfectant.
b. Wash both sides of toilet seats with disinfectant.
c. Wash all mirrors, basins, bowls, urinals.
d. Spot clean toilet partitions.
e. Empty and disinfect sanitary napkin disposal receptacles.
f. Refill toilet tissue, towel, soap, and sanitary napkin
dispensers.
3. Public Areas
a. Wipe down entrance doors and clean glass (interior and
exterior).
b. Vacuum elevator carpets and wipe down doors and walls.
c. Clean water coolers.
<PAGE> 1
74
Exhibit 21
SUBSIDIARIES
Name State of Jurisdiction
- ---- ---------------------
MHC of Nashville, Inc. Delaware
Pinnacle Care Corporation Delaware
Mariner Health of Florida, Inc. Delaware
<PAGE> 1
75
Exhibit - 23.1 Consent of Accountants
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Mariner Health Group, Inc. on Form S-8 (Nos. 33-67628, 33-77762, 33-78880,
33-99642, and 333-2780) of our report dated February 10, 1998 on our audits of
the financial statements of Mariner Health Group, Inc. and Subsidiaries as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, which report is included in this Annual Report Form 10-K
Boston, Massachusetts /s/ Coopers & Lybrand L.L.P.
March 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,627
<SECURITIES> 0
<RECEIVABLES> 170,208
<ALLOWANCES> 16,046
<INVENTORY> 0
<CURRENT-ASSETS> 219,952
<PP&E> 478,057
<DEPRECIATION> 62,109
<TOTAL-ASSETS> 1,075,769
<CURRENT-LIABILITIES> 117,699
<BONDS> 0
0
0
<COMMON> 295
<OTHER-SE> 340,523
<TOTAL-LIABILITY-AND-EQUITY> 1,075,769
<SALES> 733,476
<TOTAL-REVENUES> 733,476
<CGS> 0
<TOTAL-COSTS> 625,698
<OTHER-EXPENSES> 82,358
<LOSS-PROVISION> 4,448
<INTEREST-EXPENSE> 39,952
<INCOME-PRETAX> 22,500
<INCOME-TAX> 10,913
<INCOME-CONTINUING> 11,587
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,587
<EPS-PRIMARY> .40
<EPS-DILUTED> .39
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,572
<SECURITIES> 0
<RECEIVABLES> 142,173
<ALLOWANCES> 14,251
<INVENTORY> 0
<CURRENT-ASSETS> 176,022
<PP&E> 429,387
<DEPRECIATION> 12,775
<TOTAL-ASSETS> 942,438
<CURRENT-LIABILITIES> 87,557
<BONDS> 0
0
0
<COMMON> 294
<OTHER-SE> 349,713
<TOTAL-LIABILITY-AND-EQUITY> 942,438
<SALES> 523,093
<TOTAL-REVENUES> 523,093
<CGS> 0
<TOTAL-COSTS> 434,153
<OTHER-EXPENSES> 50,628
<LOSS-PROVISION> 3,665
<INTEREST-EXPENSE> 27,585
<INCOME-PRETAX> 38,312
<INCOME-TAX> 16,858
<INCOME-CONTINUING> 21,454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,454
<EPS-PRIMARY> .72
<EPS-DILUTED> .72
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,569
<SECURITIES> 0
<RECEIVABLES> 139,569
<ALLOWANCES> 12,947
<INVENTORY> 0
<CURRENT-ASSETS> 169,301
<PP&E> 455,218
<DEPRECIATION> 56,361
<TOTAL-ASSETS> 899,802
<CURRENT-LIABILITIES> 88,179
<BONDS> 0
0
0
<COMMON> 294
<OTHER-SE> 341,738
<TOTAL-LIABILITY-AND-EQUITY> 899,802
<SALES> 348,915
<TOTAL-REVENUES> 348,915
<CGS> 0
<TOTAL-COSTS> 291,055
<OTHER-EXPENSES> 33,184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,901
<INCOME-PRETAX> 24,676
<INCOME-TAX> 10,857
<INCOME-CONTINUING> 13,819
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,819
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,942
<SECURITIES> 0
<RECEIVABLES> 141,319
<ALLOWANCES> 12,595
<INVENTORY> 0
<CURRENT-ASSETS> 173,670
<PP&E> 445,799
<DEPRECIATION> 51,944
<TOTAL-ASSETS> 896,018
<CURRENT-LIABILITIES> 99,292
<BONDS> 0
0
0
<COMMON> 291
<OTHER-SE> 331,561
<TOTAL-LIABILITY-AND-EQUITY> 896,018
<SALES> 174,413
<TOTAL-REVENUES> 174,413
<CGS> 0
<TOTAL-COSTS> 145,506
<OTHER-EXPENSES> 16,848
<LOSS-PROVISION> 1,229
<INTEREST-EXPENSE> 9,190
<INCOME-PRETAX> 12,059
<INCOME-TAX> 5,306
<INCOME-CONTINUING> 6,753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,753
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,616
<SECURITIES> 0
<RECEIVABLES> 138,810
<ALLOWANCES> 11,872
<INVENTORY> 0
<CURRENT-ASSETS> 170,354
<PP&E> 433,974
<DEPRECIATION> 47,549
<TOTAL-ASSETS> 881,233
<CURRENT-LIABILITIES> 102,200
<BONDS> 0
0
0
<COMMON> 290
<OTHER-SE> 324,498
<TOTAL-LIABILITY-AND-EQUITY> 881,233
<SALES> 590,809
<TOTAL-REVENUES> 590,809
<CGS> 0
<TOTAL-COSTS> 511,627
<OTHER-EXPENSES> 51,359
<LOSS-PROVISION> 2,738
<INTEREST-EXPENSE> 26,246
<INCOME-PRETAX> 26,997
<INCOME-TAX> 10,799
<INCOME-CONTINUING> 16,198
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,198
<EPS-PRIMARY> .56
<EPS-DILUTED> .55
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,703
<SECURITIES> 0
<RECEIVABLES> 122,213
<ALLOWANCES> 10,133
<INVENTORY> 0
<CURRENT-ASSETS> 163,128
<PP&E> 376,304
<DEPRECIATION> 44,399
<TOTAL-ASSETS> 721,889
<CURRENT-LIABILITIES> 88,066
<BONDS> 0
0
0
<COMMON> 290
<OTHER-SE> 318,083
<TOTAL-LIABILITY-AND-EQUITY> 721,889
<SALES> 418,534
<TOTAL-REVENUES> 418,534
<CGS> 0
<TOTAL-COSTS> 366,323
<OTHER-EXPENSES> 35,728
<LOSS-PROVISION> 15,677
<INTEREST-EXPENSE> 17,733
<INCOME-PRETAX> 16,483
<INCOME-TAX> 6,593
<INCOME-CONTINUING> 9,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,890
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,601
<SECURITIES> 0
<RECEIVABLES> 120,893
<ALLOWANCES> 8,817
<INVENTORY> 0
<CURRENT-ASSETS> 717,528
<PP&E> 371,997
<DEPRECIATION> 40,607
<TOTAL-ASSETS> 717,528
<CURRENT-LIABILITIES> 83,880
<BONDS> 0
0
0
<COMMON> 288
<OTHER-SE> 316,039
<TOTAL-LIABILITY-AND-EQUITY> 717,528
<SALES> 280,783
<TOTAL-REVENUES> 280,783
<CGS> 0
<TOTAL-COSTS> 242,435
<OTHER-EXPENSES> 22,510
<LOSS-PROVISION> 1,606
<INTEREST-EXPENSE> 10,970
<INCOME-PRETAX> 15,838
<INCOME-TAX> 6,269
<INCOME-CONTINUING> 9,569
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,569
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,184
<SECURITIES> 0
<RECEIVABLES> 120,831
<ALLOWANCES> 12,275
<INVENTORY> 0
<CURRENT-ASSETS> 161,640
<PP&E> 345,451
<DEPRECIATION> 36,593
<TOTAL-ASSETS> 648,084
<CURRENT-LIABILITIES> 90,388
<BONDS> 0
0
0
<COMMON> 285
<OTHER-SE> 304,245
<TOTAL-LIABILITY-AND-EQUITY> 648,084
<SALES> 135,179
<TOTAL-REVENUES> 135,179
<CGS> 0
<TOTAL-COSTS> 121,818
<OTHER-EXPENSES> 5,670
<LOSS-PROVISION> 740
<INTEREST-EXPENSE> 4,392
<INCOME-PRETAX> 3,299
<INCOME-TAX> 1,254
<INCOME-CONTINUING> 2,045
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,045
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,593
<SECURITIES> 0
<RECEIVABLES> 87,995
<ALLOWANCES> 7,726
<INVENTORY> 0
<CURRENT-ASSETS> 113,270
<PP&E> 200,613
<DEPRECIATION> 28,861
<TOTAL-ASSETS> 385,779
<CURRENT-LIABILITIES> 42,519
<BONDS> 0
0
0
<COMMON> 205
<OTHER-SE> 240,302
<TOTAL-LIABILITY-AND-EQUITY> 385,779
<SALES> 298,049
<TOTAL-REVENUES> 298,049
<CGS> 0
<TOTAL-COSTS> 263,316
<OTHER-EXPENSES> 14,292
<LOSS-PROVISION> 3,218
<INTEREST-EXPENSE> 2,226
<INCOME-PRETAX> 20,441
<INCOME-TAX> 7,768
<INCOME-CONTINUING> 12,673
<DISCONTINUED> 0
<EXTRAORDINARY> 1,138
<CHANGES> 0
<NET-INCOME> 11,535
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
